All Things Financial Planning Blog


The 5 Biggest Changes in Personal Finance over the Last 20 Years

Personal-DebtMy son recently turned twenty and it inspired me to reflect on all of the changes in his life as well as in my professional life. My son’s progression has gone from being a baby, to a toddler, to a growing child, to a teenager, and finally to a young adult. He is now trying to figure out his professional place in life as he just finished his first year of college. During that same timeframe, I’ve seen personal-finance go through its own five stages of maturity. Twenty years ago it was more about buying a product, being transaction focused, little reliance on technology, running massive volume plans, and focusing just on the money aspects, not health and psychological aspects.

  1. Let’s face it, our culture must sell products and we’re pretty darn good at it. The problem is that the marketing and slick ads of all the things we buy in America today, don’t always match the quality and integrity. I think the biggest move that our industry has made in the last 20 years was to go from selling a product to following a process. The process includes a comprehensive financial plan. The financial plan not only talks about investments but also about understanding debt, figuring out a budget, understanding human capital (what we think of as our skills to make money for ourselves), reviewing your insurance for the major risks in life, and understanding that all of these things are linked together in order to get us all to the finish line.
  2. The transaction focus over the years has ebbed and flowed in terms of the hyperactivity in order to get better performance. Back in the olden days, it was about transactions because that’s how many advisers were paid. It was said that advisers are not in the storage business they’re in the moving business. Today the focus is on asset management for a fee, retainers, hourly fees, and project fees rather than commissions. Although I see a bit of a backlash happening in the last few years where it appears technology is getting ahead of the small investor. The advent of massive millisecond transactions have caused us to doubt the integrity of the system which the world of investments is built upon. We had multiple occasions like the “flash crash” and the search for algorithms giving institutions a major-league advantage over the average investor.
  3. For those who need help with their finances, the place to start your search is to ask a friend if they know somebody that’s good. Yet the next step is to get on the Internet and search for someone that appears to fit your standards. Even though it’s like trying to take a sip out of a fire hose every time you do a Google search people are finding most of their initial information on the internet. Today, I feel it’s much more of a collaborative effort between the adviser and the client. The adviser gathers the information needed to better help assist the client in making decisions. The best advisers these days are more of a librarian than a master of many disciplines.
  4. The financial plans that we put together over the years can be extremely comprehensive and lengthy. The problem with that is that planning by the pound doesn’t always get things done because most people are very busy these days and just want to get down to a summary version. I know that because I do a daily radio show commentary and 14 years ago I had 3 minutes to talk, today I have a minute and 10 seconds. A more modular approach works better because it talks about your specific problem at the moment and how you fix it. I feel that the best plan these days is to have one page versus 100.
  5. Probably the most important change that I’ve seen over the last 20 years is that financial planning has gotten much more holistic. It is about looking at the big picture and trying to incorporate wisdom, along with emotions, as we see the springing up of behavioral economics and why we do what we do. Reading a book like Daniel Kahneman’s Thinking, Fast and Slow (he was the first psychologist to win a Nobel Economic prize) should be mandatory for anybody who’s going to invest or put together a financial plan. It’s really critical to try and take health, wellness, happiness, human capital, emotions, relations, and wealth together as they are all part of the playing field.

The world of financial planning and investment advisory has moved steadily in the right direction over the last 20 years and I hope that it will continue to do so. There is certainly a lot of room for improvement yet I feel that some of the breakthroughs that we’ve seen in healthcare and technology over the last two decades are going to find their way into a simpler, more comprehensive blend of our money and life connections. Robbers used to say, “Your money or your life.” The next phase of financial planning is going to be “Your money and your life!”

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA


Take Charge of Your Financial Literacy

End 2010 with a “KISS”As you may have seen on this or other sites, April is Financial Literacy month. While some people go back and forth as to whether or not literacy is the right term, the fact is it’s never been more crucial to have a good grasp of your own personal financial situation and to educate yourself and your family as to how they relate to money.

Movements to include more financial education at all levels have cropped up across the country. Many states have passed laws mandating some level of financial education in state curricula, but funding has not followed. Many business leaders have called for an increase in awareness and education, but concrete solutions have not been realized. I attended the RISE Conference at the beginning of the month where even Federal Reserve Chairman Ben Bernanke referenced the need for financial education as a key pillar to improving the long term economic picture for our country.

