Do You Not Saving Enough

download-49If your primary focus when it comes to investing is how to find a better strategy with a better return, you’re doing it wrong. The truth is that until you’ve built up a sizable portfolio, your investment return, surprisingly, doesn’t matter that much.

What really matters is your savings rate. It may not be sexy, but no amount of return can make up for not saving enough. You don’t have to take my word for it. Let’s look at a simple example.

Meet Jim and Olivia

Jim and Olivia are both 35. They both make $100,000 per year, have $30,000 in retirement savings, and want to retire at 65 with $2,000,000.

Jim takes the exciting approach of trying to maximize his investment return, and it turns out he’s really good at it! He’s able to earn a 12% return year after year, well above current market expectations.

Olivia’s approach isn’t quite as exciting. She goes the tried-and-true route of choosing low-cost index funds, which earn her a steady 7% return per year.

But there’s one other difference.Because Jim is so focused on his investment strategy, he never finds the time to save more than $3,000 per year. So even with his other-worldly (and, frankly, unlikely) returns, he only ends up with just over $1.6 million. That’s $400,000 short of his goal.

On the other hand, Olivia is a savings rockstar. She carves out enough room in her budget to save 20% of her income, or $20,000 per year. And even with her average returns she ends up with over $2.1 million.

By focusing on saving instead of returns, Olivia met her retirement goal and ended up with $500,000 more than Jim.

When Do Returns Start to Matter?

Wade Pfau, one of the leading retirement researchers, has shown that for the first DECADE of your investment life your annual return has less than a 1% impact on the success or failure of your retirement goal.

In other words, it’s a long time before your returns really start to have an impact on your final outcome. It’s your savings rate that matters most. So when do your returns become more important? Here’s a simple formula you can use to figure it out.

Let’s assume that a reasonable savings goal is 15% of your annual income. And let’s also assume that you will get a 7% investment return per year.

With those assumptions, the amount you save each year will be greater than the amount you earn from returns until your investment portfolio is 2.14 times greater than your annual income (15% divided by 7%). If you earn $100,000, that means that the amount you save every year will have a bigger impact than the amount you earn in returns until your investment portfolio reaches $214,000.

Financial Planner

download-48As a financial planner, my job is to help people make smart financial decisions. That means planning ahead for big purchases, making rational spend vs. save decisions, and generally being purposeful and thoughtful with your money.

It’s a noble endeavor, but the truth is that we’re all human and we all make less-than-optimal decisions from time to time. Myself included. Here are three examples where I made decisions that were frowned upon by my financial planning alter-ego.

#1: The Big Indulgence

My brother got married. It was a beautiful wedding, lots of fun with friends and family, and he and his wife had a great time. It was also a little awkward for me. As the older, single sister at the time, I honestly felt a little self-conscious.

So what did I do? I spent a LOT of money on makeup: brushes, blushes, two types of foundation, extra eye shadows. I went nuts! It was an emotional decision through and through. It was way more than I “should” have spent, and certainly more than I had planned. But I wanted to look good and the makeup helped me feel comfortable. It may not have been the most rational decision, but it was certainly a human one.

#2: The Overextension

A few years ago I decided to start my business. And while I was excited about the possibilities for how it could grow, there was also a lot about it that I couldn’t really plan for. I didn’t know how long it would take to be profitable, how much of my time it would consume, or really anything else about what the experience would truly be like.

So of course I also decided to start remodeling my house at exactly the same time. Another project with a lot of moving parts, a lot of uncertainty, and a big investment of time and money. Tackling two big goals at the same time caused a lot of stress. I was worried about money, stretched for time, and initially couldn’t give either one the attention they deserved.

My financial planner alter-ego should have told me to take one thing at a time. But in this case my impatience got the best of me.

#3: The Impulse Buy

In early January I got a call from a friend. She was heading for the Australian Open in a few weeks and she had an extra ticket. She was calling to see if I wanted to go. Heck yeah I wanted to go! This was the Australian Open! So without giving it too much thought, I said yes.

Of course, I hadn’t planned for this trip. At all. I hadn’t saved for it. I hadn’t carved the time out of my schedule. And it was only a few weeks away. This was a last-second, impulse decision to the extreme.

