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No Substitute

If advertising trends are any indication, more and more of us are experiencing increased levels of what I’ll call “yield fatigue”. New advertisements and articles appear everyday about where to go to earn something on those dollars otherwise sitting in savings accounts, money markets, CDs and the like. We enjoy the safety these type of vehicles offer, but are growing exceedingly tired of earning nothing or near nothing while the cost of gas, health care, tuition and other goods continues to rise. We have to do something. Right?

It’s no secret that our relationship with money has always and likely will always revolve around fear and greed, risk and reward. It is frustrating to scrimp and save only to see no short term fruit born for our efforts. That all said, it seems that, in our quest to earn a bit more of our hard-earned dollars, some are starting to get a little loose with the definition of the word substitute.

Suggesting moving some of your cash or short-term, high quality bonds to dividend paying stocks, high-yield (a.k.a. junk) bonds or emerging market bonds may sound promising at first glance. I’d argue that’s the greed side of the equation playing with your mind. That’s not to say that there aren’t situations where taking more risk to earn higher returns than cash is currently offering don’t exist, they certainly do. The irresponsible part is anyone proclaiming, or any investor believing, that this is a “substitution” for cash or cash like investments.

No, the equation hasn’t changed. If you wish to earn an expected return greater than that being offered in cash, you must accept the additional corresponding risk. In other words, moving some of your safety net into riskier investments, even if only slightly so, should be carefully evaluated, preferably with a trusted advisor. Everyone has different long term needs, wants, wishes and abilities to tolerate risk. Some may be able to stay on track sitting on their current cash reserves through this continuing low-rate environment while others are falling further behind on their hopes to meet their goals. If you do choose to make some adjustments and go it alone, make sure, at a minimum, you at least . . .

  1. Maintain your emergency fund in cash. Make your first savings priority to have at least six months of living expenses available in cash, possibly more if you’re self-employed or a single income home.
  2. Avoid investing in anything other than cash and short term, high quality bonds for any cash you might need in the next five years. The stock market is a place for long term investing. If you’re going to need the money soon or there’s a high probability you might, leave it on the sidelines.
  3. Dividends are nice, but so is preserving your capital. There’s nothing wrong with making dividend paying investments part of your investment strategy. Just make sure you understand how volatile they can be to your principal. Also keep in mind that when the value of a stock goes down, so might the amount of dividend you receive. When the market went south in 2008 and 2009, many companies suspended dividends right when their stock values are at their lowest. Can you afford to have your income stream and the value of your portfolio impacted that dramatically all at once?

With some thoughtful strategizing, your plan can include all the safety and security you need in the short term, with an eye towards growth with those investments slated for the long term. Just make sure you aren’t moving things from one category to another without understanding the risk. Often times when it comes to cash, there’s just no substitute.

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


20 Financial Planning Questions That You Need an Answer To!

Answering financial planning questions is something that I am passionate about and absolutely love to do. Although when I think about what’s important in my business, it is not so much answering those questions (because lots of times people don’t understand, remember, or get around to it), it’s really about getting to the heart of the important issues and knowing the right questions to ask. Most of the questions I hear are usually about something they need to do right away or they are reacting to recent news events. As we head into the holiday mayhem, take a few minutes to reflect on what you’re concerned about.  

Here’s my top 20 list for you to determine what’s most important in your life right now:

  1. Do you know how much you save or spend each year?
  2. What is my current net worth?
  3. What are the ten most important things I want to accomplish while you’re on this Earth?
  4. Am I borrowing money the most efficiently?
  5. How much am I investing in my own human capital or that of my children and grandchildren so they can earn the most during their working years?
  6. Do I have the proper choices in my retirement or 401(k) plan and is it enough to allow me to retire when I intend to?
  7. Do I have the proper amount in an emergency fund?
  8. If something were to happen to me, will my family be able to put everything together?
  9. Do I have the proper amount of insurance so my family will be taken care of if I die, become disabled or am sued?
  10. Does long term care make sense for me?
  11. Is my estate plan up to date and do I have a will, a durable power of attorney, a healthcare proxy, or a trust?
  12. Is there anything else I can do to reduce my income taxes that I’m not doing now?
  13. What is my risk tolerance and how much risk am I taking right now?
  14. What is my current asset allocation with all the things I own?
  15. Have I named the proper beneficiaries of my insurance and retirement accounts?
  16. What has been my rate of return over the years and is it competitive to the respective benchmarks?
  17. Am I up to date on the latest investments like Exchange-Traded Funds and Alternative Investments that may be negatively correlated to the stock market?
  18. If I only had 5 years to live, what would I change in my life?
  19. If money were no object, what would I be doing right now?
  20. If I found out I was going to die tomorrow, what do I regret not doing?

