Financial Literacy Test!

I saw a report on financial literacy in America that was a bit embarrassing. So we are going to make sure those of you reading this blog are exceptionally smart when it comes to money. With that, here is a test to get a baseline on your financial fitness:

  1. If you have $10,000 earning 6% a year, how much will you have after 5 years?

A: $13,000    B: $14,800    C: $13,382.26    D: $14,762.46

  1. If inflation is 3%, how much purchasing power will $10,000 afford you after 5 years?

A: $11,592.74    B: $8,500    C: $11,500    D: $8,587.34

  1. If you have $10,000 and the value decreases by 10%, then increases by 10%, how much value do you have?

A: 9,900    B: $10,000    C: $8,800    D: $10,100

  1. If you have $250 a month to pay down debt with, does it make more financial sense to pay off the last $250 owed on a credit card at 5% or apply the money on a $2,000 credit card debt at 12%?

A: Pay off the $250 at 5%    B: Pay down the $2,000 at 12% C: Buy a suit


  1. C. $13,382.26. Don’t forget about compounding interest, dubbed the 8th wonder of the world by Albert Einstein. You would earn $600 the first year, then you would earn 6% on not just the original $10k, but also the $600 you earned the year prior, and so on.
  2. D. $8,587.34. Remember that inflation erodes purchasing power. You may think things are getting more expensive as time goes on, but inflation says your money just isn’t worth as much as it used to be.
  3. A. $9,900. If you take a loss, it takes a higher percentage to get back to where you were. In this example you had $10,000, it decreased 10% to $9,000, and earning 10% on $9,000 only earned you $900.
  4. B. It makes more sense to apply the $250 payment toward the $2,000 credit card debt at 12%. It may feel good to pay off the smaller balance completely, but percentages are percentages. Paying the higher interest debt first always makes more sense than paying the smallest balance first.

How did you do? If you didn’t get them all right, don’t worry about it! These might be basics in financial literacy, but they aren’t commonly taught. You can always learn more about these topics if only with a quick online search.

Alternative Investments

What is an alternative investment? This term simply refers to an investment or asset that isn’t your normal stock, bond, or mutual fund. When I say alternative investment, most people think of real estate or hedge funds. This month let’s talk about the pros and cons of some alternative investments.

  1. Gold (or other precious metals) – This is a very hot topic with a lot of my clients right now. People seem to either love precious metals and allocate way too much of their portfolio to it, or don’t want anything to do with it. Very rarely do I see someone who has a reasonable allocation to a precious metal. The pros are precious metals don’t always move in alignment with the rest of the market. This makes it a great tool to diversify and mitigate some market risk. Within a certain limited period, precious metals have earned a decent rate of return. The cons? It is a tangible asset that isn’t as readily tradeable like a stock is. You must find a buyer and agree on a price if you want to sell the asset. It can also be very volatile.
  2. Real Estate – If you can read this, you have probably also read or heard that everybody makes loads of money in real estate and some lofty statistic that correlates millionaires to investing in real estate. The pros of real estate are the tax advantages, the cash flow opportunities, and potential appreciation. The disadvantages are, similarly to precious metals, it isn’t as readily converted to cash. It takes time to make real estate transactions, often include an agent that can add fees, there are expenses involved in owning real estate, and it takes constant management. The last one is the issue I have in recommending real estate to my clients. The commercials on TV and fliers in the mail advertise double digit returns while you sleep. Historically, cash flow has been the greatest opportunity for wealth building with real estate, not appreciation on it’s own. There is management, upkeep, repairs, replacements, finding tenants, etc. involved. To do it yourself is stressful. To hire out help eats into the returns. Real estate can be a good fit for investors who like to play a more active role in their portfolio. I just like to make sure their expectations are in alignment with the most likely reality.
  3. Art – This is probably the least liquid of the three alternative investments we have discussed. Art takes careful due diligence as the valuations and market size is much smaller than precious metals and real estate. As a result, I have only seen art acquired for lifestyle reasons more than investment reasons. If you enjoy art and it is something you want to invest in, consider working with an expert or two in the industry and don’t take shortcuts in researching before making acquisitions. Your greatest risk is probably overpaying followed by not being able to resell it at the valuation price. The risk of losing money due to actual lost value of the piece of art is smaller than those first two risks in my opinion.

