The Right Time Without Timing

Many financial planners – including me – will tell you that market timing is not a good idea.  But that doesn’t mean that we should all bury our heads in the sand and ignore opportunities.  It’s a fine line, but there is a difference.

One example is the current mortgage rate environment.  Look at whether it makes sense to refinance your mortgage while rates are still low.  Whether you want to lower your payment, stretch out your payments over a longer time, or let a lower rate so you can get the mortgage paid off more quickly, now is a time to explore that.  But be careful.  There are mortgage lenders who will refinance anyone who asks without looking at whether you improve your situation with a refinance or not.  So get some good referrals on who to work with.

It’s also a good time to buy up in terms of housing.  Yes, you may get less for your little house than you feel it’s worth.  But all factors being equal, you lose less on selling your small house than what you save on buying a bigger house.  In other words, let’s say you get 10% less on your $200,000 house (lose $20,000), but you save 10% on a $350,000 house (save $35,000).  You’ve come out ahead.  Once again, having a realtor who can tell you if that’s the case is vital.  So don’t just pull out the phone book and start shopping.  Get a good referral.

If you think it’s time to change your portfolio approach, this may be the perfect time to do it.  If you took a bath on your individual stock portfolio and want to move to mutual funds and ETFs, this is probably a great time.  That portfolio change might have cost you big bucks in taxes a year or two ago.  But you might actually get some tax losses if you make that move now.  And – at the risk of sounding like a broken record – talk to a good financial advisor about it.  This is definitely a time when you want a fee-only and not a commission or fee-based professional.  If someone makes big bucks over making the changes, you may never know if the change was in your financial interest or theirs.  The good ones are still alive and well in this economy.  Look at http://www.acaplanners.org/Advisors.aspx  or http://findanadvisor.napfa.org/Home.aspx  to find one.

Experiential Learning for Parents

Parenting is an art as much as a science.  What nurtures creativity and responsibility in one child may breed wanton disregard in another.  What is a great instructional tool one day is seen as useless and starts an argument the next.  And while there are many helpful and well documented methodologies for parenting, the best informed parent will make some mistakes – and learn from them.  As someone who has literally written the book on teaching kids about money (The Ultimate Parenting Map for Money Smart Kids - $10 including free shipping at www.brightleitz.com), I continue to learn from mistakes when I put theory into practice. 

One of the hard learned lessons for me as a parent is that every stage of life for kids brings new lessons for the children and for their parents.  The child who saved all her allowance as a grade schooler may have spent all her pay check within three days of every pay day as a teenager.  What can be learned from this is that phases in kids’ lives are temporary.  The outlook of the grade schooler isn’t lost, it’s just on vacation.  And the teenager will learn to pace her spending if her parents resist the temptation to either lecture her about budgeting or give her extra money.

Another lesson is that most operating procedures work best when well defined. Here’s an example.  This summer my family had multiple teenage drivers as well as my husband and me sharing cars.  In the past we pretty much had a one-driver-per-car ratio, so the rule had been that each teen driver paid for their own gas.  As we started playing musical chairs with car usage, I decided to generously allow the kids to use our gas card.  We had them pay for a few more things we generally pay for.  Feeling particularly kind, I’d often encourage the kids to get a soda at the gas station store. Hey, it’s summer!  Live it up! 

Then the gas card bill came in.  OMG!  The bill for the first month of summer was literally over four times the size of our average bill for that card.  None of the kids was around when I opened the bill, so no shouting or bloodshed ensued.  But the system changed immediately.  Of course, it wasn’t entirely their fault.  My card, my decision.  So defining things up front – and thinking through potential outcomes – can make for less painful learning for everyone.

Picking A College

I’m fortunate to have intelligent friends.  This blog will have some guest postings from some of these folks.  Rob Reed is a financial planner in Ohio and also has experience working in academia.  In regard to understanding how to choose a college, I literally couldn’t say it better. 

WHICH COLLEGE?

 Parents spend more time thinking about how to pay for college than what kind of college their children should attend. Yet the kind of college students attend affects not only what parents pay but—much more important—their children’s educational experience and chances for success.

The issue is not how smart a child is but where a child has the best opportunity to succeed. The relationship between students and their professors is the basis for that success. Therefore, I classify colleges by what they pay professors to do.