I’ll admit that I think my last three questions are my favorites. They were developed by the financial planning star named George Kinder, of the Kinder Institute, who wrote the book The Seven Stages of Money Maturity. It’s essential to make sure that you answer the questions that are important in your life and that they align with your finances. In fact, the motto of our firm is to help you “connect your money with your life.” 

The 19th century writer Marcel Proust had some really powerful questions that you might want to ask yourself as well. Below are a few of them that a journalism professor, client and friend of mine used to help aspiring writers develop plots. I think these might inspire you and get you thinking for a while:

  1. What is your most marked characteristic?
  2. When were you the happiest?
  3. What is your greatest fear?
  4. What is your greatest extravagance?
  5. Which talent would you most like to have?
  6. What is your motto?

I’m sure there are a number of important questions that I didn’t include on this list. I’d love to hear yours so that I can write about them in my future blogs. In fact, I guess I have 20 blogs lined up in case I have writers block next month! Happy holidays and happy hunting for your questions and answers in life! 

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC .

Asset allocation does not ensure a profit or protect against a loss.

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

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Mirror, Mirror…

Occupy Wall Street is creating a great deal of buzz around the globe, and it is a remarkably fascinating movement to witness. No matter what side of the proverbial fence you reside on, this movement is drawing a great deal of attention to several issues our country’s leaders have long ignored.

Opponents argue that there is no leadership, no direction and no central reason for its existence. And while proponents may have had no consensus rationale for participating in the first place, they are beginning to realize that the true underlying issue is that they believe their future has been compromised in one form or another.

It is unfortunate that it often requires devastating pain and suffering to draw attention back to issues that we turned a blind eye to in the past. While the Wall Street movement is drawing some attention to our macroeconomic and political issues, we ought to pause individually to consider the personal financial decisions we, collectively, have turned a blind eye toward the last several years.

While our political leaders and the big, bad banks had plenty of involvement in the financial crisis of the past several years, consumers played an equally vital role. While it is unpopular to state this, much of the angst and turmoil “caused by the financial crisis” is really the result of poor (or a complete lack of) planning.

Before we cast stones, let’s take an honest assessment of our personal situations and the decisions we have made to ensure that we have built an adequate moat around our financial lives.

We talk often about creating a margin of safety in your financial life. This concept is derived from Benjamin Graham’s book, The Intelligent Investor. It merely means that when making investment decisions, one ought to ensure that they are buying a company at a price well below its real value. This concept is equally important in our ongoing financial decisions.

As an example, consider how many people purchased a home that stretched their budget to the max (or beyond the max!). The banks’ role in this process was knowingly allowing people to purchase more home than they could afford. However, the purchasers of these homes were equally responsible for allowing their eyes to get bigger than their stomachs. In the pursuit of bigger and nicer, we forgot to consider what happens when things do not go as planned.

Most households manage their cash flow pretty effectively until a “surprise” expense throws them off. Another “surprise” expense pops-up the next month, and then two more arise in month three. This creates a cascading snowball effect and results in a death spiral it is extremely difficult to recover from. What makes these scenarios worse, however, is that the “surprise” expenses often come in the form of car repairs, health care costs, a broken furnace, etc., which are really not surprises at all. The timing is unknown, but the expense itself can be reasonably anticipated.

The alternative to the death spiral is something like a job loss. Without question, a job loss is a far more financially devastating event, and far more difficult to prepare for. However, these are precisely the reason financial planners insist on their clients maintaining substantial cash reserves, or emergency funds. When a financial expert jumps on CNN or Fox News and tells everyone to maintain reserves of 3 -6 months of living expenses, they have situations like this in mind. For many folks, the idea of establishing and funding an adequate cash reserve was deemed unnecessary or far-fetched. In reality, if you can’t afford to build a cash reserve with your current cash flow situation, you are living beyond your means with no margin of safety.