If you have interest in alternative investments, but don’t have any experience yet, consider researching ETFs. There are ETFs that invest in commodities, in precious metal related companies, in real estate, etc. That is one way to gain exposure in your portfolio and some experience before committing to holding the physical assets.

A Post for Valentines Day

Valentines Day isn’t commonly used as an opportunity for a financial adviser (or really anyone in financial services) to post an update to a blog or do much client education. It’s been a while since my last blog post though and I knew I wanted to post something. I thought for a bit and decided I am going to use this day as an opportunity to bring up life insurance. Groan… I know… It is a boring topic. Why bring it up on Valentine’s day? Here’s why:

Life insurance is not a “needs” based product. Whaaaaaat, mind = blown. When someone goes to buy life insurance they always ask me to calculate out how much they “need”, and I sit them down and we have a conversation that goes something like this.

Do you have the most basic most primitive shelter that represents your home, or do you live somewhere between necessity and what home you want to live in, in the neighborhood you want to live in?

Do your kids go to the most basic primitive version of school, or do you live in the school district or send them to the private school or college you felt was best for them?

Do you ride your bike or take public buses to work or have some other basic primitive version of transportation, or do you drive the car you chose? (I got push back from this one time. The guy drove a freaking Mercedes. No sir, you have an upgraded form of transportation, even if it isn’t a Rolls Royce)

Why does the conversation go here? Because life insurance isn’t a “need” product. It is a “want” product. We live where we want, send our kids to schools we want, and have the transportation we want. So when we sit down to talk about replacing income for a spouse or leaving money to kids to give them a leg up if something happens to you prematurely, why do we even need to sit down and calculate what the minimum is you can get away with? If you want to sit down and calculate the minimum you think you need so your family can scrape by, I don’t think you are looking at it correctly.

Life insurance is a want product. One could argue it is even a LOVE product. It is for our spouses, family members, business partners. Every dollar of premium paid represents a promise from both the policy owner and the insurance company that should something terrible happen, homes will be kept, kids will continue to have the highest advantages, and business will continue to operate. That isn’t said enough and, say what you will about life insurance, it is an important foundational piece in anyone’s financial plan.

What to Do with a Lump Sum

There are two primary ways we receive money during our accumulation years: earned income or for those of us lucky enough, an inheritance. This month’s topic by request was what to do with a lump sum. Maybe you received an inheritance, maybe some life insurance money, or perhaps you earned a large bonus. Here are three ideas on what to do with this chunk of change.

Note, you will not see “pa

y off your house” anywhere in here. We have talked about this before, and it is typically not the best idea. Also note, if this IS an inheritance and it is qualified


(say an Inherited IRA) sometimes the best thing to do is leave it be or continue RMDs. Don’t pull money out of qualified accounts with early withdrawal penalties and huge tax bills to do any of the things I talk about in this article. With those prefaces, let’s jump in!

  1. Pay down high interest debt – Ok, MAYBE you have considered this one, but I am suggesting we be intentional about deciding what to pay down. Home mortgage rates are extremely low right now plus you are taking a tax deduction on the interest. If you have any credit card debt with those crazy 18% interest rates, let’s start there. Any debt that is more than 8% interest is probably smart to pay down or pay off. Anything less and you could be better off investing for growth instead and letting the interest service the debt down over time.
  1. Preserve it in a lump sum – One strategy I have used with clients is purchasing a single premium life insurance policy. Single premium life insurance policies typically purchase substantial death benefit in the range of $2 for every dollar paid in, plus the cash value is usually 90% or more of the initial lump sum and grows 3% or more a year with base guarantees and no loss provisions. Some insurance companies even offer long term care insurance benefits in the life insurance policy as well. For some clients, these triple duty policies are a great fit.