NOTE: This list focuses on general education institutions offering undergraduate degrees. It excludes technical schools, military institutions and strictly sectarian schools.

At Community Colleges professors are hired and promoted based solely on their teaching. These schools are an excellent start for students who feel they need extra preparation or who are unsure about attending college. Community colleges are inexpensive and offer a solid grounding in college basics. They have small classes and highly personalized instruction.

These schools offer unique advantages. For example, if a student discovers he has little interest in a general college education, he can transfer directly into one of the school’s vocational programs. This training offers a solid preparation toward a well-paying career. If on the other hand a student discovers an aptitude for college-level academics, she can transfer to a four-year college or a state university and thereby save several years of higher tuition cost.

At Four-Year Colleges professors are hired and promoted based primarily on their teaching, though they are also expected to do research. These mid-sized schools (10,000–15,000 students), have mostly regional reputations and typically grant only undergraduate degrees. Most classes are small and taught by full-time faculty who are expected to personally mentor students.

These are good schools for students who are ready for college but have not settled on an interest area or who need personal attention from professors. There are many schools in this category and consequently there is much variation in quality and character. Tuition reflects this variation. Some strong Ohio colleges include Dennison, Kenyon, and Otterbein.

A university is a collection of colleges (humanities, medicine, law, etc.) under one banner.  At Large State Universities professors are hired and promoted based primarily on their research. These schools have a national reputation, student populations of 30,000 or more and boast a world-class faculty. Especially in the freshman and sophomore years however, your child will probably be taught by the professor’s graduate students. Indeed, typically at these schools there is minimal interaction between full-time faculty and undergraduate students.

Unlike smaller schools, university professors are so overloaded with research demands and responsibilities toward their graduate students that professors do not have the time to seek out undergraduates to mentor. While this sounds grim, engaged undergraduates with initiative can find professors who are genuinely interested in working with them. Students, however, must be assertive enough to seek out professors.

In essence, Large State Universities are the Wal-Marts of education: they offer a tremendous selection of courses at rock-bottom prices but there is little personal service unless the consumer (student) actively seeks it out. These schools offer the greatest educational opportunity for each tuition dollar but students must be able to take advantage of it.

Many Large State Universities have branch campuses throughout the state. These campuses offer the advantages of small class size, personalized professional instruction and often a more relaxed admission policy. Later transfer to the main campus is typically a straightforward process and, in any case, students receive the university’s diploma regardless of which campus they attend.

In Elite Institutions professors are paid and promoted based on outstanding teaching and research. These internationally known schools boast small classes taught by renowned scholars. This is the ‘best of both worlds’ and tuition reflects this fact. Admission is highly competitive but for many bright kids with strong high school records attendance is a life-altering experience. Attendance is a serious commitment though, both for the parent who pays the bills and for the student who strives to succeed in this high pressure environment.

For bright students who cannot afford or gain admission to an Elite Institution, the Honors Program at a Large State University is a cost effective alternative. These programs are essentially mini-Elite Institutions set inside a larger university. Professors actually compete to personally teach these students who often have their own classes, dorms and mentoring programs.

This is only a general overview. Within each college-type there are good and bad schools, better and worse bargains. This classification does not single out the “best” colleges; hopefully it helps you identify the type of college best for your child. 

College Loans Now

Our nation – both the citizens and the government – is drowning in debt right now.  Too much debt, much of it poorly structured, has put our economy in a slump.  So it may seem foolhardy to consider getting a loan for college now.  But there can be good reasons for getting a loan and higher education is one of them. 

 A “good debt” is one that allows the borrower to have something of value that will appreciate over time.  And the debt allows the person to obtain this asset with growth potential much sooner than if they had to wait to pay for the asset in cash.  An education that will allow greater earnings for the rest of your life can be worth borrowing for.  Government subsidized loans with low interest rates are optimal.  The Plus loans generally carry higher interest, so make sure that you can’t get tuition reduction or do a work/study program before getting into that tier of student loans. 

An element to examine closely now is taking a loan now that you’ll repay with an existing 529 plan or other savings that have been in the stock market.  There may be future growth in these accounts that would be worth waiting to receive.  You can pay the loans back early, but you generally can’t get college loans after you’ve take the courses and paid the tuition.  This is one of the areas where some professional advice can help you make an informed decision relative to your particular circumstances.

