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Mid-Life Money Errors

If you are between 40 & 60, beware of these financial blunders & assumptions.

Between the ages of 40 and 60, many people increase their commitment to investing and retirement saving. At the same time, many fall prey to some common money blunders and harbor financial assumptions that may be inaccurate.

These errors and suppositions are worth examining, as you do not want to succumb to them. See if you notice any of these behaviors or assumptions creeping into your financial life.

Do you think you need to invest with more risk? If you are behind on retirement saving, you may find yourself wishing for a “silver bullet” investment or wishing you could allocate more of your portfolio to today’s hottest sectors or asset classes so you can catch up. This impulse could backfire. The closer you get to retirement age, the fewer years you have to recoup investment losses. As you age, the argument for diversification and dialing down risk in your portfolio gets stronger and stronger. In the long run, the consistency of your retirement saving effort should help your nest egg grow more than any other factor.

Are you only focusing on building wealth rather than protecting it? Many people begin investing in their twenties or thirties with the idea of making money and a tendency to play the market in one direction – up. As taxes lurk and markets suffer occasional downturns, moving from mere investing to an actual strategy is crucial. At this point, you need to play defense as well as offense.

Have you made saving for retirement a secondary priority? It should be a top priority, even if it becomes secondary for a while due to fate or bad luck. Some families put saving for college first, saving for mom and dad’s retirement second. Remember that college students can apply for financial aid, but retirees cannot. Building college savings ahead of your own retirement savings may leave your young adult children well-funded for the near future, but they may end up taking you in later in life if you outlive your money.

Has paying off your home loan taken precedence over paying off other debts? Owning your home free and clear is a great goal, but if that is what being debt-free means to you, you may end up saddled with crippling consumer debt on the way toward that long-term objective. In June 2015, the average American household carried more than $15,000 in credit card debt alone. It is usually better to attack credit card debt first, thereby freeing up money you can use to invest, save for retirement, build a rainy day fund – and yes, pay the mortgage.1

Have you taken a loan from your workplace retirement plan? Hopefully not, for this is a bad idea for several reasons. One, you are drawing down your retirement savings – invested assets that would otherwise have the capability to grow and compound. Two, you will probably repay the loan via deductions from your paycheck, cutting into your take-home pay. Three, you will probably have to repay the full amount within five years – a term that may not be long as you would like. Four, if you are fired or quit the entire loan amount will likely have to be paid back within 90 days. Five, if you cannot pay the entire amount back and you are younger than 59½, the IRS will characterize the unsettled portion of the loan as a premature distribution from a qualified retirement plan – fully taxable income subject to early withdrawal penalties.2

Do you assume that your peak earning years are straight ahead? Conventional wisdom says that your yearly earnings reach a peak sometime in your mid-fifties or late fifties, but this is not always the case. Those who work in physically rigorous occupations may see their earnings plateau after age 50 – or even age 40. In addition, some industries are shrinking and offer middle-aged workers much less job security than other career fields.

Is your emergency fund now too small? It should be growing gradually to suit your household, and your household may need much greater cash reserves today in a crisis than it once did. If you have no real emergency fund, do what you can now to build one so you don’t have to turn to some predatory lender for expensive money.

Insurance could also give your household some financial stability in an emergency. Disability insurance can help you out if you find yourself unable to work. Life insurance – all the way from a simple final expense policy to a permanent policy that builds cash value – offers another form of financial support in trying times.

Watch out for these mid-life money errors & assumptions. Some are all too casually made. A review of your investment and retirement savings effort may help you recognize or steer clear of them.

Warmest Regards,

april-signature

  

Citations.

1 – nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [6/25/15]

2 – tinyurl.com/oalk4fx [9/14/14]

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Major Risks to Family Wealth

Will your accumulated assets be threatened by them?

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?

It is because families fall prey to serious money blunders – old and new. Classic mistakes are made, and changing times aren’t recognized.

Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.

For example, let’s say we have a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing and action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and it is an inconvenience.

Sadly, procrastination wins out in the end and as the account lacks a POD beneficiary, those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA … his real estate holdings … and more.1

Minimal or absent estate planning. Every year, multimillionaires die without any leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. A 2015 Caring.com survey found that only 56% of American parents have a will or living trust.2

A will may not be enough. Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need more rigorous estate planning. The same is true if he or she wants to endow charities or give grandkids a nice start in life. Is this person a business owner? That factor alone calls for coordinated estate and succession planning.

