Allocating Your Most Valuable Asset—You

What is your most valuable asset? Your home? Not likely, even back in 2006. Your 401(k)? Doubtful, even when it was 2007. No, if you’re not yet glimpsing your retirement years, it’s likely that your biggest asset is you—and not just metaphorically.

Let’s say you’re only 30, with a degree or two and some experience under your belt. You’re making $70,000 per year. If you only get 3% cost-of-living-adjustment raises, you will crest a million in aggregate earnings in just the next 13 years.

Over the course of the next 40 years, over which you’ll almost surely continue working, you’ll earn more than $5.2 million.

Or maybe you’ve just celebrated your 40th birthday—the new 30—and you’re hitting your stride professionally, making $150,000 per annum. With only 3% raises, you’ll make more than $2.1 million in just the next dozen years.

(How’s that 401(k) looking again?)

You are your biggest asset.  It’s called labor capital, and it’s an asset all too often underestimated by financial advisors and their clients.

Labor Capital Curve

While your financial assets start small and hopefully grow over time, compounding through disciplined saving and wise investing, your labor capital brims with potential before descending later in your career.

What would it look like if we treated labor capital with the respect it deserves throughout the financial planning process?

First, we’d invest purposefully in our labor capital. Yes, this means pursuing education, but it also means cultivating our earning potential through mentoring and coaching.

It also means pursuing a job that we enjoy so we don’t feel boxed in if it’s necessary or desired to extend the longevity of our career—and our labor capital.

Second, we’d adjust the rest of our financial plan—especially our investment plan—to accommodate for our labor capital. Moshe Milevsky asks the important but rarely asked question, “Are you a stock or a bond?” in his book of the same name.

If your work offers a high reward but also high risk—let’s say you’re self-employed or you work in a cyclical boom/bust business—you’re a stock. If you enjoy the stability of your position as a tenured professor, but gripe with your colleagues about your unremarkable pay raises, you’re a bond.  "An investor’s ability to take risk is impacted by the stability of their earned income," says Larry Swedroe in The Only Guide You'll Ever Need for the Right Financial Plan, co-authored with Kevin Grogan and Tiya Lim.

If your labor capital acts like a stock, even if you have the intestinal fortitude to endure risk, you should likely be skewing your financial assets more conservatively. Whereas, if your income is more representative of the tortoise than the hare, you may consider infusing your portfolio with a little Usain Bolt.  "[E]ffective diversification of the client’s entire household balance sheet may entail using financial capital to counterbalance against the risks of human capital," says planning guru, Michael Kitces.

Lastly, we’d ensure that our moneymaker is adequately insured. If you work for a well-established company, it likely pays for a base level of disability income (DI). But for most, this isn’t enough, for at least two reasons:

If your company pays the premiums on your group DI policy, the benefits to you will be taxable. Most group policies cover 60% of your salary compensation (although typically not your bonus or incentive comp). If you didn’t have to worry about paying taxes, that wouldn’t be so bad, but after taxes, you’d be lucky to walk away with 40% of your gross pay—while enduring higher medical expenses on the home front.

Additionally, most group DI policies only cover your “own occupation” for two years, at which time you must be medically incapable of performing the material duties of any occupation. (Intending no offense to the gracious folks at the entrance of a Wal-Mart, this means that if you can’t pin a smiley face sticker on the front of someone’s shirt, you ain’t gettin’ your disability checks.)

To make up for either or both of these shortfalls, it makes sense for many—if not most—of us to explore the acquisition of a supplemental long-term disability income insurance policy to stack on top of your insufficient group policy. And if you’re self-employed or otherwise uncovered by a group policy, you’re entirely exposed to the risk of losing your most valuable asset. Private policies aren’t cheap and have too many moving pieces, so you’ll want to educate yourself further. But ignore this very real risk at your own peril.

BOTTOM LINE: Discussions of labor capital can be a great encouragement to those just starting their occupational journey—or those who’ve fallen behind on the accumulation of financial assets—but integrating our labor capital into our financial plan only helps if we allocate our income well.  This means spending money on the most important things in life, saving money for a time when our labor capital is exhausted, and ultimately giving money to the people and causes dearest to us.

If you enjoyed this post, let me know on Twitter @TimMaurer.

Survey Shows Students Are Dumping Top Colleges Due To High Cost

The disproportionate rise in the cost of college relative to the cost of everything else is not news, but a new survey shows that college students are dumping their top choices for education based on price. Have we finally reached the tipping point?

Well, I’m a planner—not a prognosticator—so I’ll defer judgment to those with functioning crystal balls, but let’s address the college cost crisis and a way to avoid becoming the next student or parent squashed by education overpayment.

Is there really a crisis?

