Spending & Saving

How to Make Sure “Lifestyle Creep” Doesn’t Ruin Your Financial Plan

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Sometimes more money can mean more problems.

“Lifestyle creep”

An unusual phrase describing an all-too-common problem: the more money people earn, the more money they tend to spend.

Frequently, the newly affluent are the most susceptible.

As people establish themselves as doctors and lawyers, executives, and successful entrepreneurs, they see living well as a reward. Outstanding education, home, and business loans may not alter this viewpoint. Lifestyle creep can happen to successful individuals of any age. How do you guard against it?

Keep one financial principle in mind: spend less than you make.

If you get a promotion, if your business takes off, if you make partner, the additional income you receive can go toward your retirement savings, your investment accounts, or your debts.

See a promotion, a bonus, or a raise as an opportunity to save more.

Do you have a household budget? Then the amount of saving that the extra income comfortably permits will be clear. Even if you do not closely track your expenses, you can probably still save (and invest) to a greater degree without imperiling your current lifestyle.

Avoid taking on new fixed expenses that may not lead to positive outcomes.

Shouldering a fixed mortgage payment as a condition of home ownership? Good potential outcome. Assuming an auto loan so you can drive a luxury SUV? Maybe not such a good idea. While the home may appreciate, the SUV will almost certainly not.

Resist the temptation to rent a fancier apartment or home.

Few things scream “lifestyle creep” like higher rent does. A pricier apartment may convey an impressive image to your friends and associates, but it will not make you wealthier.

Keep the big goals in mind and fight off distractions.

When you earn more, it is easy to act on your wants and buy things impulsively. Your typical day starts costing you more money.

To prevent this subtle, daily lifestyle creep, live your days the same way you always have – with the same kind of financial mindfulness. Watch out for new daily costs inspired by wants rather than needs.

Live well, but not extravagantly.

After years of law school or time toiling at start-ups, getting hired by the right firm and making that career leap can be exhilarating – but it should not be a gateway to runaway debt. According to the Federal Reserve’s latest Survey of Consumer Finances, the average American head of household aged 35-44 carries slightly more than $100,000 of non-housing debt. This is one area of life where you want to be below average. (1)

Sources

  1. time.com/money/5233033/average-debt-every-age/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Planning Income For Life: Using The Bucket Strategy in Retirement

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Constructing a portfolio this way may help you ride through a bear market in retirement.

The bucket approach may help you through different market cycles in retirement.

This investing strategy, credited to a Florida financial planner named Harold Evensky, has simple and complex variations. It assigns fixed-income and equity investments to different “buckets” with the goal of providing sufficient cash flow to retirees during different stages of their “second acts.” (1,2)

The simplest version involves just two buckets.

One holds the equivalent of 1-5 years of cash reserves (in deposit accounts and/or fixed-income investments), and the other holds everything else in the investment portfolio. When you need to fund your expenses, you turn to the cash and the fixed-income vehicles and leave equities untouched. Rebalancing your portfolio (that is, selling investments in an overweighted asset class) lets you increase the size of your cash bucket. (1,2)

Other versions of the bucket approach have longer time horizons.

In one variation designed to be used for at least 25 years, a cash reserve bucket is created to fund the first two years of retirement, its size approximating 10% of the portfolio; the cash comes from FDIC-insured sources or Treasuries. A second bucket, intended to generate somewhat greater income, is planned for the rest of the first decade of retirement; this bucket is filled with longer-duration, fixed-income investments and comprises about 35% of the portfolio. The third bucket (the other 55%) is designed for the years afterward and contains a sizable equities position; the goal here is to realize some growth and compounding for a decade, then tap into that bucket for income. (1,2)

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In glimpsing the details of the bucket approach, you can also see the big picture.

Suppose a bear market occurs just as you retire. Since your retirement income strategy pulls cash from deposit accounts and fixed-income investments first, your equity positions have time to rebound. You have a chance to avoid selling low (and selling off part of your retirement fund).

Is the bucket approach foolproof?

No, but no investing strategy is. In the worst-case scenario, you drain 100% of the cash bucket(s) and end up with an all-equities portfolio. That is hardly what you want in retirement. Bucket allocations must be carefully calculated, and periodic bucket rebalancing is also needed.

The bucket approach may have both financial and psychological merits.

Most retirees use the 4% rule (or something close) when withdrawing income: they take distributions from various accounts and asset classes, perhaps with little regard for tax efficiency. If Wall Street stumbles and their portfolios shrink, they may panic and make moves they will later regret – such as selling low, abandoning stocks, or even running toward alternative investments in desperation.

When you use a bucket approach, you first turn to cash and/or liquid securities for retirement income rather than equities. Psychologically, you know that if a bear market arrives early in your retirement, your equity holdings will have some time to recover. This knowledge is reassuring, and it may dissuade you from impulsive financial decisions.