  1. Invest in you – This is very dangerous for me to even recommend. I firmly do believe in enjoying the journey to retirement as much as enjoying retirement itself. SOMETIMES it makes sense to invest in yourself. If you are already consistently saving for retirement, if you are on track to have enough income in retirement, if your debts are already paid off, etc. you could benefit from taking a sabbatical from work, take an exotic vacation, or some other splurge. Maybe with just a piece of the lump sum. What would I do if I received a lump sum? I would invest in a custom fit designer suit. The one I have eyed for eight years now runs $3,500. I know $3,500 on a suit sounds frivolous (maybe that is why I haven’t done it in the last eight years), but I know that wearing a great fitting suit boosts my productivity and confidence. Plus it would last for years. $3,500 for tangible productivity and confidence that pays dividends for the next 10 years really doesn’t seem to frivolous after all.

That is it for this month. If you see me around town in a perfectly fitted, Armani, black, two-piece, two button, slim cut suit, you will know that I went with number three.

How to Retire Early

The million dollar question these days is: “how do I retire early?”

Ironically this question seems to become more popular as life expectancies in the United States are increasing. This not only gives us the challenge of funding our retirement sooner, but also for a longer period of time! Approaching retirement can be daunting so let’s over simplify it and break down the three things you can be doing right now.

  1. Save more. This is a “duh”. Just remember there is no silver bullet for retirement. At the end of the day, you must save something. This is probably the most important on this list. You must have something to pull income from in retirement and you have to have something to earn growth on leading up to retirement.
  2. Spend less. This one is a bummer that I typically don’t talk about. There are three types of money: accumulated money, lifestyle money, and transferred money. I don’t ever like to touch or take away from lifestyle money. It is important to enjoy the journey to and through retirement. It is ALSO important to live within your means though, especially if you want to retire early and fully enjoy a long retirement.
  3. Earn a higher rate of return. This is last on the list. “Rate of return” gets the lion share of credit when it comes to finances, and it really shouldn’t. Let’s look at an example of a 50 year old making $100k a year hoping to retire at age 60 with $350k saved and $20k being saved annually. Let’s say their portfolio is earning 8% a year and they will retire on $70k a year. We aren’t considering social security or a possible pension, but this person would run out of money at age 75 as is. To stretch those dollars saved to age 90 would require a 16.79% annual rate of return. That just isn’t practical. If they didn’t have any return on their savings at all, the money would only last to age 67. Earning growth on your money is important like the other two points above, it just won’t get you all the way through retirement on its own.

We have obviously over-simplified how to retire early. There are other factors that go into prepping for retirement such as tax and debt service efficiencies, but these are the foundation of a sound retirement. These three components also work together in perfect harmony to give you the retirement you have always wanted.

What do YOU want to learn about your money? Let me know and I may write about it in a future post!

The 2 Worst Financial Mistakes Everyone Makes

Finance is often considered a taboo topic in our culture; we don’t like to talk about it. Some people hire professional advice, and some people prefer to go the Do-It-Yourself route. The commonality between all of us, is we have all heard advice from a friend, a family member, a radio personality, or a tv personality. Here is a list of the top four worst pieces of advice almost ALL of my clients have heard or taken from these outside sources.

  1. Pay off your mortgage as fast as you can

The idea here is that you can finance your house on a 15 year mortgage, or you can make additional principal payments on longer term mortgage and save on interest. Sounds innocent enough, doesn’t it? I worked with a new client recently that told me their investment portfolio was earning an impressive 8% a year. In the same breath they proudly told me they had no debt because they paid cash for their house. I was dumbfounded they just admitted that they pulled a sizeable chunk of money out of a portfolio earning 8%, to pay cash for a house that they could have financed for 3.25-4.25% easily. They gave up use and control of that whole chunk of money and their house will appreciate OR depreciate regardless of how much they have paid off. What if they financed the house for 30 years, kept their money in their investment portfolio, and let the interest earned make their house payment for them with money to spare?