Yes, I believe there is. The cost of education has risen at approximately 2½ times the rate of inflation since 1985. From 1985 through 2011, the consumer price index went up 115% while the cost of college increased nearly 500%. Although the gap has closed slightly the past two years, the cost of education is still outpacing inflation.

A crowd of college students at the 2007 Pittsb...

Some claim that college costs are over-exaggerated because “the list price of college—especially the list price of elite private colleges—receives far more attention than the actual price.” To which I respond, are elite private institutions now reading from the same playbook as jewelry stores at the mall, where everything is half-price—all the time?

Aren’t people who don’t qualify for aid or scholarships still paying $59,950 for tuition, room, board and fees at Harvard?

(Yes.)

But a degree from a prestigious university doesn’t actually have to be expensive. If you commute from home to a community college for two years and then complete your degree at any number of outstanding state universities, you can purchase an entire degree for the price of one semester on campus at an Ivy League school.

Amazingly, it may still be worth every penny to go to Harvard or Yale or any number of elite private schools, like Johns Hopkins or Lehigh, if you’re pursuing a specialty for which they are held in the highest esteem. Beware, however, because there is a growing parity among undergraduate degrees across the board—it may be grad school now where a big investment really pays off.

Developing an education savings plan

How, then, can parents and students develop a plan to maximize the college experience but minimize the price tag?

First, be honest with yourself (and your kids). If you’re a student, don’t fool yourself into thinking that any investment made in education is worth it. Don’t take total loans for greater than your first year’s (reasonably) expected salary after graduation.

If you’re a parent, humble yourself enough to acknowledge if you simply can’t afford to help your kids. They may curse you now, but they’ll be thankful later when they don’t have to pay your medical bills at the assisted living facility.

Second, decide if and how much you’re willing to pay for college. The realms of government, education and finance have colluded to give college the appearance of a birthright of every American, a burden resting on the shoulders of every parent.

No, it’s still a privilege, and you, as a parent, still have the prerogative to limit or yank funding based on your values and goals. I had a client who made more than a million bucks a year who decided he was only going to cover two years of college for each of his kids—the second two years—because he wanted to ensure they’d be vested in their education. (And no, my wife won’t let me get away with this.)

Third, develop a family education policy. This is the answer to the question, “How much are you guys going to pay for?” The worst answer is, “Whatever it costs for wherever you can get in, sweetheart.” Whatever you do, don’t write a blank check for education, or you’re all but guaranteed to pay top dollar.

Fourth and finally, fund your education policy. Ideally, the above conversations have taken place between mom and dad even before Junior is born, because that’s the best time to start saving.

If your family education policy is that “We will cover the cost for an in-state university as long as you graduate high school with a 3.0 GPA or above and maintain a 3.0 or better throughout college,” you’ll likely need to save approximately $350 per month from the day Junior comes home through his high school graduation.

If you’ll gladly pay for the kids to go to your alma mater—out of state—then you should be saving $700 per month, and if you only bleed crimson, increase your savings to $1,200 per month, per child for 18 years.

[youtuber youtube='http://www.youtube.com/watch?v=1P5gICJq_Pc&list=UU-H-L8u8PzzgdAzBLrqU6PQ']

What is the optimal savings vehicle?

The optimal savings vehicle is actually a combination of vehicles. It is a good idea to use a college investment savings 529 plan, which basically works like a robust Roth IRA for education purposes. You contribute to the plan after tax, and all principal and growth in the plan is distributed tax free, if distributed for qualifying education expenses.

Morningstar does an excellent job comparing plans throughout the country each year. I recommend against any plan that requires you to pay a commission, limiting your investment, since the best plans are commission-free. Savingforcollege.com is a good resource as well, but in my opinion, their guidance is tainted by its willingness to accept payments from commission-based salespeople in its “Find a Professional” feature. Blech.

Since you use market-driven investments with inherent volatility in investment savings 529 plans, however, you may consider using a prepaid 529 plan if your time horizon is shorter. These plans vary by state, but most allow you to lock in today’s tuition prices for tomorrow. Be careful, however, because the financial instability of several states has put their prepaid plans at risk.

Regardless, I recommend saving only 50% of your anticipated savings needs in 529 plans because of their inherent limitations (imperfect investment options and, in some cases, investments reduced by commissions). You also don’t know exactly what will happen with Junior in the future. If he decides to join the Hells Angels instead of the glee club, you may pay penalties to get your money back.

Save the other 50% in the account most oft forgotten—the liquid investment savings account where you fund all the maybes in life. (Maybe we’ll buy a second home. Maybe we’ll add an addition for your mom to live with us. Maybe we’ll need more money for college funding.)

It is absolutely true that college can be ridiculously expensive, but only if you let it. Either way, state your expectations and plan accordingly to avoid joining the scholastic chorus of boos coming from those who paid a premium for a discounted education.

If you enjoyed this article, please let me know on Twitter @TimMaurer.