Bruce Berkowitz of Fairholme Capital Management has famously discussed his methodology for protecting himself and his investors: kill the company. “We spend a lot of time thinking about what could go wrong with a company, whether it’s a recession, stagflation, zooming interest rates, or a dirty bomb going off.”

Consumers could gain a lot of ground on their financial security by simply practicing this with their ongoing financial decisions. In your personal space, the company is your household’s finances. Instead of focusing on what could go right, focus on what could go wrong, and make sure you are adequately protected against it.

Cash reserves are critically important in this regard. Adequate life and disability insurance will protect against the loss of the breadwinner’s earnings. Be realistic about your job security and forward-looking earnings. Do not over-commit to future expenses. Save consistently and with purpose. If you realistically have a hard time “killing the company”, you can probably afford that bigger house or car. However, if this exercise highlights significant exposures in your financial life, or a relatively likely event will lead to financial ruin, you must have the discipline to walk away.

Joe PitzlJoe Pitzl, CFP®
Director of Financial Planning
Intelligent Financial Strategies, LLC
Edina, MN

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To Our Military Members: Protect Your Financial Future

My first real job was the U.S. Navy. I was 17 years-old and was leaving home and going to be “on my own” for the first time. The Navy taught me many things, some of which have shaped the person I have become but one thing I didn’t learn was how to manage money. My first checks in boot camp were spent on junk food (the chow hall food left much to be desired) and stationary to write letters to friends and family. When I received my checks on the 1st and the 15th, I promptly purchased everything I “needed”. My shopping list included a stereo (for my room in the barracks) and some civilian clothes; of course, the base nightclub and bowling alley benefitted from my bi-monthly windfall. I did develop better financial habits over the four years but, at the end of my enlistment, I left the Navy broke with a young son. I hadn’t participated in any of the retirement savings accounts (now called the Thrift Savings Plan) and I didn’t even know how to set up a budget.

Fast forward more than 25 years and I see many service members struggling with some of the same challenges I faced as a young sailor. Many are receiving a pretty substantial amount of money each month without any real understanding of how to plan for a secure future. Others are trying to support a family on wages that often fall short, making them eligible for food stamps. Certainly, there are many programs the military has in place to help service members learn money management. Unfortunately there are also a host of financial predators seeking ways to separate you from your hard-earned cash.

The Foundation for Financial Planning has developed some excellent tools to help service members (active duty and veterans) learn more about ways to Accomplish Your Financial Mission and manage your financial life. The free resource offers tools to help you:

  • Calculate your net worth – know the value of what you own and what you owe (this also will inform which insurance products you may need to protect what you have).
  • Create a spending and saving plan – the only way to reach your financial goals is to know how much is available to save for goals or to reduce debt.
  • Build an emergency fund – prepare for the unexpected a little bit at a time to avoid going into debt or using payday lenders when financial emergencies occur.
  • Manage credit – in addition to having a negative impact on your ability to borrow money at reasonable rates, service members are at risk of losing a security clearance if debt gets out of control.
  • Get key estate planning documents – make sure you and your family are protected. The military has most of the documents in place, but you have to know what the documents mean and keep copies for yourself in a safe place.
  • Get the insurance you need – think about it, what can’t you afford to lose? Are you and your spouse adequately protected? Could you afford to replace all of your personal property in the event of a flood or fire?

We are grateful to you for your service to our country. You owe it to yourself and your loved ones to take good care of your financial future.

Saundra Davis
President & CEO
Sage Financial Solutions
San Francisco, CA

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Emergency, Emergency!

No, we’re not talking about the state of the global economic environment, although that might be appropriate, too.

Instead, I want to take a look at a key financial planning concept. In my experience, most people have little trouble understanding the advisability of saving for a goal, such as retirement.

To a lesser degree, most people understand the need for various types of insurance. The mortgage company helps us to recognize the need for homeowners insurance, since we cannot get a mortgage without it. The state and the bank help us to have the same understanding regarding auto insurance.

While we may not like to pay the premiums (and who does?), we usually can recognize the need for life, health, disability, and other basic types of coverage.