Sources

  1. seattletimes.com/business/about-to-retire-heres-how-to-cope-with-stock-market-shocks/
  2. news.morningstar.com/articlenet/article.aspx?id=839521
  3. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

7 Tips to a Financially Secure Retirement

If you haven’t retired already, at some point you’ll probably want to. Financial security in retirement doesn’t just happen. It takes planning, commitment and money. You’ll need enough money to potentially live on for at least 20 years, probably more. With the average life expectancy in the U.S. at nearly 80 and growing (1), you’ll want to be sure you can maintain the lifestyle you envision throughout your retirement years.

To help you focus on what you should be doing to succeed, here are 7 planning tips:

1. Make Saving a Habit

If you are already saving every month, awesome! Keep going! If you’re not, start now. The sooner you start the more time your money has to grow.

2. Know Your Retirement Expenses

This is much easier to do the closer you get to retirement. A twenty or thirty year old may have no idea what those numbers will eventually be. If that is you, concentrate more on the other tips. For those of you with retirement in your sightline, figure you will need AT LEAST 70% of your pre-retirement income to live comfortably. Knowing what you need is the key to getting what you need. The key to a secure retirement is to have a clearly defined goal.

3. Participate in your 401(k) or 403(b)

If your employer offers a 401(k) plan or 403(b) plan sign up and aim to contribute to the maximum. Over time, compound interest and tax deferrals can make a huge difference in the amount you accumulate for retirement.

4. Invest Wisely

Diversify your savings to reduce risk (i.e. don’t put it all on black!). In a nutshell, risk simply means how much money could you potentially lose with your investments. To check your current tolerance for risk use our free tool. It will give you something called your Risk Number™ which is a great starting place to see how much risk you can emotionally handle. You can then compare that to the Risk Number™ of your current portfolio and see if they match up or if you potentially need to make changes. Keep in mind, your investment mix may need to change over time due to age, goals, and circumstances, so it’s always a good idea to monitor your risk tolerance and portfolio allocation. Remember, financial knowledge and financial security go hand in hand.

5. Check Your Social Security Benefits

Social Security benefits provide supplemental income to you and your spouse during retirement. If you are counting on social security to bail you out, think again. Social Security provides enough for you to live around the poverty line. Check the Social Security website to see how much the government will pay you every month.

6. Ask Questions

The more you know, the better your chances of enjoying financial security in your retirement years. Talk with your accountant or financial advisor. Better yet, book a meeting with me right now! Ask questions and get good advice. Build a plan, and stick with it.

7. Make Planning for Your Retirement a Priority

Use our retirement check-up tool to find out if you are on the right track. It’s never too early or too late to start saving for your future. However, the longer you wait or leave things to chance, the less likely you will live a financially secure retirement.

“Planning is bringing the future into the present so that you can do something about it now.” -Alan Lakein

If you know anyone that could benefit from this advice, feel free to share this video with them. Good luck on your journey toward a financially secure retirement.

For more financial planning tips, download my free report: “8 Steps to Organize and Optimize Your Financial Life”. Thanks for reading!

The Golden Rule for Financial Success

This seemingly simple task is nearly impossible for many of us to do consistently and successfully. But, if you learn the rule early and stick to it, you will be well on your way toward financial freedom. So, what is the Golden Rule? Spend less than you earn.

Spend < Earn

Many of you working with us already know the rule. However, be sure to share this essential advice with your kids and grandkids to help set them up for financial success.

If this is the first time you are hearing this advice, pay attention. Spending less than you earn is the first step toward creating a REAL financial strategy. If you spend more than you make the only place you can go is into debt. When your debt becomes unmanageable you lose your financial independence. This means you may have trouble affording to do the things in life you want to.

The Benefits

When you spend less than you earn you can have money to:

My Advice

Regularly set aside money the same way you would pay any other bill. By doing this, you carve out savings from what you earn as if it were an expense.

“Never Spend Your Money Before You Have It” -Thomas Jefferson

Think of it as the cost of purchasing your financial freedom! As a rule of thumb, aim to save at least 10% of what you make.

What to Do if You are in Debt?

If you are deep in debt, get educated about your money and create a plan to dig out. You will need to find ways to:

  • Decrease your expenses
  • Maximize your savings

Online tools like First Step Cash Management, YouNeedaBudget.com, and Mint.com can help you monitor and control your cash flow. In addition, clients of Weiss Financial Group can track their spending in their Secure Client Website. I’ve found that these online tools really help you understand where your money is going so you can make informed decisions about your spending habits.

Video:

If you know anyone that could benefit from this advice, feel free to share this video with them. Good luck on your journey toward financial independence.