So, what does this mean to me and my family?

Efforts by federal, state and local governments, school boards and other institutions to determine how best to increase personal financial education amongst all Americans is an admirable goal, but one likely to take a generation or more to truly have an impact.

That’s not to bemoan those efforts. Shifting how a population thinks about something as fundamental to our lives as money is a big job. It’s simply to suggest that perhaps it’s time those of us that are so inclined pick ourselves up by our proverbial boot straps and take charge of our own financial education.

How do I do that?

It all depends on your current personal financial knowledge, what areas need some improvement and who you are. No matter where things stand in your life, there are countless tools available to help. Yes, the internet can be a bit of a gamble as to the quality of information available, but that’s no excuse for not taking the time to seek out free or inexpensive resources that could dramatically change your financial future.

Giving specific examples of where to go to find great resources for all the various stages of life is a whole series of blogs for a different day. For now, I’ll just give you a quick list of some of my favorites.

Starting Young
For teaching children some of the basic tenets about respecting money, there’s a new website called The Secret Millionaire’s Club. The club was partially developed by Warren Buffett who acts as the mentor in the animated series to a group of entrepreneurial kids. Guest appearances by Jay-Z, Shaquille O’Neal and other celebrities add to the fun. The website features information on how to access videos, related games and other tools to help kids embrace strong financial values.

Establishing A Budget
Ah, the monthly budget. A process loathed by many and fully embraced by few. Yet, we know it to be one of the best ways to keep spending in line. There are lots of tools out there to help make this process a little less of a chore. My current favorite is You Need a Budget or YNAB. YNAB is great because it’s not just a way to track spending, but a whole philosophy shift in how you approach your month to month needs. The software comes at a cost, but the related education tools around spending, taxes and other financial areas add lots of value.

If you’re more interested in just seeing where the money is going and keeping track of your assets and liabilities, Mint offers a free service through their website which is widely established as an industry leader.

Saving For College
Surprisingly, the College Board administers much more than just the SAT. It’s also a great resource for learning more about financial aid, college scholarships and the college planning process. If you’re just looking to get over that shock of how much you might need to save to help pay for a child’s education, Bankrate has a great calculator that allows you to add multiple dependents, choose between in-state, out of state and private schools and include savings you’ve already stashed away.

This is far from an exhaustive list, but just a way to get you started thinking about different ways you can improve your financial IQ on your own. None of this takes the place of finding a trusted adviser to provide one-on-one advice when you want to get serious about your specific situation, but a lifetime of improved decisions about your money starts with the first step.

Don’t wait another month or for another reminder about how important your personal finances are to your life. Take that first step today!

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


Emergency Cash Reserves – Unloved yet Necessary

My New Year’s Resolution for EveryoneI met with a couple recently to deliver their financial plan, and throughout the first half of the meeting we laughed repeatedly as they seemed to have guessed my recommendations and either did or planned on doing exactly what I had written down.

They’ve been contributing 15% of their wages to their long-term retirement plan, have no debt other than a mortgage that will be paid off well before retirement, are able to pay a college tuition bill within their cash flow, and up until recently have been making it a point to contribute to Roth IRAs.

Aside from the validation from a professional, what possibly could this couple have needed with a financial advisor?

Admittedly, not as much as many clients I see, but one of the major observations was the excessive amount of importance on trying to be as efficient as possible. They put every available dollar towards the long-term retirement plan or into paying down their long-term mortgage debt, and in doing so they blew past step one in creating a solid financial foundation – having an adequate amount on hand for short-term emergencies and cash needs.

Our sample couple here came to me wondering how in the world they will be able to pay for a second tuition bill, or purchase new cars. They recently stretched their budget even further by refinancing their 30 year mortgage to a 15 year, and increased their monthly minimum payment. I also pointed out that they had no options to cover any other short-term emergencies that life may send their way other than to go into debt, or raiding a retirement fund.

In preparing their recommendations, I gave them a financial scorecard they would receive the following grades:

Long-term savings – A+

Credit and consumer debt – A+

Living within their means – A+

Having adequate liquidity – D

Overall financial health – B-

What this couple was lacking is cash on hand. Unlike most of your other financial priorities, holding cash is never the most efficient thing to do and so its importance is often overlooked. Compared with paying down a mortgage at 4%, or earning 5-10% in a long-term investment, cash earning next to nothing just isn’t an attractive idea!

