Financial Fundamentals

Your options for what to do with your money seem as boundless as the prairie sky I grew up under. But in truth your options are limited, because you can really do only five things with money:

• Spend it
• Save it
• Invest it
• Pay taxes with it
• Give it away

Slice the pie however you’d like, but those are your options – five pieces. Only two slices are mandatory: spending and paying taxes – for most people. We all have basic needs that require spending. I don’t know anybody, and have never heard of anybody, who is completely self-sufficient, who produces everything they need to live or makes enough of anything that they can barter for everything else they need. Everyone spends something.

Despite the talk of zillionaires that pay no taxes, it is almost impossible not to pay some income tax. Your income will almost certainly be taxed. But taxes are not as ironclad as many think either. The U.S. tax code provides many opportunities to reduce the taxes you have to pay. It is neither illegal nor unethical to reduce your tax bill in ways provided by the tax code.

The other three categories – saving, investing, and giving – are completely voluntary. Many people have chosen, to their detriment, not to cut their pie into that many pieces no matter how big or small the pie.

Few of us have the resources to do everything we would like with our money, so we need to establish priorities. We have to understand our options and how they interact, clearly. A bigger slice for spending reduces the size of all other slices, except paying taxes. On the other hand, less spending may increase the size of the investing or giving slices, which may also decrease the size of the tax slice. The objective of financial planning is to increase our control of the size of each slice.

The Different Focuses of Financial Professionals

In today’s world, many financial institutions offer a wide range of financial services to clients. Since the regulatory wall between banks and brokers was knocked down, the distinctions have been blurred, with many banks offering brokerage services, and vice versa. Still, I believe it remains true that most professionals tend to focus their efforts more narrowly.

Stockbrokers. Most stockbrokers help primarily with the accumulation phase and tend to have a shorter-term approach to investing, concentrating on the best possible returns at any given time, rather than a longer-term view that helps you get to where you want to be.

CPAs. Certified public accountants are primarily tax specialists, not investment specialists.

Private Bankers. Banks tend to focus on trusts, so they offer legacy/transfer services but usually not broad-based planning.

Insurance Agents. Insurance agents focus on risk or the legacy/transfer phase of planning. They are often also well-versed in certain types of tax-deferral or tax-avoidance products that are insurance related. However, most do not offer well-rounded financial strategies.

Attorneys. Lawyers work primarily on estate planning, a legacy/transfer niche.

Financial Advisors. Financial advisors can take your financial plan beyond accumulation strategies to address distribution and legacy/transfer issues as part of a comprehensive plan. I am proud of what I do, and I believe independent companies like mine, by bringing together experts in all of the planning phases, offer the most comprehensive service.

Shopping for a Lender (Part 2)

It is just as important to look for a lender with a reputation for integrity and service. You will be sharing all of your most private financial information with your loan company. Signing for a loan is a big commitment, so make sure that you feel comfortable with your lender. Here are some important items to consider when shopping for a mortgage lender:

Rate Commitment
Many lenders quote an interest rate at the time of application. However, if market interest rates should go up or down during the period before you close on your loan, you need to find out what interest rate you will ultimately be charged. It is also important to know how long the lender will commit to this rate.

Loan Servicing
After your loan is closed, you will be dealing with a loan servicing company. The loan servicing company will accept your payment every month and handle any questions you may have concerning your mortgage balance. Many lenders service their own loans while many others sell their servicing to outside firms. You should know upfront that the lender you choose works with reputable loan servicing companies.

Considering the cost involved, your final choice of a lender should be one who offers you a good deal financially. However, keep in mind that you will be dealing with your lender for many years and it is always easier to deal with people you like and trust.

Shopping for a Lender (Part 1)

When shopping for a mortgage lender, you should make price comparisons, but interest rates alone should not be the determining factor in choosing a lender. Here are some important items to consider when shopping for a mortgage lender:

Fees
Mortgage lenders charge fees for a variety of things such as filing an application, appraisal, credit reports, etc. Be sure to know upfront what the lender charges are so that there are no surprises at closing. Lenders are required to state interest as an annual percentage rate (APR). This rate takes into account the loan origination fees. When comparing interest rates among various lenders, be sure to use the APR as your measure.

Processing Time
What is the average length of time for a mortgage loan to be processed? This is an important question to ask if you need to move into a home quickly.

The Whole Picture

Do you have the diversification you need to keep your portfolio on track even when the stock market falters? The first step is to sit down with your financial advisor to take a closer look at your holdings to make sure your portfolio is well enough diversified to stand the test of time.

Does your investment portfolio have the diversification you need to sail smoothly through the ups and downs of the market? True diversification means more than spreading your assets around to a handful of stocks. It means putting assets into a variety of different types of investments beyond the stock market.

The younger you are the more aggressive you can be. While no strategy assures success or protects against loss, a portfolio heavily weighted in stocks might make sense for investors in their 20s and 30s. But the closer you are to retirement, the more important it is to spread some of your money to other types of investments.

Make sure you have the diversification you need to keep your portfolio on track even when the stock market falters, The first step is to sit down with your financial advisor to take a closer look at your holdings to make sure your portfolio is well enough diversified to stand the test of time.

Plan To Get There!

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher-and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.

Investing and Saving

The goal of investing is quite different from saving. Saving makes money available to you in a secure place; investing seeks to make 13that money grow for some future use.

Two rules of thumb: Invest 10 percent of your income, and pay yourself first. Your deposit into your investment account should be the first check you write each time you get paid, not the last. If you pay yourself first, you’ll be able to manage on what remains. If you instead plan to invest what remains from your paycheck after you’ve met other needs (and wants), you’ll find that you have little or nothing left for investing most months.

Time, Not Timing

In these days of detailed and ubiquitous reporting on stock markets one of the great dangers facing individual investors is the temptation to time the market. Never forget that time, not timing, is the investor’s greatest ally.

If your biggest concern is when to invest your money, you’re worrying about the wrong thing. Investing a set amount each month IS fine as a saving strategy, but as an investing strategy, it’s flawed. The best time to invest is as soon as you can. If you have created your asset allocation strategy, invest now!

But many people don’t follow this advice, or they try to beat the market by picking the right time to invest.

Trusts

Trusts are vehicles that can help shelter your assets from taxation and manage the property that you leave to your heirs. Simply put, you transfer property in the name of a trustee who manages it for the benefit of a third party, the beneficiary. One of the great advantages of trusts in their flexibility. They can be adapted to fit a wide variety of situations. In fact, as our attorneys at Wealth Enhancement Group say, “Trust is not the key word. Trust doesn’t tell you that much.”

What precedes the word trust tells you everything. The most important aspect of trusts is that they allow property to be managed according to the donor’s specific wishes, far into the future. Living trusts allow you to control trust assets; irrevocable trusts take away control but offer many attractive estate tax implications and more. Your advisers can help you determine which type of trust best suits your situation.

Wills

The basic instrument of estate planning is the will, a legal document in which you state who will receive what portion of your property, as well as when and under what conditions they will receive it. A will also allows you to designate a guardian for your children and an executor or personal representative who carries out the terms of the will. If you die intestate-without a will-the executor and guardian are appointed by the court, and your assets are disposed of according to state law.

In all states, however, at least part of your estate will go to your children, and ,n many states they will receive more than your spouse. A will that is complete and current, on the at names all those legally entitled to a share in your estate, accounts for assets, and pays all creditors, will ensure that the administration of your estate proceeds quickly according to your intentions. Keeping those close to you informed of your plans, especially if you’re financial or family situation changes, can help avoid litigation, costly delays, and unnecessary conflict.