The Potential of W

Don’t worry.  This isn’t a political posting about our former president. 

Most people expect a recovery from this recession to come in a V shape.  The economy was at a peak, it has fallen into a valley and seems to be heading in a generally upward direction – in other words it looks like the letter V. 

We Americans tend to think about the economy in what I call “The Eternal Now”.  I don’t mean that in a positive metaphysical way of living for the moment.  I mean that we tend to think that whatever is happening now will happen forever. 

When the stock market was booming, people didn’t want to keep any money in safe cash type investments.  They wanted all their money in the stock market where it would – they assumed – always be growing.  People borrowed against the value of their home because the house would be worth more tomorrow than today and they could always just sell it if they needed to.  They paid for everything with a credit card because their income would always go up. 

Sound familiar?  And now too many of the folks who were thinking this way have no money for emergencies, had to sell stock market investments at a low to pay for necessities and can’t pay their mortgages because they lost their job. 

The economy has started a shaky move up, but some of the things that are helping it could cause it to take another sizeable dip before it’s truly recovered.  The government obviously can’t bail out everyone forever.  And the influx of government money in the economy could cause inflation, which could cause another dip in the markets and our general productivity.

So if you’re starting to get back to some of the bad habits that got us into a recession in the first place, stop.  Spend less than you make.  Build up an emergency fund in something really boring like a bank savings account.  Don’t fund your life with debt.  The recovery may look more like a W.  It may go up, then go back down, before it starts a more steady recovery.  Your job isn’t to predict the economy.  Your financial responsibility to yourself is to be prepared if things aren’t smooth in the economy.  Then you’ll be part of the solution, not part of the problem.

Top Ten Reasons to Participate in Your Company Retirement Plan

Now that tax season is over, folks are taking a look at their bigger financial picture again.  With all deference to fabulous late night talk shows, here are ten reasons to consider putting some of your hard earned wages into an account with your employer’s retirement plan.

10. The company is required to provide a variety of investment choices and access to information about those investments.

9.  You’ll save taxes on the money you put in the plan now and you’ll probably be in a lower tax bracket when you take the money out after you retire.

8.  Forced savings – if you don’t get it in your pay check now, you don’t spend it now.

7.  It keeps you from trying to time the market.  The money gets invested every month. 

6.  The balances you have in retirement accounts don’t usually count against your kids’ ability to qualify for student financial aid.

5.  Many companies contribute some money to your account if you contribute.

4.  Lots of retirement plans allow you to borrow against your account if you need to. 

3.  If you want to “buy low” in the market, this certainly seems like the time to do it!

2.  You can brag to your friends at parties about your investment portfolio.

1.  You’re putting away money for retirement.  When you’re old and grey, you’re less likely to have to go to work and ask strangers, “Do you want fries with that?”

 

 

The Solution

It’s abundantly clear that our economy is ailing.  So everyone can sit around and whine about it, criticize the people who are working toward a improving the economy, or be part of the solution.  Which action do you choose? 

 

The media seems to be divided into two camps.  Some journalists are part of the solution by keeping their audiences informed of opportunities in markets, government programs, and the private sector.  Others seem to be finding satisfaction in preaching the end of the financial world to anyone who will listen.  This latter group seems to have lost their Thesauruses.  The least they could do is find some other words for “plummet”.

 

So many people are saying that they are terrified every time they open their investment statements or listen to the news.  It’s reminiscent of the old joke about a fellow who goes to the doctor and says “Doc, it hurts when I do this.”  He then lifts his arm at a rather odd angle above his head.  The doctor replies, “Then don’t do that.”  That’s not to suggest that we shouldn’t follow the news and make sure that our investments are still of good quality. 

 

Find the media sources that give you news that you can use and that prompt you to positive action.  Be in touch with your financial advisors and confirm that they’re watching your investments and will let you know if action is needed.  And don’t just complain to your friends if you’re unhappy with the government’s approach to dealing with the economy.  Let your elected officials know your concerns.  Give them specific feedback and offer them solutions.

 

Be part of the solution. 