Tim Maurer, CFP® is Director of Personal Finance at the BAM ALLIANCE and an adjunct faculty member at Towson University.

 

 

 

 

 

The chances are good that your 401(k) isn’t.

We need not look far to learn that 401(k) plans are imperfect or worse, so instead of lumping on more criticism about how you and your employer have botched your 401(k), let’s discuss how to make the most of a not-so-great situation.401k-Plan

Step 1: Don’t blame shift. There is a time for criticism, so keep reading, but too many people use the imperfections in, or a lack of understanding of, their retirement plan to feed the self-deceptive siren’s call to inaction.

Yes, it’s true that there is systemic as well as plan-specific dysfunction in many 401(k)s—and 403(b)s, TSAs, TSPs, SIMPLEs, 457s and whatever other “defined contribution” retirement plan you might have at work.

Yes, it’s true that 401(k) plans are often needlessly complex and confusing, often filled with a seemingly endless array of choices, designed more for plan sponsors than for participants.

Yes, it’s true that 401(k) investment options are notoriously poor and over-weighted with fees.

Yes, it’s true that defined benefit pension plans—when the company you dedicated yourself to for many years would continue to pay a stream of income through your retirement—were helpful but are now largely extinct.

Yes, it’s true that Social Security benefits will likely provide less—or at least less value—for future generations than for present and past, putting even more pressure on our own ability to save for retirement.

But 401(k) and equivalent vehicles are still the best way for most Americans to create a tax-privileged reserve that is designed to generate future income when we’re no longer capable of doing so. Even justifiable criticism shouldn’t be an allowance for negligence on our part.

Step 2: Control what you can. Despite the many maladies likely infecting your 401(k) plan, we still have control over the elements that determine our investing success the most—the amount we contribute and the allocation of the portfolio.

You’ve heard the grandfatherly wisdom of saving 10%. Well, as it turns out, it just might work. A crude calculation suggests that if you save 10% of your income right out of college through retirement age, you’ll likely have saved enough to generate approximately 66% of your pre-retirement income in retirement. If you add Social Security benefits and subtract your annual savings, you’ll likely have more disposable income than in your last day of work.*

If you are able to increase your annual contribution amount to 15%, you’d have enough to generate 99% of your pre-retirement income, so anything you get from Social Security would be a travel bonus.

But life is not a linear Excel calculation. Life changes and tends to get more expensive in the middle when we’re supporting the 2.5 kids, yellow lab and the picket fence. Therefore, you’ll likely need to save more at the front end when you have fewer expenses and on the back end after the kids have moved out, so consider the 10% rule of thumb as less of a cap and more of a floor.

Saving more helps reduce the risk of falling short of your goals.  Saving more enables you to take less equity risk, thereby reducing the stress of bear markets, allowing you to sleep better and stick with your strategy.

Regarding the optimal portfolio allocation, the weight of evidence suggests that the bulk of our long-term returns are attributable to proper asset allocation, not security selection. That is, the proportionate arrangement of your mutual funds is more important than the funds themselves. And since the vast majority of actively managed mutual funds get beaten by the index they’re chasing, you’ll have probability working for you if you use passively managed index funds if they’re available.

Here’s a generic example of a model portfolio from Bill Schultheis’ Coffeehouse Investor model. Neither Bill nor I would suggest that this should be your portfolio, but it helps illustrate the concept of diversification through asset allocation.  Coffeehouse

Your portfolio should be customized based on your abilitywillingness and need to take risk and will likely include more or less exposure to these and other asset classes.

In the book The Only Guide You’ll Ever Need for the Right Financial Plan, co-authors Larry Swedroe, Kevin Grogan and Tiya Lim instruct that an investor’s ability to assume risk is largely determined by time horizon—when will you likely need the money? Your willingness to accept risk involves “the fortitude and discipline to stick with your predetermined investment strategy when the going gets rough,” while the need to bear risk “is determined by the rate of return required to achieve the investor’s financial objectives.”

Often, however, we are not the best suited to gauge our own ability, willingness and need to take risk. Instead, consider using risk tolerance tools available through your 401(k) plan, or better yet, talk to a financial advisor who doesn’t have a stake in the outcome of your risk analysis.

Once you have determined an optimal allocation for your 401(k) portfolio, it’s time to put the plan on autopilot, thereby reducing your personal tracking error. Adjust both your current allocation and your future contributions, and if you have an automatic rebalancing feature that will periodically bring your portfolio back into alignment with your new allocation, use it. If not, rebalance manually, selling high and buying low.

Step 3: Talk to your human resources department. Once you have done all that is within your power to make the most of your 401(k), it’s time to talk to company leadership about making the plan even better. If yours is one of the majority of plans that has high expenses, low transparency and poor investment options, suggest they consider a change. You might not think your opinion will carry any weight, but you’re unlikely to see the plan improve unless people like you are questioning its effectiveness.