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, perhaps generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.

The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals worked within the mansion, supervising a family’s entire financial life. While the traditional “family office” has disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports and assist in decision-making. If your financial picture has become too complex to address on your own, this could be a wise choice for your family.

Technological flaws. Hackers can hijack email accounts and send phony messages to banks, brokerages and financial advisors greenlighting asset transfers. Social media can help you build your business, but it can also lend personal information to identity thieves who want access to digital and tangible assets.

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that. Maybe they are only one or two degrees separated from you.

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed.

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When heirs do become decision makers, it is usually upon the death of the elders.

Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.

You may plan to reduce these risks (and others) in collaboration with financial and legal professionals who focus on estate planning and wealth transfer. It is never too early to begin.

Warmest Regards,

 april-signature

Citations.

1 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter1-5.html [5/5/15]

2 – caring.com/about/news-room/american-parents-wills.html [4/22/15]

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Yes, Young Growing Families Can Save & Invest

It may seem like a tall order, but it can be accomplished.

Plan to put yourself steps ahead of your peers. If you have a young, growing family, no doubt your to-do list is pretty long on any given day. Beyond today, you are probably working on another kind of to-do list for the long term. Where does “saving and investing” rank on that list?

For some families, it never quite ranks high enough – and it never becomes the priority it should become. Assorted financial pressures, sudden shifts in household needs, bad luck – they can all move “saving and investing” down the list. Even so, young families have planned to build wealth in the face of such stresses. You can follow their example. It is less an option than a necessity.

First step: put it into numbers. Most people have invested a little by the time they reach 30 or 35, and some have invested avidly. A plan is not always in place, however. The mission is simply to “make money” or “build wealth” for “the future.”

This is good, but also vague. How much money will you need to save by 65 to promote enough retirement income and to live comfortably? Are you on pace to build a retirement nest egg that large? How much risk do you feel comfortable tolerating as you invest? What kind of impact are investment fees and taxes having on your efforts?

A financial professional can help you arrive at answers to these questions, and others. He or she can help you define long-range retirement savings goals and project the amount of savings and income you may need to sustain your lifestyle as retirees. At that point, “the future” will seem more tangible and your wealth-building effort even more purposeful.

Second step: start today & never stop. If you have already started, congratulations! In getting an early start, you have taken advantage of a young investor’s greatest financial asset: time.

If you haven’t started saving and investing, you can do so now. It doesn’t take a huge lump sum to begin. Even if you defer $100 worth of salary into a retirement plan a month, you are putting a foot forward. See if you can allocate much more.

If you begin when you are young and keep at it, you will witness the awesome power of compounding as you build your retirement savings and net worth through the years.

Just how awesome is it? An example: let’s say you save $100 per month in an investment account for 20 years and the account returns a (hypothetical) 5% for you over those two decades. In 20 years under such conditions, your $100-a-month nest egg will not amount to $24,000 – it will work out to $41,011, which is 71% more! If you put in $200 a month, you wind up with a projected $82,022 off of the $24,000 in contributions! We aren’t factoring in account fees or market fluctuations, of course – but you get the picture. Stretched out to 30 years, a consistent $100-per-month contribution and a consistent 5% return project to $82,302; raise the monthly contribution to $200 and you get $164,604. These numbers factor in annual compounding; use daily compounding as the variable, and they grow a bit larger. So even if you set aside and invest a few twenties each month, you may still end up with appreciable retirement savings – and these are numbers for one retirement saver, there are two of you.1

What’s that? You say you can’t retire on $164,000 or less? You’re absolutely right. You have to devote more than that to your effort. You may need a million or two – and if you plan ahead, you may very well generate it. Ownership of equity investments, real property, business or professional success – this can all help to position you and your family for a comfortable future, provided you keep good financial habits along the way and pay attention to taxes.

How do you find the balance? This is worth addressing – how do you balance saving and investing with attending to your family’s immediate financial needs?

Bottom line, you have to find money to save and invest for your family’s near-term and long-term goals. If it isn’t on hand, you may find it by reducing certain household costs. Are you spending a lot of money on goods and services you want rather than need? Cut back on that kind of spending. Is credit card debt siphoning away dollars you should assign to saving and investing? Fix that financial leak and avoid paying with plastic whenever you can. Other young families are doing it, and yours can as well.