Employer Contributions

Everyone needs to save for the day they hope not to work any more to make ends meet.  If you are comfortable with your job security and have good savings you could get to in a pinch, investing through your company’s retirement plan is worth considering.  Staying on a consistent investment plan through a down stock market can pay off quite nicely when markets recover.  If your company offers to match part of what you contribute to the plan, that’s even better!

 

So check your employer benefits and see what’s available to you.  Some companies don’t allow employees to contribute to a retirement plan until they’ve been with the company a while.  Some allow you to contribute, but won’t match anything.  Or if they do contribute into your account, it’s based on what you invest and you have to be in the plan for awhile (sometimes up to five years) before you can have the company’s share if you leave the company. 

 

If your employer offers a plan, it’s a great benefit for you which is greatly enhanced if they offer a contribution to your account.  It’s certainly worth exploring if you can supercharging your retirement savings!

Losing Strategies in the Current Economy – And the Winning Alternatives

Lock in Losses – If you sell your stock market holdings now, while the market is down, and bury the money in your back yard, you’ve guaranteed that you’ll lose money.  The good ol’ “buy low, sell high” motto still holds.  If you start putting money back in stocks when the market goes up, you’re selling low and buying higher.  For most people, the best advice is that if you’re in the market, stay in until it recovers. 

 

Hot Tips – Get your advice from reliable sources.  The guy in the next cubicle, the woman who cuts your hair, and your brother-in-law the carpenter aren’t financial advisors.  This is a great time to buy good quality investments on sale.  But don’t assume everything is the secret next home run. 

 

Stop Saving – Even though interest rates are in the basement on savings accounts and money market funds, everyone needs savings.  So don’t stop saving just because the returns aren’t stellar. 

 

Overspend – The consumption economy is how we got here.  Look at what you need and what that budget looks like.  Then get your spending closer to that needs based budget and out of the Gotta’ Have It budget. 

 

Markets recover.  So do individuals who make smart moves in down markets. 

Dancing in the Rain

About the time that clients were receiving their monthly statements on their investment accounts, my business partner and I noticed an influx of calls and e-mails.  The general question being asked was “Am I okay?”  We work to position our clients in all aspects of their financial lives to make it through difficult financial times.  In our minds, that’s as important as taking advantage of financial opportunities – for some people it’s actually more important.  Our clients know that and generally talk-the-talk and walk-the-walk of diversifying investments, staying calm during difficult times, and making decisions based on factors other than fear or greed. 

 

But these are pretty unnerving times and even some of the most fearless individuals are beginning to have little beads of sweat popping onto their foreheads.  A friend forwarded this anonymous quote to my business partner: “Life isn’t about waiting for the storm to pass.  It’s about learning to dance in the rain.”

 

So let’s look at a few “dance moves” for current times:

-         Eliminate frivolous items from your spending.  Unless you’re spending more than you make or you’ve lost a major source of income, don’t go overboard.  Everyone needs some rewards built in to their budget. 

-         Have funds available.  Make sure you have 10% of your annual pre-tax income where you could get to it pretty quickly and another 20% or so when you could get to it over time or with some tax consequences. 

-         Don’t put the rest of your money all into the stock market.  Beyond your highly liquid money, also have some that’s in pretty boring stuff life certificates of deposit and government bonds.

-         Stick with quality.  This is a great time to get bargains on quality.  But don’t be speculative.  High quality diversified mutual funds are often better for the average consumer than individual stocks or mutual funds that concentrate on only one industry.  Professional advice on your situation is warranted.

-         Don’t be penny wise and pound foolish.  Don’t be afraid to get professional advice.  Have a pro do your taxes, consult on your investments, and advise you on your overall financial situation. 

-         Don’t scrimp on things you’ll later regret.  If you can afford some niceties that are timely, get them.  Buy holiday gifts, get professional portraits of your high school senior, take the vacation you had planned.  Don’t miss meals to do these things, but when times are good again, you don’t want to be sorry for once in a lifetime things you missed. 

-         Be patient.  It may seem that the economy fell apart over night.  It didn’t.  The poor decisions and waste that impacted the financial markets and several of our industries have been going on for awhile.  The solutions will take time to be completely formed and implemented and the results will take awhile to be fully realized. 

 

Mistakes should be learning opportunities, so we should all take note and become wiser.