Imperfect though they are, even bad 401(k)s can be made into an excellent tool for wealth accumulation by those who dedicate themselves to making the most of this foremost retirement planning vehicle.

If you enjoyed this post, let me know on Twitter @TimMaurer.

 

*Assumes saving 10% per year on a $50,000 beginning salary at age 22 that increases with inflation at 3% earning 8% per year before retirement at age 67 (Social Security full retirement age) and 5% thereafter.

Financial Advisors: Differentiate Yourself By Being Yourself

The most freeing day of my career was when I sold my golf clubs.

Different

Although the transformation had been under way for several years, it was a moment of symbolic importance. It signaled an official decision to permit myself to be something other than what I had come to believe the financial industry wanted me to be. I was officially granting myself permission to be myself.

Conformity

I apologize in advance for stereotyping, but the sales managers I had worked for had personified the industry for me. Not fond of nuance or implication, they simply had expressed that I was to be, among other things, a golfer. So I bought a set of new clubs outfitted with a nice bag, and I hired an instructor to help me master the gentleman’s game.

After several lessons, my laidback instructor told me he’d never seen anyone grip the club quite so hard. We discovered that I had complemented my less-than-elite athleticism with heavy doses of intensity and hustle to remain competitive in sports while growing up. Unfortunately, as it turned out, these traits were counterproductive to success in golf.

Instead of investing thousands of dollars in psychotherapy to try and loosen my grip on a golf club, I sold my clubs and bought a used road bicycle. I grew to love the sport, which rewarded my overcompensation of will and desire.

But I wasn’t just dumping golf at that moment. I was dumping it all—the notion that I should only wear dark suits, plain white (or light blue on Friday) shirts, power ties, hair that is neither too long nor short and a clean shaven face. Eureka—I could even wear a pair of jeans to the grocery store now!

Differentiation

Paradoxically, as long as I lived inside of the industry’s box, I was taught to differentiate myself professionally—to become “the guy” for orthopedists or cosmetic dentists or corporate attorneys. Everything I did in life, work and play was supposed to send a message that would presumably attract a specific niche of people who are known for making especially profitable financial advisory clients.

Of course, there is nothing wrong with golfing, differentiating yourself or serving a niche. In fact, each of these pursuits can be beneficial for you and your clients when practiced in earnest. What is wrong—or at least unhealthy and more than a touch manipulative—is becoming someone you are not for the benefit of purposefully differentiating or conforming.

What if the Holy Grail of finding your niche and setting yourself apart from the crowd was found simply in permitting yourself to be yourself?

Being Yourself

If you always wanted to be a Navy fighter pilot but got turned down because you’re too tall or your eyesight was worse than 20/20, you could develop a niche serving military officers. If you aspired to be a surgeon but threw up all over the cadaver on the second day of medical school, you could serve the medical community. And of course, if you’re passionate about golf and enjoy the simplicity of uncomplicated garb, you should be entirely free to live up to the stereotype of the financial advisor.

There’s only one caveat, but it’s a big one: When you give yourself the freedom to be exactly who you are, you might disappoint other people. It’s easier for companies and managers—even parents, spouses and, in some cases, kids—to put you in a predictable construct that may best serve their needs and wants.

What if you want to help social workers navigate the world of personal finance and thereby would likely have to take a pay cut? What if it means you’d be working with clients less and drawing more? What if becoming fully you means moving to Latin America to manage a micro-finance operation and teach English? What if it means educating advisors more than investors?  What if it means designing a practice that conforms to your family instead of the reverse?

You might have to change ZIP codes, companies or professions altogether.

Unfortunately, being who you are—especially in the financial industry—may not be the easiest thing to do, but choosing to be yourself is simple because it’s natural, and incredibly liberating.

If you enjoyed this post, please let me know via Twitter @TimMaurer.

 

Time Is More Precious Than Money

As the Fed has taught us through the money-printing machine cloaked as quantitative easing, the potential supply of U.S. dollars is limitless. Even for most of us individually, we are capable, to varying degrees, of generating and regenerating money through work, investment and happenstance.

Time, however, is a different story.

Thanks to Emily Rooney for permission to feature her artwork

Thanks to Emily Rooney for permission to feature her artwork

It brings to mind these lyrics: “Where you invest your love, you invest your life,” croons Marcus Mumford in the song “Awake My Soul” on Mumford & Sons’ debut album, “Sigh No More.”

Sure, musicians are notorious for writing lyrics because they sound self-important, or maybe simply because they rhyme, but Mumford has earned a reputation for lyrical brilliance and offers us something deep and meaningful here to apply in our lives and finances.

No matter how much we strive, delegate and engineer for efficiency, there are only 24 hours in each day. We are unable to manufacture more time, and once a moment has passed, it is beyond retrieval.