But, having an emergency cash reserve is a critical piece of a financial plan. It acts like a moat around your financial castle. It protects you from the need to sabotage your long-term investment plan, or take on high interest debt in order to cover cash needs.

Having a minimum of three months of your net income in an emergency cash account is a requirement of any complete financial plan (Note: three months is a minimum. If you are self-employed, have rental properties, or other concerns about income remaining stable you may need to be at six or more). Even at the expense of not fully funding a retirement account or not paying extra on that student loan for some time. Make having emergency cash in a savings account or money market a priority now, and when the time comes to need it you won’t have to worry.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


Paragliding Off the Fiscal Cliff

Asset-Allocation-in-a-CrisiWell the fiscal cliff, much like the Mayan calendar, and much like Y2K, was just another non-event. A lot of buzz with even a lot more fizzle. The sun has risen, aircraft are safely landing and football dominates the thinking of sports minded folks as we all enjoy the first day of the New Year and the rest of our, hopefully long, lives! Not to downplay the significance of what could have happened had all things remained unsettled and all provisions of previous tax and budget agreements been exercised, just a comment on how often we hear that the World is coming to an end only to find that through all the huffing and puffing nobody’s house was blown down.

Soon we will learn more about the specifics of the 11th hour agreement and we will then hear lengthy discussions from the media and others about how ‘the can just got kicked down the road’! Yes, there are components of the bill that will be ‘permanent*’ but there will still be budget deficit ceiling negotiations, tax reform* discussions and entitlement reform to deal with in the next two months before we can say we have our fiscal house in order, whatever that may look like, remembering that there are differences in opinions about balanced budget management requirements versus budget deficit flexibility, etc., etc. etc.

The Tax Policy Center has estimated, as a result of the Taxpayer Relief Act of 2012, an average annual ‘pocketbook’ hit depending on the following levels of taxpayer income …

$20,000 to $30,000 $297
$30,000 to $40,000 $445
$40,000 to $50,000 $579
$50,000 to $75,000 $822
$75,000 to $100,000 $1,206
$100,000 to $200,000 $1,784
$200,000 to $500,000 $2,711
$500,000 to $1,000,000 $170,341

[Chart courtesy of LA Times, author Alana Semuels]

Taxes on Earnings
Payroll. Everyone will feel the loss of the 2% payroll tax holiday starting January 1, 2013. If you make more than $200,000 (single) or $250,000 (married filing jointly) you will also feel the PPACA (Obamacare) 0.9% additional ‘health care’ tax taken from your paycheck.

‘Ordinary Income’
Wages and interest income (as well as short term capital gains) will be taxed at the ordinary tax rate brackets which will remain the same as prior years (Bush tax cuts) except for individual taxpayers earning over $400,000 or married taxpayers earning over $450,000. Those taxpayers will see their tax rates go as high as 39.6%. For individuals earning more than $200,000 and married couples earning more than $250,000 there will be a 3.8% ‘health care’ tax added to the taxes paid at ordinary rates for interest income earned (and short term gains but not for wages).

‘Capital Gains and Dividends’
The good news here is that capital gains (long term) and dividends will both still get favorable capital gains tax rate treatment of 0% or 15% if your income is under the $400,000/$450,000 level. If your income is over those amounts, a capital gain maximum rate of 20% will apply. Let’s not forget, however, that the 3.8% ‘health care’ tax ($200,000/$250,000 income levels) comes into play here as well making the potential capital gains rate for those making more than the $400,000/$450,000 a maximum 23.8%.

Alternative Minimum Income Tax (AMT)
This is a break, if you can call anything about AMT a break. For each of the past several years tax preparers have had to wait until the last minute for Congress to come up with a statutory AMT exemption amount (it is like our standard deduction that we have for regular tax purposes) so that we would know who would or would not become subject to AMT. If Congress had not upped the 2012 exemption amount to $78,750 for married couples and $50,600 for individuals, a married taxpayer could have had to pay, perhaps, as much as $8,775 more in taxes in 2012 [$78,750 – $45,000)(.26)].