Now, I had an amazing time and don’t regret a single thing. But money was tighter in the months surrounding the trip and everything was just a little more stressful. In an ideal world I would have planned for this kind of trip months ahead of time. Sometimes life happens and the planning happens in hindsight.

Tips to Make a Plan For Your Finance

As I meet with clients to present their financial plan, it is common to sense a figurative (and often literal) sigh of relief at the meeting’s end. Admittedly, some may just be glad to have survived the long presentation, but I’m fairly certain that most are relieved to have a path forward.

A recent article on (“From Voting to Writing a Will: The Power of Making a Plan”) struck a chord with me and added a little bit of science to my observation. In this piece, Todd Rogers and Adan Acevedo apply behavioral science to show how having a plan can reduce the “intention-to-action gap” that so many of us can relate to.

Ideally, we should have a plan in place before a crisis hits and we need to act. This is a central theme in all aspects of financial planning – do you have a Will, is your emergency fund sufficient, is your home adequately insured, are you saving enough for retirement? Thinking about these questions and then building a plan to address them can decrease some of the stress and anxiety in our lives.

During the recent Metro Washington Financial Planning Day, one of the presentations addressed the value of running a “financial fire drill.” As children we were taught to “stop, drop, and roll” during fire safety awareness events. As adults, a financial fire drill can help us assess whether we are prepared to address adversity in our financial lives.

An effective plan defines the desired end goal as well as the necessary steps to achieve that goal. We may need to adjust our initial path as “life happens,” but the planning process is iterative and can help keep us on track. I borrowed a bit of wisdom from my colleagues and now use it at the conclusion of each financial plan I write: “Financial planning is an ongoing process as opposed to a single event and your plan will need to change as your life changes.“ Do you have a plan to push beyond life’s challenges and reach your goals?


Control of Your Money

When most people draw up a household budget, they envision paying for a list of necessities and then using the rest of their income on “extras” that are important to them. Yet many of these well-intentioned people end up frustrated and disappointed when their carefully planned budget becomes unworkable within weeks or even days.

Here’s the problem: When creating budgets, most people think only in terms of normal monthly bills and obligations — rent or mortgage, food, regular loan payments, utilities and so on. But they don’t create a realistic plan that takes into account what they actually spend.

Inevitably, this approach leads to ongoing stress and frustration because something always derails the plan. At worst, it can lead to an ever-increasing accumulation of credit card debt.

A better spending-and-saving plan will make the stress disappear and give you control over your financial future.

A step-by-step budgeting method

Here’s a budgeting system that is realistic and takes into account not only regular monthly payments, but also spending that doesn’t happen every month, or even every year. Follow this plan, and you’re less likely to be surprised by costs that weren’t on your original budget.

Start with your net monthly pay

This means all the money available for spending after all paycheck deductions have been taken out (such as taxes, health insurance and retirement plan contributions).

Subtract the amount needed to ‘pay yourself first’

The concept of “paying yourself first” is important. It’s doesn’t mean taking a chunk of your income and spending it on whatever you desire that particular month. It means taking some money from each paycheck and setting aside for additional savings beyond your employer’s retirement plan, as well as for paying down outstanding debt. This will help you secure your financial future.

Subtract a reserve for non-monthly expenses

One of the most important things you can do to budget realistically is to create a short-term savings account for non-monthly expenses. This includes things that are fairly easy to plan for, such as car insurance bills that arrive every six months; set aside one-sixth of that total every month in your savings reserve.

Don’t stop there, though. This category also includes seasonal expenses, such as home landscaping, and those that tend to occur annually in bunches, such as vacation costs and gifts.

Replacement items and maintenance also fall into this category. For example, you will have to replace “personal property” like furniture and large appliances once in a while. Lower-cost items, such as a toaster or hair dryer, will need replacing from time to time, too. A new toaster may not seem like much of an expense, but if you do not plan for it, it can blow up your spending plan.

Your car will need routine servicing, as well as new tires on occasion. If you own a house, eventually things like the furnace, air conditioning, roof and driveway may need to be replaced.

