Financial Confidence

December 10, 2012

You know investor confidence. Various measures of it are announced periodically to explain movements in the equity and bond markets and, since the housing bust, even in the housing market.

You know consumer confidence. The University of Michigan and the Conference Board each measure it monthly because consumer spending accounts for 70 percent of U.S. gross domestic product.

Now financial confidence is getting attention. A large insurance company devotes a portion of its website to helping African-Americans develop financial confidence. A large financial advisor company offers a quiz to help potential clients measure their financial confidence. And books, magazines and websites are offering financial confidence advice to women.

There’s definitely something in it. A serious academic study in the Journal of Behavioral Decision Making recently concluded that people with greater confidence in their financial abilities are more likely to be planning for retirement and more likely to be minimizing investment fees. This was true even if their financial knowledge wasn’t high. It seems that confidence is a necessary ingredient in one’s ability to begin the difficult and complex retirement planning process.

No one is born with financial confidence but, if you’re reading this, you’re capable of growing your own.

Start by writing down your goals. Divide them into less than a year, one to five years, and longer than five years. Put a dollar amount on each. Then, match up your finances with your goals. Even if they’re not matching particularly well, you’ll have gained confidence simply by understanding your situation.

Max out your 401(k) contributions to leverage the tax advantages and the employer matching contributions. There’s no easier or more efficient way to grow your financial assets and therefore your financial confidence.

Many sources recommend managing risk with disability, life and long-term care insurance as a way to gain confidence.

While these may be fine starting points, we think your next step should be learning by working with a professional. Find a fee-based financial planner that you like, and make those product-purchasing decisions jointly with your planner. The surest marker of financial confidence is the willingness to seek a partnership with a professional who knows more than you do. After all, financial confidence isn’t an end in itself. It’s a means to begin planning for a successful retirement, and the best way to do that is with a financial advisor.

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Dream a Little Dream: Know where you want to go

July 10, 2012

People often think defining an investment strategy is the first step in creating a solid financial plan. Slow down. Before you even begin to gather all the information you’ll need to form an investment strategy, sit down on the porch or patio or in front of the fireplace (with your spouse or partner if you have one) and let your mind roam.

What do you really want from life? If you could do anything you want, what would you do? Don’t put financial restrictions on yourself now. Dream. Stretch a little. Once you have that dream defined and you know roughly where you want to go, you can begin to determine what role a financial plan can have in helping you live that dream. 

A good investment strategy begins by identifying your specific individual goals and the time you have to achieve them. Those highly personal decisions, very often driven by your love of others, will suggest your strategy. Your strategy may include shorter- and longer-term objectives.

Are you investing to buy a house, pay for college or to retire with sufficient income to support the lifestyle you desire? How much money will you want for each objective? When will you need it? How can you get there? Will you have to make trade-offs to achieve those goals? Which take the highest priority?

The answers to all of those questions will help you determine your individual strategy. Without that strategy it is nearly impossible to know how to invest.


Be It Resolved: Meet Your 2012 Money Goals

January 4, 2012

The time for those New Year’s resolutions is upon us.

In my opinion, making financial resolutions doesn’t have to be painful. If you follow some simple guidelines, financial and other resolutions don’t have to be overwhelming. Remember that the key to reaching any goal is to make it specific, achievable and measurable. Celebrate and reward yourself once you get there. And realize that it’s perfectly acceptable – and smart – to ask for a little help when needed.

Be it resolved: Health first
Before getting into financial resolutions, I want to mention how important it is to consider your health and make it a priority. This is a great place to start with resolutions because there are so many ways to improve health without spending much money. You can go for more walks, which are absolutely free. Or take an exercise class or buy (and use!) a cookbook that focuses on healthy foods. Try a healthy new activity and see if it gives you some extra energy and enthusiasm for your financial resolutions.

Be it resolved: Save and invest more
Based on my conversations with clients, family members and friends, saving more and spending less always seem to be the most popular financial resolutions. The two things go hand in hand and may sound simple, but many people find it difficult to build their savings to the level they desire. You need the right perspective and a specific, achievable savings goal in order to succeed.

Saving really boils down to paying yourself first. For most people, a realistic goal is to save 10 percent of your income. If your employer offers a retirement savings plan with matching contributions, resolve to make the most of it and contribute as much as you can. It is one of the best ways of boosting your savings. You may also want to open and begin making regular contributions to a Roth IRA, which allows you to make tax-free withdrawals of your direct contributions at any time.

Be it resolved: Pay off inefficient debt
If you are one of the many people who want to dump a debt burden this year, you need to know that not all debt is created equal.

Efficient debt isn’t so bad, but you will want to get rid of inefficient debt as soon as possible. Efficient debt works for you because it is tax-deductible and/or appreciates in value. Examples include a home mortgage or an investment in education that can increase your earning power. Inefficient debt includes high-interest credit card debt and debt used to buy things that depreciate and are not deductible, like automobiles and many other consumer goods. Resolve to pay off inefficient debt first.

Be it resolved: Consult a financial advisor
If you feel overwhelmed just thinking about financial resolutions, it’s the perfect time to consult with a financial advisor. A professional can help you get organized, identify goals, save time and find ways for you to maximize your financial efficiency this year.

Best wishes for a healthy and prosperous 2012!

Wealth Enhancement Group


The Propensity to Consume

August 31, 2010

Most People and most societies consume what they can. Americans are notoriously short-sighted, as demonstrated by a low personal savings rate by international standards. There could be many explanations, from a standard of affluence that has distanced us from the struggle for mere survival, to our propensity to invent and create that places a premium on spending whatever money we have in order to create more. We are the consumer society. Just look at the ads in magazines or newspapers and calculate the percentage of them that sell what for most people are luxuries.
You may be surprised to find that you are guilty of a habit that dooms you to never having money. Some people who constantly feel money pressure buy themselves little treats or rewards, in part because they never have the money to buy themselves what they really want. But it’s precisely that accumulation of “little” expenses that prevents them from getting ahead. Many don’t even realize they do this. The only way to find out is to keep track of what you spend. Do it for a week or a month. Try to remember each expenditure, no matter how small. Record everything in a little notebook each day. Add them up in different categories at the end of your test period: food and drink, entertainment, utilities, gifts and so forth. Pay particular attention to the small expenditures on unnecessary items and see how they accumulate over time.


Sharing Your Wealth

August 24, 2010

The tax laws of the United States encourage gifts by granting tax deductions for them in many cases. If individual citizens voluntarily help meet our country’s needs, their contributions reduce the responsibility of the government. Many would also argue that private support of charitable activities is more efficient than public support.
Due to the tax treatment of charitable contributions, individuals may realize not only immediate tax benefits but also advantages in terms of after-tax cash flow and the size of the estate they may pass on to their heirs. Gifts to charity during one’s lifetime or at death, if structured properly, will reduce the estate tax liability. An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limitations.


A Debt like No Other

August 17, 2010

If you have incurred inefficient debt, one method of eliminating it is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise. It provides low interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.


Shopping for a Lender (Part 2)

October 24, 2009

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.