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Category Archives: Finance

Three ways to give your children a financial

Give presents that mean something

Of course children love toys and having something to play with, but not every present they receive has to give them instant gratification. Putting money in a unit trust or stock broking account might not sound like the most exciting gift in the world, but it can be very rewarding.

For a start, it gives them some sense of having their own savings and some money of their own to look after. Over time, it’s also the best way to teach them about different savings products, asset classes, and things like interest and dividends, as they can see for themselves how they work.

A low-cost online stock broking account could even allow them to make their own decisions about what stocks to invest in. At an early age their decisions are not likely to be influenced by rigorous analysis, but they can still invest in companies that they know something about.

Involve them in their own savings

If you are saving for your child’s education, are they aware of it? Do they know that you are putting away money every month, where it is going, and what it is for?

Explaining to your children that you are saving for their future allows for you to have a discussion around why it’s important to do this and how it works. Not only will this give them some sense that they can’t just take things for granted, but it also gets them thinking about the importance of financial planning.

Think of their future before they do

The earlier your children start saving for retirement, the less they will need to save. One of the biggest impacts you can make on their future financial well-being is therefore to start for them.

Plan to present your child with a lump sum on their 18th or 21st birthdays, either in their own tax-free account or placed in a retirement funding vehicle. You may not think you are contributing much, but just R10 000 will grow to nearly R1 million over 45 years at a compound growth rate of 10% per year. That is a worthwhile boost to their future retirement, and will also get them thinking about their financial future as soon as they enter the working world.

If you do this in a retirement annuity (RA), they will not be able to access the money until they are at least 55, which will ensure that it is kept for what it is meant for. However, if you believe that they will be disciplined it makes more sense to use a tax-free savings account. This is because over such a long period the benefits of a tax-free savings account will likely be greater, and you can also invest fully in growth assets like equities, while an RA will have to meet the restrictions of Regulation 28.

For a Successful Financial Plan

On the surface, the cost of a financial plan is simple: generally between $2,000 and $4,000, depending on its complexity and where you live.

But dig deeper and you’ll find that the plan’s success also depends on you spending time to implement it.

Consider the case of a young physician who recently came to my office inquiring about a financial plan. His primary issues were cash flow with tax considerations, debt service and investment advice. I suggested he would also need an insurance review and estate planning, since he had none. At the conclusion of our getting-acquainted meeting, my colleagues and I quoted a fee for the financial plan and what it would include. He decided to work with us.

Next we had a goal-setting meeting and collected his pertinent financial documents such as his tax return, investment statements, debt statements and more. We provided risk-tolerance questions and discussed his short- and long-term goals in greater detail. Then there was an interim meeting where we reviewed his goals — to be sure we prioritized them correctly — his risk-tolerance results and his investment analysis.

A couple of weeks later, we had a plan-delivery meeting, where we reviewed the recommendations in all the areas of his financial plan. He took the binder home to review and start implementing the plan.

He returned in a month for a progress meeting. He had made some headway on our list of recommendations, but not as much as I had hoped for. At the conclusion of that meeting he told me: “You were very clear as to what the plan would cost me in dollars. What I did not know was the time it would take me to collect the information on which the plan is based, to meet with you, to read and study your recommendations and then to finally implement them.”

He was correct: It costs both time and money to enact a financial plan that will really help you. Eight months later, I received an email from the doctor, letting me know he’d completed all the recommendations. In the end he said the total cost, in terms of dollars and time, was well worth it.

Beware of additional costs

Keep in mind that with some financial service providers, there could be huge additional costs in the form of fees or commissions. This could also be a conflict of interest if your advisor recommends products that pay him more, rather than the ones that are best for you. So be sure you know exactly what fees are involved when you start working with an advisor.

While my recommendations in the doctor’s plan included specific changes to his insurance and investment holdings, I did not sell him any of the coverage plans that I recommended, nor did I sell him the investment products he needed. That’s because I am a fee-only advisor. I want my clients to know that I have no vested interest in the implementation of the insurance or investment part of the plan.

This is not the case for advisors who provide both a plan for a fee and then sell you the investments or insurance products as well. All too often, the insurance recommendations made by those who sell the products, too, include more and larger policies than what I would recommend. It is a sad fact that the commission may be driving the plan recommendations, rather than what is best for the client.