Itemized Deductions and Personal Exemptions
A couple of years ago there was an income phaseout employed to reduce the benefit a higher income earning taxpayer would get from itemized deductions and personal exemptions. That phaseout for itemized deductions is being brought back for 2013 and will start at $250,000 for individuals, $275,000 for head of household and $300,000 for married filing jointly. Personal exemptions will have the same phaseout dollar filing status threshold amounts, again, for tax years 2013 and thereafter.

Extended through 2013

  • Tax free distributions from IRA to charity
  • Educator expenses
  • State and local sales tax deduction
  • Debt relief income recognition exemption for qualified residence indebtedness
  • Variety of energy tax credits for energy efficient homes and energy-efficient appliances.

Extended for five years

  • Enhanced earned income credit
  • American opportunities credit

Extended permanently

  • Child tax credit of $1,000

Estate tax

  • Estates that exceed $5,000,000 will see the estate tax rate increase to 40%
  • Annual gift tax exclusion amount is $14,000 per individual for 2013

Again, the good news is that we didn’t end up like Thelma or Louise and we didn’t experience the thrill of a bungee-cliff-dive, both very good things. The bad news is that we seriously need to bring all sides together to address long term fiscal soundness through tax, entitlement and budget reform. All in all this Taxpayer Relief Act of 2012 is very modest in tax law changes and tax savings so a lot of work will need to be done in the next two months. Let us hope that this year’s group of elected officials can get the job done! Happy New Year to All!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA

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Ingredients for Holiday Spending Success

It’s that time of year again. There’s excitement in the air, discussions and twitter posts about all that we’re grateful for, and holiday decorations popping up in the stores so fast that you’d think we all but missed Thanksgiving already. The holidays are officially upon us, which means so is the season for gift giving, additional expenses, and trying to hold tight to our spending plan all the way into the New Year.

One key thing to remember with holiday gifts and expenses is to have a clear-cut strategy for purchases. By following the steps listed below, not only can you keep yourself on track with holiday spending, but you can also prevent a post-holiday spending hangover from wrecking havoc on your finances:

  1. Know your current expenses. Ensure you have a detailed spending plan in place and are aware of where your money is currently being allocated. Utilize a website such as or a simple excel spreadsheet to track your fixed and discretionary expenses. Once you’ve determined where your money is currently being spent, you can begin to pinpoint areas within your current budget where there is flexibility to trim back. By cutting back on certain expenses now, you can begin to save and free up additional funds for holiday purchases.
  2. Create a list. Check it twice. Draft a holiday budget that includes amounts for gifts, meals and parties, travel, decorations and any year-end charitable donations that you make. Before heading out to the stores, create a list of whom you specifically need to shop for or what you need to purchase. Allocate a predetermined dollar amount to be spent on each person or item in order to keep your spending inline.
  3. Research. Look through holiday advertisements and browse websites for gift and discount ideas. Compare the pros and cons of shopping online versus in-store so that you can stretch your dollar further. In addition, if you typically donate more money to charitable causes at year-end, research a few issues you’re passionate about and commit a set dollar amount to one or two charities instead of “sprinkling” funds around. Or perhaps establish a donor advised fund, which allows for the tax efficiency of a charitable donation and helps eliminate any stress caused by making a “rushed” gift.
  4. Get Creative. Once you know the “who” and “how much” of your shopping – then the fun begins! Allow yourself to be creative with gift giving. Look into using credit card points for gifts or working on some DIY crafts. Remember that it truly is the thought behind a gift that counts. Figuring out someone’s favorite type of baked good and then whipping up a batch of cookies could be a meaningful and cost effective route. Similarly, hosting a gift exchange and limiting the gifts to “board games” or “favorite bottles of wine” can help to cut costs and create a fun theme for an event.

Ultimately, the holidays are a time to spend with loved ones, celebrating all we have to be thankful for. Remember that planning, organization, creativity and flexibility are four key ingredients for conquering holiday expenses.