Of these 24 hours each day, if we assume that we will sleep, work and commute for approximately 17 of them, that leaves us with a measly seven hours to apply ourselves to loftier pursuits. After an hour at the gym, an hour to eat and another hour to decompress with a book or TV show, we’re down to four hours to personally affect those for whom we are presumably working and staying healthy—the people we love.

Our human capacity to love also has its limits.

While not measurable, we can all acknowledge that our capacity to love, in the four hours each day that we have to invest it, is affected by how we’ve invested the other 20 hours. By the “end” of many days, we are just beginning our four hours, and we are already spent. Even if we wanted to, we have nothing left to give—no love left to invest.

I am a chief offender of misallocating my love.

I often allow the four hours I have to give to my wife, Andrea, and two boys, Kieran (10) and Connor (8), to shrink to three, two or even one. In whatever time is allocated, I often serve leftover love, having over-invested myself throughout the day. Then I steal from their time, interrupting it with “important” emails and calls.

I must acknowledge that these are choices I make.

We have the choice to order our loves, to acknowledge the limited nature of time and our own capacity, and to prioritize our work and life.

It’s entirely appropriate to love our work and the people we serve through it. It’s entirely appropriate to love ourselves and to do what is necessary to be physically, fiscally, psychologically and spiritually healthy. It’s entirely appropriate to love our areas of service and civic duty, and to serve well. Therefore, almost paradoxically, it’s entirely appropriate to spend 83 percent of our daily allotment of time in pursuits other than the direct edification of those we love the most.

But what would our lives look like if we engineered our days to make the very most of the other four hours?

Would we have a different job? Would we live in a different house or part of the country? Would we drive a different car? Would we say “no” to some people more and to other people less? Would we invest our time and money differently?

Would you invest your love differently?

I’m excited to be part of a contingent of financial advisors asking these questions of our clients (and ourselves).  We don’t believe that the only way to benefit our clients is through their portfolios, and we believe that asset allocation involves more than mere securities.

This isn’t a particularly new concept.  Indeed, the second phase of the six-step financial planning process, as articulated in the Certified Financial Planner™ (CFP®) practice standards, is to “determine a client’s personal and financial goals, needs and priorities.”  But thought leaders like Rick Kahler, Ted Klontz, Carol Anderson, George Kinder, Carl Richards and Larry Swedroe are persistently nudging the notoriously left-brained financial realm to reconcile with its creative and intuitive side for the benefit of our clients.

With statistics suggesting that as many as 80% of financial planning recommendations are not implemented by clients, it’s officially time to recognize that personal finance is more personal than it is finance.

If you enjoyed this post, I'd love to hear from you on Twitter via @TimMaurer.

The Only Lesson You Need To Learn From The Debt Ceiling Debacle

Executive Summary-01Few of us would argue that the government shutdown and this year’s debt ceiling debacle are issues of importance, but over the course of your lifetime, which do you think has a bigger impact—the decisions the government makes or your own personal decisions?

We tend to spend more time bemoaning the action and inaction of those with less of a direct influence in our lives—especially legislators and Presidents—than those who most directly impact our lives: US.

You are an entity.  You and your spouse (if you’re married) and your children (if you’re a parent) are certainly beholden in part to other entities, like companies, cities, states and countries, but you also enjoy a great deal of sovereignty.  You decide where to live, what to eat, whom to befriend and marry, how to derive an income and how to spend it.

Please allow me to disabuse you of a few “It’s their fault!” self-deception anthems especially common in the realm of personal finance:

  • The arc of your career is not your boss or company’s responsibility. Good bosses and companies create environments in which good employees can flourish.  Bad bosses and companies inspire good employees to join better companies or create new businesses.  Bad employees play lots of video games.  At work.
  • Regardless of your levels of income or net worth, your financial success or failure will be predicated primarily on the effectiveness of your cash-flow management system.  This is most commonly and disdainfully referred to as a budget.  I recommend YNAB to college students and millionaires alike.  You can never be too rich or poor to budget.
  • Your long-term success in investing is not the responsibility of your financial advisor or investment manager (although they can help or hurt).  There are innumerable (good and bad) variations on the portfolio creation and management theme, but if all you ever did was establish a reasonably diversified, indexed, balanced portfolio (call it the “minimum effective dose”), you’ll likely outpace most of your peers and many professional investment managers.
  • Your ability to retire comfortably will be impacted by many factors—especially the three you just read—but none more so than your willingness to make regular contributions equal or greater to 10% of your annual income.

Although politicians and pundits may attempt to convince us otherwise, the long-term trajectory of our lives are more a consequence of impulsion than compulsion—UNLESS we give someone or something else that control. If you rely more on outside influences than those within your control, you have ceded too much.