When you are looking for a financial plan, be sure that you use the services of a Certified Financial Planner and that the planner does not sell any products. To find such an advisor near you, contact Garrett Planning Network or the National Association of Personal Financial Advisors.

Don’t Make These 5 Mistake

1. Obsess Over Investment Strategy

There’s often this feeling that if you can just find the perfect investment strategy, your financial success will be guaranteed.

So you read articles, listen to the experts on TV, and tinker with your investments, all with the hope of finding an edge that puts you over the top.

But here’s the truth: the returns you earn, good or bad, have almost no impact on your bottom line until you’re a decade into the process.

What does matter, a lot, is your savings rate. It may not be sexy, but simply saving enough money is far more important than any other investment decision you can make.

2. Forget About Irregular Expenses

If you’ve tried budgeting before and it hasn’t worked, chances are you’ve been undone by all the unexpected expenses that keep popping up.

Your car needs a new tire. Your daughter has to go to the doctor. Your friend gets married in another state.

Here’s the thing: a good budget knows that these kinds of expenses aren’t unexpected. You may not know when they’re coming, but you do know they’re coming.

And you can make them a part of your regular budget simply by saving ahead for them each month. That way the money will already be there when you need it.

3. View Cutting Back as the Only Option

Cutting spending is often the quickest and easiest way to free up room in your budget for the big financial goals you’d like to achieve. Which is why it’s usually a great first step.

But it’s not the only option.

In fact, the biggest long-term results often come from finding ways to increase your income. So don’t be shy about asking for a raise or starting a side hustle. Those are powerful tools that can expand your world of financial opportunities.

4. Think That Credit Card Debt Is Normal

According to NerdWallet, the average American had $15,310 in credit card debt as of 2015. So I guess debt is normal in the sense that a lot of people have it.

But if you want to be financially healthy, you need to accept that credit card debt cannot be part of your life. It’s actually the biggest obstacle that’s keeping you from reaching your goals.
If you have credit card debt, getting rid of it is almost always a top financial priority. That may mean that other financial goals have to wait, but the sooner you get rid of your debt, the sooner you’ll be able to make real progress towards the things you care about most.

5. Look for Easy Fixes

Unfortunately, there is no easy button when it comes to your finances. The solutions are often fairly simple, but they take time, dedication, and hard work before they truly pay off.

For example, creating an account with mint.com and linking all your bank accounts is a great start to the budgeting process. But the app itself won’t solve all your problems.

You’ll still need to take the time to categorize your expenses, both up front and on a regular ongoing basis. And you’ll need to use that information to take action and make changes in how you use your money.

No single app or tactic is going to fix everything for you. You have to take ownership of your situation and do the hard work to make it better.

 

How to Save Money for a New Car

The first step one should take is to identify the investment objective. In this case that is a car, with an assumed cost of R300 000 at the end of a five-year term horizon. It is important to understand this time horizon as well as your appetite for risk to decide on the most suitable investment vehicle.

Some of the most popular after-tax investment vehicles include endowments, unit trusts and the tax free savings accounts. These vary in terms of accessibility and tax implications and we would need to know the clients full financial situation before recommending a suitable product.

For a client who wants to lock their investment for a five-year period, an endowment would be a vehicle to consider. We do, however, have to take into account their marginal tax rate when making this decision.

This is because endowments are taxed within the fund at a set rate of 30%. This benefits investors who have a marginal tax rate greater than that, but can be prejudicial if their tax rate is lower.

Because the money in an endowment is taxed within the fund, your withdrawals are tax free. In order to get this benefit, however, endowments have a minimum investment time horizon of five years. At that point the money can be accessed or the investor can choose to extend the policy term.

You would be able to choose different underlying investments within the endowment, and given your time horizon, a moderate-to-balanced portfolio will most likely be appropriate. It is, however, important to take your risk appetite into account.

To know whether this would really be the best option for you, however, it is important to get an understanding of the tax implications from your financial advisor.

Financial Planner

On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.

There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.

I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.

By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.

Two Big Reasons to Watch Your Investment

1. Low Fees Lead to Better Returns

This is pretty counterintuitive. We’re used to better things costing more money and cheap alternatives meaning important sacrifices. But it’s the exact opposite when it comes to investing.

In 2010, Morningstar released the results of a study in which they found that cost was the single best predictor of a mutual fund’s future investment return. The lower the cost, the better the future return. In other words, in investing, the cheap alternatives aren’t a sacrifice at all. They’re actually the higher quality items and they increase your odds of success.