Mary Beth Storjohann, CFP®, CDFA
Senior Financial Planner
San Diego, CA


How A Six-Year-Old Saves For Retirement

In our society of conspicuous consumption and spending-beyond-means, many parents face an uphill battle to encourage children to save for the future, resist instant gratification, and most importantly, understand how to budget and use credit wisely. At a recent dinner party with a group of parents with young children, the conversation turned to this exact topic. When I shared how I teach our kids about money, these parents encouraged me to write an article to share my approach. This article explains how my wife and I attempt to instill financial values in our six-year-old son. I recently began giving our six year old an allowance, but with a twist.

It’s never too early to learn about taxes. As Benjamin Franklin said, “The only things certain in life are death and taxes.” My six-year-old receives a gross allowance of $6 per week (one dollar for each year of his age), in the form of one-dollar bills. From this $6, he has to pay $1 in taxes to the Oghoorian-Family-IRS. In this way, he experiences the impact of “earning” (in this case getting) money and having to pay a portion of it to taxes. Of course the first thing he asked when I first collected taxes was what exactly his taxes pay for; my response was that his taxes pay for food, shelter, travel, and other services we deem “public” goods. So far, our son is subject to only a flat tax. But as his allowance grows with age (and he learns percentages), so will his tax bracket. I just hope he doesn’t get ensnarled in the Alternative Minimum Tax.

After paying taxes, our son must allocate another $1 toward savings; “forced savings”. Unlike the $1 tax that’s taken by the IRS, he gets to keep the $1 savings per week in a separate part of his cash box so that he can see it grow (rather than as a theoretical value he would see on a bank statement.) His savings rate is only 17 percent of his gross allowance, which is less than I typically recommend to my clients, but I wanted to keep things simple and in round numbers for now. Once he learns percentages, he will be required to save at least 20 percent.

Should our son be inclined to spend more than his net allowance, he may be granted a loan from the Bank of Mom & Dad at prevailing market interest rates charged by credit cards. A lower rate may be available if he’s willing to collateralize one of his toys. This will hopefully teach him the negative impact of interest as a debtor.

Keeping Track:
I also created a ledger, similar to an old checkbook for those of you who still remember them, for our son to write down his gross allowance, itemized deductions, calculate his net weekly allowance and his cumulative earnings and savings. This exercise strengthens his math skills and further reinforces the concepts already discussed.

Of course this is just the beginning. As our son learns more about money and saving, I will begin to introduce financial priorities that are important in our family such as charitable contributions and investing savings for capital appreciation. While he will certainly have to pay capital gains tax on his investment earnings, I haven’t decided yet whether to give him a tax deduction for his charitable contributions.

We hope that with this early and continued education in sound financial planning, that no matter what our son grows up to be and do in his life, he will always spend and save wisely. Of course, even with all our good intentions, we never truly know what the outcome will be. Check back in 20 years to hear about how our allowance experiment turned out!

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


Forward Thinking

A few years ago I helped conduct a focus group. One of the conclusions was that those focus group members who had a longer term perspective seemed to be the wealthiest. Those wealthier participants were more forward thinking.

When you graduate from high school you will only go to college if you see the long term benefits. Certainly, most high school graduates make more money over the next four years than their college bound peers. Ten years from high school the balance has shifted to college graduates.

People who live paycheck to paycheck would be just fine if their expenses were the same each paycheck. The problem comes in when the car breaks down or their child becomes sick, expenses that were not in the budget and throw off their pattern. Someone with a longer term perspective might understand that the car will need work each year and the family will have some health expenses.

Small businesses that are structured to generate a profit, profit that will be used to grow, will not grow as fast as small businesses that create the infrastructure for growth on day one. Thinking forward to envision the business you want to create speeds the process of getting there.

Career growth will be sped by understanding where you are going. It is often stated that you should dress at work for the position you want, not the position you have. That is also true with education, experience and attitude. Get the education, get the experience and demonstrate the attitude you need to reach your career goals.

It is not easy to shift from a paycheck to paycheck focus to a financial independence focus. You can begin by shifting the focus from the next paycheck to the second one. If you already have a year-long focus, start to make a five year plan. If you have a five year plan, consider planning your legacy.

This forward thinking process can help you become wealthier but it can help you achieve other goals as well. Your vacation will be better planned, your hobbies more smoothly enjoyed, your retirement less fretful if you apply forward thinking to start sooner and consider the opportunities and potential obstacles more carefully.

John Comer, CFP®
Comer Consulting, LLC
Plymouth, MN