What I want to consider is at least as important as having adequate insurance coverage. Let’s look at a foundational human psychology concept to lead us into this fundamental financial need.

Maslow’s Hierarchy

Dr. Abraham Maslow was a psychologist who identified what has become known as Maslow’s hierarchy. Maslow’s research showed that most humans must focus on meeting foundational needs before they are able to grow to the full level of self-actualization. In his hierarchy, Maslow placed physiological (food, water, shelter, etc.) and security needs at the core of human requirements.

Financial planning actually uses a similar construct. It is recognized that foundational security needs must be met before it is wise for an individual to work on meeting most higher-level needs. Security needs include adequate current income, insurance, and emergency funds. That last item is what I want to look at.

The Need for an Emergency Fund

Just like you cannot purchase homeowners insurance to cover a house that is burning, you cannot plan for a financial emergency while you are in the middle of one. We don’t often like to think about the possibility of losing a job, or enduring a serious illness or other major expense. Yet, these are all potential realities for each of us. An emergency fund is one tool that can help us prepare for such, well, emergencies.

Most planners recommend keeping a fund of between three to six month’s worth of expenses in a very stable place. Stable, in this case, means passbook savings, money market, checking account, and short-term CDs. None of them will earn much, but that is not the purpose. Instead, these saving vehicles let you know that if you put in a dollar, you will have that dollar to withdraw when you need it.

Sadly, many of the people whose houses went into foreclosure as a result of the recession may have been able to keep them if they had the recommended amount of money in an emergency fund. Think of the fear and anxiety that could have been avoided if this planning principle had been incorporated.

I can hear the objection, though, and it’s valid. “We barely have enough money as it is, how can we afford to add what amounts to another bill?” A statement like this can as easily come from someone living on $50k a year as from the person with annual income of several hundred thousand dollars. There is often at least some tendency to spend all we make, and more (gotta love credit). Once you have those increased expenses, they remain until repaid, and that can take a very long time.

So if you are living month-to-month, how do you build an emergency fund? Slowly and methodically. It’s actually a pretty good idea to think of it as a bill. From each paycheck put 10% (or less is that’s too much) into your emergency fund. Keep at it until you have the desired amount – which could take a few years. Once you have the funds, leave them alone. That pile of money sitting in savings may look tempting – especially when you want a new TV or maybe to stay an extra day on vacation. Don’t give into the temptation, though. Consider your emergency fund to be off limits until you have a bona fide emergency. Then, reach for your checkbook or debit card and take care of the emergency…and smile. Your saving and discipline has just paid off.

The hope is that you never have to tap your emergency fund. However, if you do, there’s a tremendous peace of mind that comes from knowing it is there for you.

Michael Snowdon Michael Snowdon, CFP®
Greenwood Village, CO

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Financial Priorities for New Graduates

You’ve done it graduate – passed all your classes, despite all your partying, and got a sheepskin for your wall! Now it is time to get a job and start contributing to society (maybe after a quick trip to Europe!). But wait, before you go squander your new paycheck on fill in the blank, what should your financial priorities be?


Boring. But, before we do anything we need to know how much you have left over after you pay your bills and feed yourself. Create a budget spreadsheet starting with your monthly take-home pay. Then, list all your fixed expenses (rent/mortgage, utilities, loans, insurance, cell, etc.), estimate your variable expenses (groceries, gas, dining out, etc.), and calculate what’s left.

Emergency Fund

What happens if you lose your job or get sick and can’t work…Aflac? Nope, an emergency fund keeps you from calling on mom and dad who have long since tired of footing your bills. Set up an autodraft into a savings account to cover 3-6 months of living expenses. Keep it in cash – no Kramer’s stock picks! Use this money for emergencies – new tires, home repairs, Vegas (just kidding!) – when you deplete it, restart your autodraft until it is rebuilt.

Debt Reduction

Unless your parents spoiled you rotten, you probably have some hefty student loans, some expensive credit card debt, a car loan, and maybe a mortgage. What should you pay off first? Pay the highest interest rate debts first, usually your credit cards. Consolidate your student loans at the lowest rate possible. Your car loan is probably at a higher rate, but student loans can take an eternity to pay off and could reduce your borrowing capacity for a new home, so consider splitting between the two. A mortgage is a good tax deduction, so I wouldn’t worry about paying this off yet. However, you should pay off an expensive home equity loan or a 2nd lien.