I don’t have the space in this article to explain the math, but it wouldn’t surprise me if they got 15 years down the road and could pay off the remaining balance of the mortgage if it made sense at the time. With interest rates on the rise, I believe it would be far more valuable to lock in the low interest rate mortgage for the longest period of time possible and keep their money working for them.

  1. Stuff as much money as you can into your 401k

We have all heard this one. You will be in a lower tax bracket in retirement! Save in your 401k, you get a tax deduction! Sounds great doesn’t it? The highest federal tax bracket estimated for 2017 is 39.6%. The federal income tax started in 1913 and the the average highest federal tax bracket since is 58.24%. Historically there have been spikes in income tax rates to help pay off debt accumulated during World War I, World War II, the Korean War, the Vietnam War, and the Gulf War. We have been paying for a war and the United States deficit is growing at an insane rate. With some of the lowest tax rates in history right now, do you think tax rates are going up, or down? My guess is they are going up. A 401k and other tax-deferred qualified plans are indeed a tax deduction right now, but what they do is POSTPONE the tax as well as the tax calculation. Whenever you take money from your 401k in retirement you will then owe income tax on the full amount taken.

If I were to write you a check for a loan you would ask me two questions: “what is the interest rate, and when do I have to pay it back?” What if I responded “you know what, I am doing quite well right now so let’s figure out the details later. One day I will have a need for my money. At that time I will figure out how much interest I need to charge you meet how much money I need”. Would you cash that check? I don’t think anyone would, but that is exactly the deal we make when we save on a tax-deferred basis. Now saving in a 401k isn’t bad for everyone, but for the average American it makes more sense to pay the tax now and save on a tax-free basis for the future!

These mistakes can cost you in retirement. Unfortunately though, I can only write based on my experience and not based on your individual situation. My best recommendation for 2017 is to hire a trustworthy Registered Investment Adviser who is required by law to act in a client’s best interest. Get an unbiased analysis on these two topics and check out the math to see if there is a more efficient way to handle your finances.

All About That Opportunity Cost

What is opportunity cost? I get asked this all the time. Just kidding, nobody asks me this. But here is why you need to know what it is: opportunity cost directly impacts every aspect of YOUR finances. In your personal economy, lost opportunity cost is everywhere.

Opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen”. I break it down like this: opportunity cost is the potential future value of a spent dollar. If you buy a $25,000 car, that car didn’t just cost you $25,000. The lost opportunity cost is what that $25,000 could have earned if you had kept it and put it to work for you over a specified period.

It is very important to consider opportunity cost with big items. Many people look at the monthly payment of financing that car and don’t consider what else they are giving up having that car. Let’s say I bought that $25,000 car today and my hypothetical investment portfolio is earning just 5%. I reasonably have 40 years until retirement. The lost opportunity cost on that purchase would be the $25,000, plus the cost to finance it (let’s say $1,953 total of interest for a 5 year loan at 3%), plus the interest I could have earned, compounded each year for 40 years. That purchase would set me back $171,378 by the time I reach retirement.

What about multiple purchases? What if you bought a $4 fancy large iced green tea latte with no sweetener, extra matcha, two scoops of protein powder, light ice, shaken-not-stirred, every work day? That would be $20 a week, $85 a month, and $1,020 a year. That doesn’t seem harmful considering you are receiving value from enjoying the beverages. What does it look like over 40 years though? You will have spent $40,800 on delectable beverages and the lost opportunity cost on that chunk of change would be $88,577 for a total cost of $129,377! I personally don’t enjoy fancy drinks THAT much.

Keep in mind that my two examples above only assume a 5% rate of return. The higher the return you can earn, the larger the lost opportunity cost becomes. It isn’t realistic, nor would I ever recommend, that you stop enjoying your own transportation or fancy beverages. It is possible to have healthy finances and a secure retirement while still enjoying the journey to get there. I simply want you to recognize that your personal economy isn’t just effected by the cost to purchase, you have to consider the lost opportunity cost in addition!