If we worry more about that which we can’t control (governmental bumbling, short-term volatility, the outcome of the World Series) than acting on that which we can, we do so only to our detriment.  And maybe—just maybe—the reason we gripe so much about that which is holding us back is that we fear the consequences of being held accountable for our own decisions, our own lives.

Control what you can, and worry far less about that which you can’t.

 

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Don’t Forget To Update Your Financial Operating System (OS)

ios-7

Android die-hards can tell you everything that is wrong with iOS7, Apple’s recently released operating system for iPhones, iPads and iPods.  Those who gripe every time something changes are also among the early detractors.  Everyone else—that is, those of us who’ve gone back for a second or third helping of tasty iKool-Aid—loves it.  The exclamation that I hear most often regarding the new iOS is, “It’s the same phone, but it seems like it’s brand new!”  What struck me even harder than iWorship last week, however, was recounting the number of individuals who, with unchanged exteriors, have undergone noticeable overhauls in their Personal Operating System (POS)—for the better.

“I’m bad with money.”

Don’t you love the way we label ourselves as predestined for failure?  “I have a bad temper.”  “I have no willpower.”  “Exercise and I don’t mix.”  “Oh, I have ADD.”  “I’m not a good listener.”  “I have a sweet tooth.”  Or the one I hear often as a financial planner and educator, “I’m just bad with money.”

It sounds like self-deprecation—even humility—but it’s actually self-justification.  We’re giving ourselves permission to behave badly in the future.  Before you get angry with me for hurling accusations, let me confess that I am one of those people who have used this tactic, unknowingly and sadly, knowingly, at times.

What all of these expressions of inability or ignorance have in common is that they’re simply inexcusable.  Not only are they not rocket science, they are not even changing the oil in your car.  They are more like brushing your teeth or putting gas in the tank.  Even if you’re predisposed to flying off the handle, it’s no excuse for being mean.  Even if you’re prone to indulgent spontaneity, you must own your decisions.  Even if you’re not a gym rat or naturally fit, as a human you weren’t designed to be sedentary.  Even if your attention migrates easily, you can’t use it as an excuse for intellectual laziness.  Just because you like chocolate, it doesn’t excuse gluttony.  Lastly, you don’t have to understand the Alternative Minimum Tax or be able to articulate Modern Portfolio Theory to spend less than you earn and plan for the unknown, the two categories into which the vast majority of financial planning recommendations fall.

“Completely new and instantly familiar”

The great news about overcoming self-deception is that we can turn on a dime once we recognize it.  While some of us may need to do a deep dive with a counselor to target more systemic self-denial, many are free to simply choose the alternative path of wisdom and act accordingly, almost immediately.  Especially regarding our dealings with money, we can upgrade our financial operating systems right now.  Like our phone updates, it may take a little time to install the new mindset, but in dealing with behavior that is not tied to a compulsive diagnosis, we can look the same on the outside with a completely new perspective internally in a very short period of time.  Two of the life-changing tools that I’ve seen dramatically reboot people’s financial programming are Dave Ramsey’s book, The Total Money Makeover, and You Need A Budget, cash flow software created by former accountant, Jesse Mecham.

Jony Ive, Apple’s SVP of Design describes the new iOS as “completely new and instantly familiar.”  The best part about acquiescing to our own personal evolution is that it too will feel oddly familiar, because it’s how it ought to be.  Adults aren’t supposed to throw temper tantrums.  We’re designed to overrule our basest instincts with self-control.  It feels great when we expend the calories we take in through physical activity.  We’re capable of being present in a world full of distractions and applying our attention to those who most deserve and need it.  Sweets taste better as treats than as main courses.  And with a little guidance—but primarily common sense and intellectual honesty—we can choose to be good managers of money, and then do so.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

5 Ways To Prepare Your Portfolio For A Government Shutdown

Screen Shot 2013-09-25 at 7.11.50 PM

Tim discussed this issue on CNBC this week.

We all stare agape, shocked that the U.S. government has allowed splintered self-interest to rise above its collective duty.  No, we’re actually not surprised.  Sadly, we’ve come to expect this.  The question we have to answer is: Are we going to alter our lives, our financial plans and our portfolio strategies to accommodate D.C. drama?

Unfortunately, there isn't a specific portfolio prescription for political gamesmanship or government gridlock.  Heavy handed federal influence in the aughts, especially since 2008, has taught all of us that the government may impose its fractured will at any time, effectively changing the rules of the game.  But the strategy to deal with this is little different from dealing with one of the market’s constants: UNCERTAINTY.  Consider utilizing the following five strategies in response to today's brand of uncertainty:

1. IF you have created a portfolio that is designed to accomplish your objectives over the long-term through deliberate diversification, you may be wise to respond to the news of a government shutdown by simply IGNORING it.  (This is my favorite response.)