I know you’ve just started working and retirement seems like a million years away…and it will be if you don’t start saving now! At minimum, take full advantage of any employer match. Ideally, you should maximize your retirement contribution. But, first, you might need to concentrate on building that emergency fund and paying off expensive debts. Bonus: it is a great tax deduction!

Fun Saving

Now that you’ve done all the boring, responsible work, set up a FUN savings account for vacations (Vegas baby!), a new car, shopping spree, boat, whatever. Thinking about getting married and buying a new home? Start building up savings for a ring and a down payment. I recommend 20% so you don’t have to get the expensive 2nd lien and have equity in your home.

It is so easy to spend all your paycheck and wonder where it went. If you take the time to prioritize and crunch a few numbers, you will be leaps and bounds ahead of your peers who don’t. Welcome to the Real World Graduate!

Gelasia Steed, CFP®
Steed Investments
Ft. Worth, TX

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Employment Is Not Permanent So An Emergency Fund Is Not Optional

So a government shutdown was averted. I was amazed at the questions surrounding the implications of a shutdown. Was the last shutdown in 1995 wiped from our national memory? Maybe it is the ever increasing speed of our culture that entices us to focus on trending Twitter hashtags while ignoring the learning opportunities inherent in events.

Such a nearsighted view leads to the inability to make mature decisions based in long-range thinking. What if college students chose majors or jobs based on recent news? Consider a student interested in energy. First they may have focused on coal, until the clean air initiatives, then maybe offshore oil, until the Gulf spill, then maybe some green energy, until the government approved more nuclear power plants, until the Japan tragedy. Now they might be on to natural gas. Would that student ever graduate?

Limited consumption of myopic viewpoints while revisiting history facilitates a big picture view we might call financial insight. A willingness to change behavior based on experiences (even near misses) results in financial maturity. Each is a multiplier for the other leading to financial freedom.

financial insight x financial maturity = financial freedom

For example everyone should now know AN EMERGENCY FUND IS NOT OPTIONAL.

No matter who you are, your stage in life, your family status, your level of wealth or income, or your employer, this statement is true. There should be no such thing as a person who cannot survive at least three months (preferably more) without income.

I have a high interest loan? Shouldn’t I use all my resources to pay that off?

  • In utopia, where you know you will stay employed, always receive compensation, and will never have a personal crisis, sure. But I have learned that I do not live in utopia. Have you? Financial insight.Many people subconsciously use low cash balances resulting from unnecessary purchases as the justification for keeping the tempting specter of plastic credit around “for emergencies.” Does an alcoholic keep alcohol in their home in case an armed thief brakes in demanding a drink? So if you are a debtaholic what should you do? Financial maturity.

I don’t have an emergency fund and I am in crisis mode right now, so what do I do?

  • That depends on how bad you want to risk the crisis getting. Take your current situation, and advance it forward by 6 months assuming nothing improves, or possibly gets worse. What tough decisions will you have to make? Consider moving towards those actions now when you still have the ability and freedom to back out or wait for a better outcome.If you have lost your job and unemployment is not enough to pay the mortgage and provide for the family, do not wait until unemployment runs out and you are 6 months behind on your mortgage to list your house.

I am in the military, deployed overseas with a young family struggling to make ends meet back home.

  • Future threats or actual government shutdown are almost given. The ends you are not meeting (either on deployment or at home or both) need to be reduced so that you can build an emergency fund. Can you imagine the added emotional toll on your spouse suffering a financial emergency with no savings and you deployed? Absolutely. The stress was there a few weeks ago. Imagine the stress if a shutdown actually occurred. Will you mature from this experience?

We can all learn. We can all mature. Some will gain financial freedom and peace from the events of the past few years. Others will just exist crisis to crisis, attempting to eliminate anxiety with actions that set them up for greater consequences in the future. Which will you be? Now that your next paycheck is secure, will you lease a new car, or downgrade your house? Will you get a new smart phone, or cancel your cable?

Aaron Coates

Aaron Coates, CFP® CIMA
Financial Advisor
Valeo Financial Advisors, LLC
Indianapolis, IN