Vow to keep “paying yourself first” – maintain the consistency of your saving and investing effort. What is more important, saving for your child’s college education or buying those season tickets? Who comes first in your life, your family or your gardener? You know the answer.

It has been done; it should be done. Stories abound of families that have built wealth out of comparative poverty. There are people who came to this country with little more than the clothes on their backs who have found prosperity; there are families (including single-parent households) who have been dealt a bad hand yet overcame long financial odds to gain affluence.

It all starts with belief – the belief that you can do it. Complement that belief with a plan and regular saving and investing, and you may find yourself much better off much sooner than you think.

Warmest Regards,

april-signature

Citations.

1 – bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [12/26/14]

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Cash Flow Management

An underappreciated fundamental in financial planning.

You’ve probably heard the saying that “cash is king,” and whether you own a business or not, it is a truth that applies. Most discussions of business and personal “financial planning” involve tomorrow’s goals, but those goals may not be realized without attention to cash flow today.

Management of available cash flow is a key in any kind of financial planning. Ignore it, and you may inadvertently sabotage your efforts to grow your company or build personal wealth.

Cash flow statements are important for any small business. They can reveal so much to the owner(s) and/or CFO, because as they track inflows and outflows, they bring non-cash items and expenditures to light. They denote your sources and uses of cash, per month and per year. Income statements and P&L statements may provide inadequate clues about that, even though they help you forecast cash flow trends. 

Cash flow statements can tell you what P&L statements won’t. Are you profitable, but cash-poor? If your company is growing by leaps and bounds, that can happen. Are you personally taking too much cash out of the business and unintentionally letting your growth company morph into a lifestyle company? Are your receivables getting out of hand? Is inventory growth a concern? If you’ve arranged a loan, how much is your principal payment each month and to what degree is that eating up cash in your business? How much money are you spending on capital equipment?

A good CFS tracks your operating, investing and financing activities. Hopefully, the sum of these activities results in a positive number at the bottom of the CFS. If not, the business may need to change to survive.

In what ways can a small business improve cash flow management? There are some fairly simple ways to do it, and your CFS can typically identify the factors that may be sapping your cash flow. You may find that your suppliers or vendors are too costly; maybe you can negotiate (or even barter) with them. Like many companies, you may find your cash flow surges during some quarters or seasons of the year and wanes during others. What steps could you take to improve it outside of the peak season or quarter?

What kind of recurring, predictable sales can your business generate? You might want to work on the art of continuity sales – turning your customers into something like subscribers to your services. Perhaps price points need adjusting. As for lingering receivables, swiftly preparing and delivering invoices tends to speed up cash collection. Another way to get clients to pay faster: offer a slight discount if they pay up, say, within a week (and/or a slight penalty to those that don’t). Think about asking for some cash up front, before you go to work for a client or customer (if you don’t do this already).

While the Small Business Association states that only about 10% of entrepreneurs draw entirely on their credit cards for startup capital, there is still a temptation for an owner of a new venture to go out and get a high-limit business credit card. It might be better to shop for one with cash back possibilities or business rewards in mind. If your business isn’t set up to receive credit card payments, consider it – the potential for added cash flow could render the processing fees utterly trivial.1

How can a household better its cash flow? One quick way to do it is to lessen or reduce your fixed expenses, specifically loan and rent payments. Another step is to impose a ceiling on your variable expenses (ranging from food to entertainment), and you may also save some money in separating some or all those expenses from credit card use. Refinancing – if you can do it – and downsizing can certainly help. There are many, many free cash flow statement tools online where you can track family inflows and outflows. (Your outflows may include bugaboos like long-term service contracts and installment payment plans.) Selling things you don’t want can make you money in the short term; converting a hobby into an income source or business venture could help in the long term. 

Better cash flow boosts your potential to reach your financial goals. A positive cash flow can contribute to investment, compounding, savings – all the good things that tend to happen when you pay yourself first.

Warm Regards,

april-signature

 

Citations.

1 – smallbusinesscomputing.com/tipsforsmallbusiness/5-tips-for-a-smoother-small-business-cash-flow.html [11/19/12]