2. Crises of every variety can serve as a good reminder to do what we should be doing anyway in our management of investments—like reallocating. This may be a particularly good time to siphon some U.S. exposure, which has been on a seemingly undeserved tear this year, shifting it to the international exposure in your portfolio which has likely lagged.

3. Regardless of the market's direction, increased uncertainty tends to create more volatility in the markets.  If your sanity will only be maintained by “doing something” at this time, you may respond to this aggressively by purchasing the VIX through a volatility index that rises when the spread between market peaks and valleys rises.  Or, respond conservatively by increasing cash allocations.

4. If this government standoff extends, the economy's recent trend toward optimism may also revert, causing the Fed to balk at its expressed intent to taper its bond-buying.  If so, you might get another chance to re-finance your mortgage and slow any strategies you've employed that are designed to hedge against rising interest rates.

5. Recession (or depression) in Europe, protracted Middle-East conflicts, war in Syria, slowed growth in China, student debt bubble, government debt bubble… Take your pick of the crisis du jour that could send our high-flying S&P 500 into the correction (or worse) many feel it deserves.  Could a government shut-down be the back-breaking straw for this weary camel?  If you rode the market all the way down and then all the way up, it might be a good time to conduct a portfolio analysis with the goal of making capital preservation a higher priority.  To stay on the ride isn’t investing—it’s gambling.

Inaction is likely the best action to take in the face of this month’s government drama as long as you have a well-conceived, well-implemented investment strategy.  But this flavor of uncertainty could also be a great reminder to do what you should be doing anyway—ensuring that your portfolio is not a collection of hunches but a well-oiled machine constructed of wisdom, knowledge and foresight.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

How Music Can Save Your Marriage And Financial Plan

IMG_6338My brother, Jon, and I have a recurring argument with our lovely wives, Amanda and Andrea, respectively.  They believe that good music is in the ear (as it were) of the beholder.  Jon and I cringe, like Will Smith and his poor children, subject to the needless visual supplements required to make the music of Miley Cyrus and Lady Gaga interesting enough to consume.  Seemingly incapable of withholding the raft of musical elitism that will surely land us in the bad graces of our beloved, we’re drawn to the life-zapping light like flying insects.

“No, you don’t understand,” I assert, “there is good music and there is bad music.  Like too much sugar will rot your teeth, too much ‘ear candy’ will rot your…your soul!”  (After all, it’s only Andrea’s best interest with which I’m concerned.)

“Then why don’t you marry Jon, so you can listen to your favorite music all the time?”

These little spats are just for fun (usually) and give our lives together a unique texture, but too much variability in the ways we live and love is draining and too often leads to a marriage requiem.  Discord over financial issues is often cited as the leading cause of divorce, and while the statistical jury is still out on whether money issues are a leading or lagging indicator of marital health, it’s clearly an issue worthy of our attention.

Here are three ways that you can apply musical theory to maintaining financial harmony in your household:

1)     Establish a rhythm – In music, the rhythm is the foundation of a song.  Musicians establish a song’s rhythm first through the time signature, musical math composed of measures and beats per measure.  Rock songs, like Led Zeppelin’s “When the Levee Breaks” with its iconic drum beat, are typically written in 4/4 time signature.  Contrast that with the Dave Matthews Band’s “Seven,” written in 7/8 time, a rarity in rock and pop that has a notably different rhythm.  Another time signature easily spotted is 3/4, as in Johann Strauss’s “Vienna Waltz,” with its recognizable 1-2-3 repetition.

Every household has a rhythm of cash flows—money comes in via income and goes out as expenses.  Regulating this rhythm to the best of our abilities allows our household to settle into a comfortable pattern.  This becomes more of a challenge when your pay comes at a different interval than your expenses, but you don’t have to be a virtuoso to accommodate for these differences.  Divide your conservative estimate of your annual income by 12 and you have your monthly budget to allocate.  Then divide any annual expenses by 12 to be sure you set aside the necessary coin to pay for them when they arrive.

2)     Create a melody – Rhythm makes a song work, but it’s the melody that makes it memorable.  You don’t have to love classical music to get Beethoven’s “Fur Elise” stuck in your head.  Great melodies are often reincarnated, like when Billy Joel reprised Beethoven’s “Sonata Pathetique, Movement 2” in his song “This Night” (listen to the chorus at: 59).

Crafting a comfortable rhythm helps keep our finances on track, but we create a melody in choosing how to spend our excess cash flow.  Maybe you’re known for generous hospitality, like one friend of mine whose parties are not to be missed.  Maybe you’re making a concerted effort to provide meaningful support to a worthy charity or broadening your children’s horizons through regular travel.  Or maybe you’re foregoing income to invest your time as a mentor or student.