For more financial planning tips, download my free report: “8 Steps to Organize and Optimize Your Financial Life”. Thanks for reading!

How Big Should Your Emergency Fund Be?

Having an emergency fund is essential to a successful financial plan. You won’t truly understand how important it is to your financial health until the day comes when you absolutely need it. So, how much do you actually need in your emergency fund?

Rule of Thumb

The basic rule of thumb has been 6 months of take home pay or 6 months basic living expenses. However, the problem with rules of thumb is that they don’t take into account the nuances of people’s lives. The size of your fund will depend on your personal situation and financial needs. Figuring this out is more art than science.

When I work with a client I actually do use a general rule of thumb as a starting point to determine how much they should have. I try to figure out if they should save 3, 6, 9, or 12 months basic living expenses or 3, 6, 9 or 12 months take home pay. What’s the difference? Well, for one thing saving for basic expenses may be a lot easier than saving for take home pay. However, saving only for basic expenses could mean a lifestyle change when you need to start tapping that fund. Whether you can make those changes is an important question you’ll need to ask yourself when building your fund.

Questions to Ask Yourself

Take some time to think about the list of questions below. The answers to these questions will help you figure out what your emergency fund goal should be:

  • How much do you take home in your paycheck every month?
  • What are your basic monthly expenses (i.e. groceries, mortgage, car payment, insurance, utilities, etc.)?
  • What are your extras every month (i.e. shopping, entertainment, dining, vacations, children’s activities, etc.)?
  • How much are your insurance deductibles?
  • Are you married or single?
  • Do you have anyone you are financially responsible for?
  • How secure is your job?
  • If you lost your job how difficult would it be to replace your income?
  • How long would it take for you to get another job?
  • Are you retired?

Now let’s take a look at my more broad rules of thumb and who they might be good for. Keep in mind, the examples I use below to illustrate a hypothetical emergency fund assume saving for basic living expenses. You will need to increase that amount if you want to save for take home pay.

The 3 Month Fund

In my opinion, this is the bare bones amount anyone should have in their emergency fund. When you are just starting to build a fund your goal should be to set aside 3 months of basic monthly expenses.

Who is this good for?

  • Anyone just starting to build an emergency fund (Having a small fund is better than having no fund at all!)
  • Someone in the early stages of their career
  • Someone who does not have any dependants or still lives at home

Example:

  • Monthly take home pay = $3,000
  • Monthly living expenses = $2,500
  • Emergency fund = $7,500

The 6 Month Fund

Once you’ve started to make some money and have responsibilities like auto payments, rent, student loans, etc. this should be your goal.

Who is this good for?

  • Anyone with financial responsibilities
  • A married couple with no children
  • Someone who many not have a mortgage

Example:

  • Monthly take home pay = $5,000
  • Monthly living expenses = $4,000
  • Emergency fund = $24,000

The 9 Month Fund

At this point in your financial life, you may be married, have children and have a mortgage. You have accumulated a good deal of financial responsibilities and a disruption in income will cause a significant lifestyle change.

Who is this good for?

  • Someone with a mortgage
  • A couple who have similar salaries
  • A married couple with children
  • Someone who feels they can land another job within 6 months of losing their current job

Example:

  • Monthly take home pay = $7,500
  • Monthly living expenses = $5,000
  • Emergency fund = $45,000

The 12 Month Fund

When your financial situation gets more complicated and your financial responsibilities have grown, you may need to consider this larger emergency fund.

Who is this good for?

  • A married couple with unequal incomes
  • Someone with a mortgage
  • Someone who is concerned it will take awhile to replace their income if they lost their job
  • A married couple with children
  • Someone who is fairly risk averse and knows they will sleep better at night if they have a large emergency fund

Example:

  • Monthly take home pay = $10,000
  • Monthly living expenses = $8,000
  • Emergency fund = $96,000

Bonus: The 24 Month Fund

This fund is reserved specifically for retirees. It covers a much longer time frame because the emergency fund serves a different function during retirement than it does during your working years. If you are taking systematic withdrawals from your investment accounts to fund your retirement, you should have at least 24 months of basic living expenses set aside to use during market downturns. This money should be in safe and highly liquid investments like traditional savings accounts, CD’s, money market accounts or money market mutual funds.

Who is this good for?