2. Even Small Fees Cost You a Lot of Money!

You may think that a 1% difference in cost isn’t that big a deal, but over long periods of time it adds up to a huge difference. Let’s put aside the fact that lower cost investments typically outperform and assume that you’ll get a 6% return no matter what.

Now let’s say that you’re saving $5,500 per year (the annual maximum for an IRA) and you have two investment choices: an index fund that costs 0.10% per year or an actively managed fund that costs 1.10% per year.

After 10 years, here’s your balance in each fund:

  • Low-cost fund = $76,412
  • High-cost fund = $72,230
  • Difference = $4,182

Here it is after 20 years:

  • Low-cost fund = $211,969
  • High-cost fund = $188,770
  • Difference = $23,198

Finally, here’s what it looks like after 30 years, which is a pretty standard amount of time for most people investing for retirement:

  • Low-cost fund = $452,449
  • High-cost fund = $376,801
  • Difference = $75,648

What would you do with an extra $75,000?

5 Things Not to Worry About Investing

1. What the Stock Market Has Done Recently

The US stock market dropped 24.63% over the first 68 days of 2009 in the midst of the housing crisis and international financial meltdown. Bad sign, right? Sure, except that the total return for the year ended up being a positive 29%.

Or how about the two years from September 1998 to August 2000 when the US stock market increased by 25% per year, only to decrease by 21% per year over the next two years.

In other words, you shouldn’t spend any time worrying about what the stock market has done recently because it doesn’t in any way predict what it will do going forward.

2. What “Experts” Think the Stock Market Is Going to Do Next

Did you know that active investment managers underperform basic index funds year after year? Or that “expert” prognosticators are wrong more often than they’re right?

Even the experts have no idea what the stock market is going to do next. The less you pay attention to their predictions, the calmer you’ll feel and the more likely you’ll be to succeed.

3. What Your Friends Are Investing In

It’s pretty easy to read a little bit about something, repeat it to your friends or family, and sound like you know what you’re talking about. I’ve done it. You’ve done it. We’ve all done it.

So the next time you hear someone talking about how they’re investing, remind yourself of the following three things:

  1. They may or may not know more about investing than you do.
  2. They definitely don’t know about your personal investment goals and the right way to reach them.
  3. Therefore, what they’re saying is completely irrelevant to your investment plan and you can safely ignore it.

4. How Exciting It Is

Nobel Prize-winning economist Paul Samuelson is famous for saying that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Good investing is actually pretty boring. You put a strategy in place, contribute to it for decades at a time, and stick with it through the ups and downs.

It’s not exciting, but it’s prudent.

5. Whether You Have the Perfect Investment Strategy

We all have that nagging suspicion that we could improve our investment strategy, even just by a little bit. I have it to from time to time.

But here’s the thing: there is no perfect investment strategy because no one knows what the markets will do in the future. Lots of people have ideas, but no one knows for sure.

So stop worrying about whether you could tweak your investment strategy to get it exactly right. Work on making it good enough and get on with your life.

4 Steps to Merging Finances

 1. Focus on Joint Goals, Not Joint Accounts

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

Ignore all of that. It doesn’t matter. At least not at the start.

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

This communication is the real key to successfully merging your finances. All the rest is just logistics.

2. Establish Shared Expenses

Now, about those logistics…

One easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

3. Create a System

There are two main ways you can start sharing those expenses.

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

4. Plan for Extra Money

Here’s something my fiance and I have done that’s helped us a lot.

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.

Top 5 most Ridiculous Recent Firings

 5. Lowering a Flag on Memorial Day

Let’s all agree on a few things for the survival of decent society, O.K.?

Number one, do not harass coffee shop clerks who don’t stroke your holiday ego. They are not in charge of compensating for your discovery that Santa isn’t real; they’re here to make lattes.

Number two, we can and should all chew with our mouths closed.

Number three, when a soldier lowers the flag to half-mast on Memorial Day in honor of some lost friends, the absolute, literal least you can do is leave the guy alone to his ceremony.

Apparently this last was too much for a Charlotte company, which reportedly chose to fire Marine Corps veteran Allen Thornwell for doing just that. His employer said that it was disturbed by Thornwell’s “passion for the flag and (his) political affiliation,” and that’s the double edged sword of at-will employment. Thornwell will hopefully find work soon, but his employer was perfectly free to let him go.