3)     Manage dissonance – Dissonance is the sound produced when two or more musical notes don’t appear to mesh well.  If you hit three adjacent white keys on a piano at the same time, you’re likely producing dissonance.  Musically speaking, dissonance can be used to good effect, creating atonal suspense that is eventually resolved, but left unresolved, it’s likely a song that no one wants to hear.

Financially speaking, every couple is born in dissonance.  Our individual personalities, strengths and weaknesses, compounded by our personal history with money, make it impossible to strike a rich major chord every time.  Our goal should be to recognize the dissonance when it arises, treating it not as failure or a misplayed note in our duet, but instead as an opportunity to work toward a deep resonance when the dissonance is resolved.

Jon and I had some fun a couple years back riffing on this topic in a video we created called “Making Financial Music.”  If you enjoyed this post or video, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

[youtuber youtube='http://www.youtube.com/watch?v=xntChpPmtq4']

Confessions Of A Self-Righteous Fee-Only Financial Planning Evangelist

250px-Saint_Francis_of_Assisi_by_Jusepe_de_RiberaEvangelical Christians have a PR problem, wouldn’t you agree?  If you want to evoke the scent of condescension, judgmentalism, self-righteousness or hypocrisy, all you need to do is tack on the adjective “evangelical” to the person, place or thing you’re describing, and voila—your work is complete.  The original evangelists—the Disciples, the Apostle Paul, Saint Augustine, even Christ Himself—don’t seem to engender so much animosity (today), but modern-day zealots who invoke these ancient names in pursuit of conforming others to their worldviews have become an easy target for cynicism, in many (while certainly not all) cases deservedly.  Self-righteous fee-only financial planning evangelists—of which I am one—are beginning to face a similar dilemma and may require an act of God to remake their reputation, especially within the industry.

My confession should not be seen as sins for which every fee-only advisor is guilty, but several others have shared similar thoughts with me—some making even bolder statements and passing firm-wide edicts outlawing comparisons designed to disparage the “unholy.”  While there are many individual acts to be brought to light, all of these indiscretions fall under a single umbrella transgression:

Instead of highlighting what we are FOR, we have magnified what we are AGAINST.  Instead of making our case to new and existing clients based on who we ARE, we have taken the more expedient route of peddling who we are NOT.  For example:

  • We are NOT salespeople.  We delude ourselves.  Everyone is selling, from the Pope, the priest and the pastor…to the doctor, the professor and the journalist…to the accountant, the attorney and the advisor…to the agent, the broker and the banker…all the way down to the butcher, the baker and the candlestick maker.  Whether it’s a product, a process or a personality, we all have something to sell.
  • We are NOT biased.  Yes, the bias of commissions is the most evident, but less evident biases can also be dangerous, and sometimes even more so when papered over with apparent altruism.  Hourly billing has an inherent economic bias to stretch an engagement.  Flat fees incentivize the service provider to clip their work, moving on to the next fee.  And those compensated by a percentage of assets under management have a clear conflict to prefer managing more, even if those assets would be better applied to debt repayment, real estate acquisition or investment in a small business.  All of us are biased, and to dispute otherwise is self-deception.
  • WE are NOT non-fiduciaries.  The spirit of fiduciary is vitally important, and the evolution of the industry depends on its application, but the word (fiduciary) itself is relatively meaningless and occasionally misleading.  Unfortunately, we have allowed the word fiduciary to become just another mousetrap to be sold, trampling the spirit of the word in our haste.  A true fiduciary is too busy acting like one to spend time yelling at those who they believe are not.
  • We are NOT, God forbid, Merrill Lynch or Morgan Stanley.  While the trend was already underway prior to 2008, the move away from proprietary wire houses to independent advisory firms turned into a tidal wave after the financial collapse.  It was primarily the investment banking and trading arms of behemoth brokerage firms that earned the public outrage, but while those complicit started raking in record bonuses the year after the crisis, tens of thousands of financial advisors were left with a heavy anchor on their business cards.  Needless to say, we didn’t exactly throw them a life vest.

Saint Francis wasn’t born with a halo around his head and animals flocking to his crib.  Early in life, he apparently lived it up as a wealthy merchant’s son and even tried his hand at being a warrior for his home town of Assisi prior to receiving the revelations that redirected his path.  The movements for which he became known, however, were enacted less through fiery rhetoric and more through penitence.  While the exact source is disputed, no one doubts that this quote attributed to Francis exemplified his life and work: “Preach the gospel at all times.  When necessary, use words.”  We as fee-only financial advisors would do well to seriously consider this admonishment.

Is it possible that the next phase of the financial industry’s inevitable transition (as well as the Church’s) will be led not by rigid demands for legalistic purity, but instead by a humbler, quieter, simpler, more effective practice grounded in affirmation?

If this post resonated with you let me know on Twitter via @TimMaurer, and if you’d like to receive my weekly post via email click HERE.