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


I Don’t Understand My Financial Plan

Get Your Questions AnsweredRecently reflecting on some of cinema’s greatest intellectual quotations, I was reminded of movie Detective James Carter’s infamous query in 1998’s Rush Hour. Chris Tucker’s character eloquently asked Jackie Chan’s character, Chinese top cop Detective Lee, “Do you understand the words that are coming out of my mouth?”

Ok, maybe not one of the most memorable moments on the silver screen, but a funny movie that stands up well fifteen years later. But, that’s not what we’re here to discuss. The quote actually jumped into my head during a discussion about how we communicate with one another, especially in advice-based relationships.

A seemingly infinite amount of information is available on virtually every issue known to humankind, all searchable within seconds from any place with access to the World Wide Web. How we process this information, understand its meaning and filter the good, the bad and the ugly really depends largely on whether or not the information is communicated in a manner we can comprehend.

This certainly has its applications in the world of personal finance. I’d argue the personal finance industry at-large, more often than not, adds layer upon layer of complexity to relatively simple concepts in order to add an air of sophistication and justify an unnecessary amount of cost. I won’t go further on that today except to say that if something sounds too good to be true, you can’t understand it, what it costs and what risks are involved, run away.
Instead, I want to focus on the authentic struggle many financial planners and advisors have in working to develop the right communication strategy based on their clients’ needs.

Scalability allows a company to grow, taking a successful model and increasingly diluting it for consumption by an increasingly growing audience. The problem with scale in the financial planning business is that those seeking advice are all at different points in their lives, with different goals, different resources to meet those goals and different ways to achieve success in meeting those goals.

We also all comprehend things differently, learn through different stimuli and apply concepts to our daily lives at different speeds. Confused? Me too. What does all this mean?

It means that we have a gap in the relationship between financial planning professional and client that both sides have to work to fill. Financial planners need to ensure they have a process in place to help identify how best to communicate concepts and recommendations in a manner that best suits each client involved.

The client, on the other hand, has the duty to speak up when they don’t understand something in their plan, be it an investment recommendation, the path to reach a savings goal or a concept or term used to illustrate a point or answer a question. “I don’t know” or “I don’t understand this” are not only acceptable responses to questions posed or information presented by a financial advisor, but should be a welcome opportunity for the advisor to take an improved approach in helping the client comprehend, thereby teaching the advisor a little more about communicating with their client and challenging them to find better ways to illustrate concepts in the future.

The bottom line is, we all need to be more vigilant about what we understand about the decisions we make and are made for us in our daily lives. When it comes to an advice-based relationship, the more we question, challenge, and discuss, the deeper, more rewarding the relationship will be. Wowing someone with the ability to use big, complicated words to make a point isn’t a talent. Effectively communicating in a manner that gives your audience the best opportunity to understand is.

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


How Accurate is Your Retirement Model?

Insider’s Guide to Finding a Financial PlannerI recently had the opportunity to revisit retirement modeling software. As one of my jobs, I teach a economics course, and one of the things I tell my students and financial advising clients is that models can provide us with ideas of how things may work, but with all of the independent variables that exist in the world, they aren’t likely to play out like we hope.

I was revisiting modeling software in part due to a recent critic of those that do not use “advanced” software to project hypothetical outcomes for clients. I used to. I’ve since given it up for many reasons. Mostly because I’ve seen life-changing decisions being made based on a model. “Mr. & Mrs. Client, you can take $50,000 out of your portfolio to buy that RV, and still feel secure in your retirement.”

That was 2007’s annual review of the model. After the market drop, the model was quite different, but the investor at least had a 2nd mobile home now.

Retirement models, like economic models or model trains, can show us a lot about the thing we’re modeling, but it is no substitute for ongoing advice and planning. And, modeling a few worst cases along with the normal case is the least you should do when making decisions based on models.

Of utmost importance however is that you understand the assumptions and factors being used. I can not begin to describe the number of retirement models I’ve seen that were so flawed with incorrect data and bogged down by assumptions. There are often static assumptions (I save $6,000 to my IRA every year), and variable assumptions (rate of investment return).