  • Retirees taking systematic withdrawals from investment accounts
  • Retirees not wanting to make lifestyle changes during market downturns
  • Retirees not wanting to reduce their withdrawals during market downturns

Example

  • Monthly withdrawal from investments = $2,000
  • Emergency fund = $48,000

5 Important Things to Remember

  1. Never invest your emergency fund in equities
  2. Always keep the money for your emergency fund in safe, highly liquid investments like traditional savings accounts, CD’s, money market accounts or money market mutual funds.
  3. If you deplete your fund, make it a priority to build it back up
  4. To assist in building your emergency fund, set up a separate, designated savings account and have automatic transfers deposited into that account
  5. Avoid using a line of credit as your emergency fund

As you have seen, there is no one right way to build an emergency fund. I’ve illustrated what I believe to be a prudent approach and provided a sample of possible solutions. As such, I tend to be fairly conservative and risk averse in my recommendations as far as emergency funds are concerned. To determine your ideal emergency fund, I encourage you to honestly answer the questions above and closely examine your personal financial situation. What is good for you may not be the same as what is good for someone else.

To learn what I can do for you visit www.weiss-financial.com.

Best Personal Finance Books of 2015

I often get asked for book recommendations, so I thought now would be a great time to pass along my favorite personal finance books of 2015. I’ve broken down my list into a few categories so you can find one right for you, but, truthfully, all of these are fascinating reads. As you’ll see, my favorites are those that manage to take complicated financial topics and explain them in an easy, approachable way.

Books

Best for Parents:
The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.
by Ron Lieber

This was actually my personal favorite, probably because, being a parent, it had the most direct impact on my life. Any parent today can attest to how difficult it is to make our kids understand and appreciate all they have. Stuff is so easy to acquire these days that they often take for granted all they have. Lieber outlines many strategies for dealing with this modern parenting issue, however, his take on allowance was the most intriguing to me. The premise is in order to teach our kids about the value of money, give them a weekly allowance not tied to chores. The theory is if you want to teach your kids how to budget, save and value their money, give them a weekly allowance. If you are trying to teach your kids about discipline and the value of hard work then focus on their studies, extra curricular activities and sports programs. I had my doubts, but figured I it was worth testing out since my previous attempts at giving allowances to my 6 and 9 year olds fizzled out after a short period of time. Surprisingly, it worked for us. I started giving my boys $5 a week in April. My youngest son initially spent the money as soon as he got it. My oldest son decided he would save his money to buy a new Wii. Between his allowance, birthday gifts, and various holidays he accomplished that goal quicker than my wife and I expected. The deal is they can use the money for whatever they want. Toys, apps, video games, books, whatever, it’s their money. My youngest soon learned the value of saving and stopped spending his cash so quickly. The bonus for my wife and I was that the kids stopped asking for stuff all the time. After 4-6 months they realized they could get whatever they had enough money for (and mom and dad approved of). If they don’t have enough money they now know they need to save. What they haven’t totally figured out yet is that they could make more money if they started doing some work around the house! The author suggests paying the kids for tasks you might pay someone else for. I got my youngest son to do some weeding in the summer but so far I haven’t had much additional success. I’m not saying this will work for everyone but both my wife and I were very surprised at how quickly the kids learned to budget, save and learn the value of a dollar. Definitely worth a read.

Best For Planning:
The One-Page Financial Plan: A Simple Way to Be Smart About Your Money
by Carl Richards

I believe everyone should have a financial plan. The problem is if you don’t know where to start, are just beginning your career, or you are not working with a Certified Financial Planner, you probably haven’t created one. This book outlines how to focus on the big picture and create a simple, workable financial plan. It clears away all the noise that distracts most people from creating a plan and helps you stick to the important stuff and get you headed in the right direction.

Best For Everyone:
Happy Money: The Science of Happier Spending
by Elizabeth Dunn, Michael Norton

This is my second favorite book I read in 2015. Even though it was actually published in 2013 I kept in on my list because of how good it is. The idea behind it is that money CAN actually buy happiness… if you use it wisely. Their research revealed some fascinating things like luxury cars often do not provide more pleasure than economy cars, and that spending your money on experiences will give you more happiness bang for your buck than buying stuff. No doubt, after reading this book you will question where you are currently spending your money and if you are getting the most happiness you can out of those purchases.

Best For Pre-Retirees:
Get What’s Yours: The Secrets to Maxing Out Your Social Security
by Laurence J. Kotlikoff

Alright, admittedly this is the least exciting book on the list. I mean, who really wants to read a book about Social Security during their free time? Nevertheless, Social Security can be an incredibly confusing maze of options. Knowing which claiming strategy is best for your situation can be overwhelmingly difficult for most people without enlisting help. Choosing the wrong strategy can cost you tens of thousands of dollars over your lifetime. This book explains the options in plain english and uses real world examples to help it make sense. I strongly recommend this book for anyone trying to decide when to start claiming social security. One caveat, with file and suspend having recently been eliminated, some of the advice is no longer relevant.

Want some great financial planning tips? Download my free report: 8 Steps to Organize & Optimize Your Financial Life. It’s packed with helpful advice, useful tips and valuable resources.

To learn what I can do for you visit www.weiss-financial.com.