The question is how much to set aside for all of this replacement and maintenance. Here are some rules of thumb:

  • Personal property — 2% to 4% of your net annual pay to replace and maintain items
  • Car maintenance and tires — 5 to 10 cents per mile. For example, if you drive 10,000 miles annually, you should plan on $500 to $1,000 per year for car maintenance. Most of this would be set aside into short-term savings that you could draw on as expenses arise. But 20% should be set aside in a longer-term savings account to replace tires when needed.
  • Home maintenance and replacement — 2% to 3% of your home’s value. Roughly one-third of this amount should be in a longer-term savings account to cover replacement of higher-ticket items like furnaces, driveways and roofs.
  • Contingency fund — 2% of net annual pay to cover stuff that you just didn’t think of.

The Lookout for Everyday Scams

Each year, hundreds of thousands of older Americans are victims of abuse, particularly financial abuse. As a financial advisor, it’s part of my job to be on the lookout for the warning signs of such exploitation. But over time what I’ve found is that people of all ages get scammed all the time.

These incidents may not in all cases be criminal, but they are ways in which we unwittingly are parted from money we’d much rather keep. Call them everyday scams – and we can all be more alert to make sure we don’t fall victim.

Here are a few prime examples I’ve seen lately:

1. A cable company continues billing on auto-pay even after the service is switched to another provider. For one client, this wasn’t discovered until several months later when we compared the cutoff date using checking account records. The company finally quit billing my client, but the refund still hasn’t arrived.

2. A dentist’s office (or doctor’s office) charges a patient’s credit card even though it is also submitting an insurance claim. By checking the explanation of benefits that my client received several months later, I could see that the dentist was promptly paid by the insurance company. Only our complaint initiated the refund of the credit card charge.

3. Fake charity sites crop up on Facebook, usually after some real and dramatic event. With this ploy, the money goes to a scammer rather than the victims of the incident. Once alerted, Facebook takes the post down, but that may come too late for those who have been bilked out of their money.

4. “Free for the first 30 days” is probably the most frequent moneymaking tactic I see by companies. They continually hit your credit card each month because you forget to cancel your commitment. These charges can pile up, so monitor your statements closely.

5. Same price, smaller package. Crackers, candy and plenty of other consumer goods fit into this category. Manufacturers may believe you won’t catch on, but I noticed it just the other day with my carton of ice cream. Be alert so that you can shop smart as smart as you can.

6. Your computer gets hijacked. “We’ll remove the virus for $50 so your computer will work again,” they say. This usually happens after you fall for the “free” virus scan. Luckily, in this case, the victim had paid for an extended warranty and service ahead of time, so the problem was remedied.

Your Student Loans

Already high, student loan debt creeps higher each year. In 2013, the average borrower who had taken out student loans graduated from college with $28,400 in debt, according to the Institute for College Access and Success. New estimates for the class of 2015 put that figure even higher, at $35,000.

Meanwhile, the average starting salary for new graduates with a bachelor’s degree is $48,127, according to the Society for Human Resources Management.

That’s a tough way to start your professional career. And if that’s what your situation looks like, it’s probably tempting to just make your minimum monthly payments and know that your debt will be gone in 10 years.

But that’s not the only way to go — and not necessarily the best way. Paying just a little more than the minimum each month can get you debt-free a whole lot sooner and save you a lot of money. To see just how big of a difference it can make, let’s crunch the numbers.

A few assumptions first

Here are the assumptions I made when analyzing the numbers for a typical graduate:

  • Total debt of $35,000, all of which was a federal student loan disbursed in 2011 with an interest rate of 5%.
  • A minimum monthly payment of $363 on a standard 10-year repayment plan (obtained using the Federal Student Aid repayment estimator).
  • Annual income of $48,000 per year, with take-home pay of $3,500 a month (obtained using TurboTax’s TaxCaster).


How much money could you save?

Using these numbers, I ran three different scenarios through PowerPay (a great tool if you want to check things yourself). Here’s how it played out.

Scenario 1: Pay the minimums

The minimum monthly payment is $363, which is about 10% of take-home pay.

If you made every single one of those monthly payments, you would be debt-free in 10 years after having paid more than $8,500 in interest.

Scenario 2: Pay more

Say you found some creative ways to save money and increased your monthly payment to $500, about 14% of take-home pay.

You would be debt-free in just under seven years and you would save yourself $2,853 in interest. All of that — just for finding an extra $137 to put toward your debt each month.

Scenario:Pay a lot more

But what if you want to get really serious? What if you feel like your debt is an emergency and you want to get rid of it as soon as possible?