4. Plain Old Racism

Let’s revisit social media, because it’s something we will all have to continue getting used to. As Millennials scrub their online footprints, terrified that even an innocent happy hour could cost them their job, other users take… a different approach.

Consider, for example, Jane Wood Allen, an employee of the Forsyth, Georgia school district who was fired for a Facebook post about First Lady Michelle Obama that began with “This poor Gorilla.”

Allen’s story is nothing all that rare, but it raises a particularly thorny issue. You see, while Forsyth County’s decision to fire Wood makes sense from a standpoint of damage control, it may not be legal. As a public employer, schools have to respect some First Amendment rights of their staff.

Private statements made on private time from Wood’s own computer may be well beyond the reach of a school district to punish her for… no matter how good the reason.

3. The $15,000 Firing

When is a firing just not worth it? When it costs a decent portion of the employee’s salary just to sort everything out.

Yet that’s precisely what happened with a Decatur, Ga. school after it fired a popular media clerk. In the aftermath of Susan Riley’s termination, allegedly over misuse of a school iPad, questions began popping up. To its credit, the district launched an investigation into what actually happened and whether to reverse Riley’s firing.

After $14,757 in fees to a local attorney, it finally decided that a mistake had been made.

2. Conspiracy Theories

The case of Florida Atlantic University Professor James Tracy is an interesting one. In a nutshell, Tracy was fired for his long standing campaign that the Sandy Hook shooting never happened. This includes a blog, comments in any media he can find, and what parents of one victim have described as a pattern of personal harassment.

As a result, earlier this year he was fired from his tenured position at FAU for, among other things, using his university credentials to advance his cause. His subsequent lawsuit has been dismissed without prejudice.

1. Being Gay

You’d think this wouldn’t be a problem in 2016, but here we are reporting on the case of a Minnesota banker who got fired for coming out.

After working for years in the family business, when Stephen Habberstad came out to his wife and siblings, the fallout reached well past his personal life and into his employment. During the divorce, he had to surrender enough stock to lose control of the family bank, which set the dominoes in motion for his speedy termination.

Amazon May Be About to Pummel America’s Clothing Stores

 Amazon (AMZN) appears to have ambitions to upend the clothing industry, and retailers from Gap (GPS) to Lululemon (LULU) should be frightened.

As TheStreet has reported, based on several recent job postings on Amazon’s site it’s planning to develop its own line of workout apparel. Wall Street is mixed on the potential for Amazon to develop a strong presence — and disrupt the old guard — in the athletic apparel space, however.

“Just because Amazon sells something, it doesn’t mean they’ll blow the competition out of the water,” said Simeon Siegel, executive director and retail analyst at Instinet

There are clear winners in the athletic apparel space and they win because of their product, strong brand loyalty, who’s sponsoring them and what they stand for, Siegel said.  While a workout clothing line from Amazon is “not a good thing,” he does not think athletic behemoths such as Nike (NKE) and Under Armour (UA) should be “quivering” because the e-commerce giant is entering the space.

Bridget Weishaar, senior equity analyst at Morningstar, also does not believe an Amazon athletic apparel line would have a big effect on sportswear giants right away.

“I don’t think it’s going to have much of an impact especially in the near term,” Weishaar said, “Especially with Lululelmon, it’s more than just the apparel itself.”

Lululemon hosts yoga classes in its stores and the company is more of a “culture and lifestyle,” Weishaar explained. The retailer has brand loyalty, ambassadors who wear the products and has a feeling of community, which is “much harder to break.”

Because Amazon is not a brick-and-mortar retailer, it also doesn’t have the background of trust in the quality, she added. “You can’t walk into the store to touch the product,” she said, so convincing a customer to purchase an item may be more difficult.

It’s also time consuming to build a brand, she said.

While Nike and Under Armour have less of a community feel in their stores than Lululemon, they have built their brands for many years and have customer loyalty. Quality is also really hard to match, especially quickly, Weishaar noted.

Even still, Amazon looks poised to take on the challenge of getting bigger in the clothing space.

Having mixed success in luring top fashion apparel brands such as Calvin Klein and Levi Strauss to sell on its site, Amazon has taken matters into its own hands. Last year, the company opened photo studios in New York and London, and has begun selling a host of private label apparel brands. It also launched a free daily show dedicated to fashion.