Well, if you could bump your monthly payment up to $1,000 per month, you would be debt-free in just over three years and you would save yourself $5,938 in interest.

And if you wanted to get really crazy and put 50% of your take-home pay toward your student loans ($1,750 per month), you’d be debt-free in under two years and save yourself more than $7,000 in interest!

What would you do with all that money and no debt holding you back?

Value of Money Thats True

Why are you working so hard to make good financial decisions?

Why are you tracking your spending, living by a budget, paying off debt, building an emergency fund, contributing to a 401(k), and everything else you’re doing to improve your financial situation? What’s your endgame here? Have you thought about it? I mean, really sat down and thought about why you’re making all this effort?

I’ll tell you what, it’s not about making the “right” financial decisions. That alone won’t make you happy. And it’s not about having more money. A bigger bank account won’t automatically make you happy, and neither will all the stuff you can buy with that money.

What WILL make you happy is the time you can afford to spend because of the money you have in the bank.

True Financial Freedom

True financial freedom is the point at which you’re able to make decisions based on what makes you happy instead of what makes you money.

It’s the point at which you no longer need the next paycheck because you have the savings to cover it. It’s the point at which you can afford to take time off and travel the world or be home with your kids. It’s the point at which you can change careers because the new one is more meaningful to you, even if it’s not as financially lucrative.

Financial freedom doesn’t necessarily mean that you never have to work again. It just means that you’ve put yourself in a financial position where you’re able to spend your time in ways you enjoy.

What Does It Take?

So, what does it take to get to the point where your money allows you to spend your time as you please? First, it takes an understanding of what you actually want to be spending your time on. What excites you? What energizes you? Which people do you want around you? What missions do you want to be a part of?

Second, it takes an estimate of how much money you’ll need to be able to do those things, and when you’ll need it. It doesn’t have to be exact. Just a reasonable guess is enough to get started.

Finally, it takes a plan for how you’re going to save that money and consistent action to make sure that plan gets carried out.

And it’s really that last part that’s the most important. Consistently saving money is the key to giving yourself financial freedom. You don’t need to be a millionaire, but having money in the bank allows you to make decisions based on what makes you happy, instead of what makes you money.

How Will You Spend Your Time?

No one ever sits back late in life and reminisces on the money they made and the stuff they bought. It’s the things we experience, the people we love, and the missions we accomplish that make for a happy, fulfilling life. And if you’re smart about it, your money can give you the time you need to pursue them.

All About Investing

Evidence increases by the day that more consumers are moving towards a plant-based diet. How can the average investor take advantage of this trend?

Low-cost index investing has become a popular approach to achieve market returns and will continue to be used by more individual and institutional investors. On the other hand, sustainable investing is also a growing trend, as more investors recognize that an “all-of-the-above” index investing strategy conflicts with their worldview. Index investors are accepting the status quo by owning companies as they are. Sustainable investors are driving change by using fund managers who engage with companies to adopt positive changes or by simple divestment (i.e. avoid investment in the company or sector).

I envision three groups of individuals who would find plant power investing attractive – vegans, vegetarians and advocates of a healthy eating / living lifestyle (ironically, HE/LL for short). The majority of individuals in this category, however, are not in a position to take on an extraordinary amount of investment risk. Investing in “pure play” meat or egg substitute start-up companies is beyond their financial reach.

The growth in the number of mutual funds that divest from fossil fuels provides an example that plant-based investors might want to follow. Why not simply avoid companies that are in obvious conflict with your worldview? Truth is, there are sufficient large, established companies to choose from in order to develop an investment portfolio that may satisfy both financial and personal goals.

As I point out in my book, Low Fee Vegan Investing, there are currently no mutual funds targeted to plant-based investors. This is unfortunate since, without this option, most investors are not in a position to take on the effort or cost to implement a strategy that would otherwise meet their needs.

I believe there are two easy steps plant-centered investors can take to encourage the development of a suitable investment tool (e.g., mutual fund, plant-based index fund). The first step would be to contact their investment professional and state an interest in having a portfolio which reflects their worldview. If sufficient demand develops, this will be noticed by financial service providers (again, recall what happened with fossil fuel divestment – many mutual funds and ETFs options were developed in a fairly short amount of time). Second, participate in the short “Plant Power Survey” that I developed to start counting the number of plant-based investors interested in this concept and, equally importantly, develop a consumer preference data set that might help the community of portfolio managers generate a set of filters for use until investor demand warrants the expense of more rigorous research.

Average investors can, collectively, use the tools of sustainable investing to exercise their power and achieve the extraordinary.


Is Renting Better than Buying

Have you ever felt pressured to buy a house? Maybe from your friends, your family, your co-workers, or even yourself? Like you haven’t actually made it as an adult until you own your home?

It’s a common feeling, but the truth is that buying a house ISN’T always the right decision. In some cases renting is a smarter move, both for your wallet and your lifestyle. Here are four reasons why.

1. Flexibility

Life changes fast. That great new job you just started might turn into an exciting opportunity in a different city. That big family you planned on having might turn into a smaller one.

Renting gives you the ability to quickly change your living situation to best match the new realities of your life. That flexibility can be the difference between seizing an opportunity and having to pass on it.

2. Cost

Proponents of buying like to say that when you’re renting, you’re essentially paying off someone else’s mortgage. So why not buy and make sure that money is going towards yourself?

There is some truth to that, if you stay in one place for an extended period of time (typically 5-7 years or longer), then buying often results in the lower long-term cost.

In the meantime buying can be really expensive. There’s the upfront cost of the down payment. There’s the cost of handling the fixes and improvements that come with any new purchase. There’s the cost of new furniture. There are the ongoing costs of insurance, taxes, and maintenance.

Renting has costs too, but they’re often much smaller and more predictable, at least in those first few years. And in many markets where housing prices are high, renting can actually be a better long-term financial decision.

You can use this calculator from The New York Times to figure out just how long you would have to live in one place before buying became cheaper than renting.

3. Adjustment

Renting is often a great idea any time you move to a new place.

It gives you the opportunity to figure out which neighborhoods you like and which you don’t so that you can eventually make a buying decision you’ll be happy with for the long-term. There’s no sense in being stuck somewhere you don’t like simply because you felt rushed into buying a house.

4. Stress

Owning a home has plenty of benefits, but it can also come with a lot of stress.

Any time something needs to be fixed, it’s on you to either do it yourself or pay for it to be done by someone else. And of course there’s that big mortgage that can feel like a weight on your shoulders.

Renting comes with fewer commitments and fewer responsibilities, which can lead to lower day-to-day stress.

The Fiduciary Standard for Investment Advice

The typical answer: These issues both seem very complicated to me, I’m already concerned where you are going with this, so let’s change the subject.

My answer: They both have the potential to alleviate human suffering, grow the economy, increase employment, and compel us to choose leaders willing to support policies that are not partisan in nature.

It is no secret that, as the use of fossil fuels has increased, carbon dioxide levels have been increasing at a rate of about 0.5% per year for the past several decades. The economic benefit of converting carbon locked up in fossil fuels for millions of years into instant energy, of course, has provided prosperity to many for the last century (e.g., inexpensive travel, food choices, home/office heating and cooling). Unfortunately, the last several generations have passed the true costs forward to the next many generations. Carbon dioxide traps heat energy in the atmosphere. The resulting disruptive impacts of excess atmospheric heat contributes to increasing human suffering (e.g., droughts, floods, wind damage). It is increasingly apparent that the true cost of burning fossil fuels has not been reflected in its price. Economists consider it a market failure when the true cost of a product or service is not reflected in its price.

If fossil fuels were now priced at their true cost, the fossil fuel age would be brought to a close and allow for a new era of sustainable energy to be established. Technology to make this happen is already in place. Improved policy making is needed to move us forward toward. A good example is the policy offered by the nonpartisan Citizens’ Climate Lobby (CCL). CCL’s carbon fee and dividend proposal was studied by an independent entity, Regional Economics Models, Inc. (REMI). The results of the analysis showed that a gradually increasing fee on fossil fuels at the source, where the collected fees are distributed as dividends to households, would transition society from an unsustainable dependence upon fossil fuels and grow the economy by generating 2,800,000 new jobs and avert 230,000 premature deaths over a 20-year period. Members of congress are aware of the CCL bipartisan proposal and are looking for signs of support from their constituents (surveys show 68% favorability of a fee and dividend approach to carbon pricing) in order to overcome the actions of the fossil fuel industry to delay the needed transition to clean energy.

Prior to 1980, most members of the middle class did not need an investment advisor – you paid off the mortgage, saved some extra cash and relied on a pension and your Social Security benefit to fund retirement. With the advent of 401k plans and the demise of pension plans, the financial services industry grew to a scale comparable to the fossil fuel industry in economic size. It took a relatively long time for policy makers to identify that excess investment management fees are a cause of significant avoidable financial loss to savers. For instance, a retired couple without pensions and a savings of $1,000,000 may expect to draw down $40,000 per year to supplement their Social Security benefits. If their investment advisor charges a fee of 1% or 2% per year over the true (i.e., competitive) cost of the service provided, the couple is getting by with $10,000 or $20,000 less per year –as little as half the amount they expected! Is this suffering? Let’s consider a single retiree who has $300,000 in savings and no pension. This retiree is sold an annuity with a 10% upfront commission ($30,000) and locked into an investment management contract he did not fully understand with an annual fee of greater than 2% per year for 10 years. Excessive, non-transparent, fees benefit few at the expense of many.

The Department of Labor recently published a rule that would require more investment advisors to act in their clients’ best interests (i.e., act as a fiduciary), which involves disclosure of fees and conflicts of interest. Many financial service providers have already shifted their practices and service models in anticipation of this ruling (e.g. one firm stopped selling nontraded Real Estate Investment Trusts with a 12% commission). A June 11th article in The Economist pointed out how informed investors are moving to lower fee investments. Keeping more wealth back in the hands of middle class investors allows for more economic activity and, by economic inference, more employment. A fiduciary standard provides for more informed investors. At the current time, however, a partisan effort is underway to overturn the fiduciary rule.

In a post-Citizen’s United world, it has become easier for established financial interests, such as the fossil fuel and financial services industries, to fund actions that promote their own narrow short-term interest and influence policy-making. The influence of large contributions to political campaigns has made otherwise solvable problems difficult to tackle by fabricating a partisan dimension to them. Without sufficient citizen involvement, progress that leads to benefits for the many can be too easily stifled.

Tax Payments Online

Did you know it is possible to schedule your estimated tax payments online?  This is a very handy service for people who have to make Form 1040-ES estimated tax payments in April, June, September and January each year.  To make your payments, use the Electronic Federal Tax Payment System (EFTPS®).  The EFTPS® enables individuals and businesses to send their tax payments to the IRS by electronic transfer rather than writing a check and mailing it, or sending an expensive wire.

With the Electronic Federal Tax Payment System (EFTPS®), a free service of the U.S. Department of the Treasury, you schedule payments whenever you want, 24 hours a day, 7 days a week. You can enter payment instructions up to 365 days in advance.  This way when your tax preparer completes your taxes and calculates next year’s estimated payments, you can login online and schedule those payments.  Then you’re done.  The nuisance of mailing in those payments by check every few months has been removed.

Reasons to use the service include:

  • It’s fast. You can make a tax payment in minutes.
  • It’s accurate. You review your information before it is sent.
  • It’s convenient. You can make a payment from anywhere there’s an Internet or phone connection 24 hours a day, 7 days a week.
  • It’s easy to use. A step-by-step process guides you through scheduling payments.
  • It’s secure. Online payments require three unique pieces of information for authentication: an employer identification number (EIN) or social security number (SSN); a personal identification number (PIN); and an Internet password. Phone payments require your PIN as well as your EIN/SSN.

One thing to be aware of is that you can’t wait until the due date to make your first payment!  Payments must be scheduled at least one calendar day before the tax due date by 8 p.m. ET to reach the Internal Revenue Service (IRS) on time.  On the date you select, the funds will be moved to Treasury from your banking account, and your records will be updated at the IRS.

There are a couple of other items to consider.  Obviously it is important you have the funds in the checking account you are transferring from.  The first time you use the system, you will have to enroll.  Also remember that the EFTPS® is a tax payment service.  You’ll need to already know the amount, tax form, and date when you schedule a payment.  This system doesn’t help you calculate your tax due.  If you want to cancel a payment, you must do so by 8 p.m. local time two business days before the scheduled date.

For those of you that make estimated payments each year, I urge you to consider using this service.  It will make your life a little easier.