In my opinion the mixing of so many assumptions in one software package most often leads to incorrect projections. For example, most individuals savings can be variable. You may make a Roth IRA deposit this year, you may not. But, how you project for it makes a difference in the outcome. Are you taking Roth IRA contributions from one account and putting it into another, depleting your savings in order to do so? Does your modeling software know the difference? If you know enough to tell it to.

Do you own a business? How is that being treated? Investments? What assumptions are being used for rates of return, interest, inflation…?

A recent tread is to model various social security strategies that couples may be able to benefit from. One variable that many who do this on their own may forget is the life expectancy. If you just ran the model without thinking beyond the various scenarios, would it give you the right answer, or is this just a case of garbage in, garbage out?

For that reason I strongly recommend a second opinion on any retirement strategy. Retirement models do not take into account the complexities that exist with the individual choices that feed into your personal financial plan. FPA’s PlannerSearch tool can help you find local financial advisors to give feedback on your financial plans, and advice on the strengths, or weaknesses, of your retirement projections and plan.

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


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

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STAYING Fiscally Fit

I’ve written several blogs, both for the Financial Planning Association and others comparing financial services to the diet & health industry. It’s where fiscal meets fitness, if you will. Today, I have another take that deals with the dreaded “maintenance” portion of any good diet or personal financial plan.

Several years ago, as a recent college grad, I was out of the practice of doing anything physical and had become overweight. I was unhappy and desperate to reverse the trend. I quickly found a diet that promised to melt away the pounds. I’ll spare you the details, but a fast 60 pound loss became 70 gained. Next, a shake-based program through a weight loss center sponsored by a local hospital got my attention. Another 70 pound weight loss came and went like the passing of the tides. This yo-yo effect, according to my doctor, was even worse for me than staying overweight. After a few more years of struggle, I decided enough was enough.

An investment plan can be very similar. You lock into one trend for a while and then, disappointed in the results, switch to the next fad of the moment. And, just like your physical health, the results of yo-yo investing are more damaging to your fiscal health than picking an even imperfect plan and sticking with it through thick and thin.

Fiscally and physically, slow, smart and simple always seems to win the race. Physically, we know that eating less and exercising more are the keys to success. Similarly in investing, having a plan, keeping costs low and buying when prices are low and selling when prices are high are the keys to long term success.

My two initial runs at weight loss took a lot of work. Chasing investment returns and the latest planning trends can too. You might save tooth and nail to finally pay off that credit card debt or reach that important goal. What occurs next, however, is almost more important than meeting the initial goal. How do you maintain the habit?

My weight didn’t come back overnight. Neither do bad financial habits. You celebrate. You buy that one item as a reward for all your efforts. It feels good and can even be healthy. It’s the next three, four or ten rewards that get us into trouble. Unfortunately, like maintaining healthy eating and exercise habits, personal finance and the path to making consistently smart decisions about your money is a marathon, not a sprint. Once you’re on track, it takes patience, determination and discipline to stay there.

I know, I know. Those are everyone’s three favorite things. Mine too! Hey, I said maintaining physical and financial health was similar, not easy.

I eventually found a way to set new eating and exercise habits. Slowly but surely, those habits replaced bad ones. Little by little, the weight came off. Since 2010, I’m proud to say I’ve lost 90+ pounds and have seen over the last several years that these habits are here to stay.

What goals are you trying to achieve? Are you looking for the quick fix or are you constructing long term changes to your habits that will provide less instant gratification and more long terms success? The results, both to our waistlines and our wallets, can be profound.

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

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The Affordable Care Act Upheld by the High Court

On June 28, 2012, by a Supreme Court vote of 5-to-4, President Obama’s much debated landmark health care bill signed into law on March 23, 2010, known as the Affordable Care Act (ACA), was found constitutional. The majority opinion, including Chief Justice John Roberts, upheld the individual mandate, (the requirement for all Americans to purchase health insurance), under the provision of the government’s right to tax people who chose not to purchase insurance. What will this mean to you?

As a financial planner I know the financial risks associated with health care costs. Increasing health insurance premiums, lack of adequate insurance due to unaffordable premiums, and most critically – the inability to purchase any insurance at all due to a pre-existing medical condition have all led to financial strain or possibly bankruptcy for many American families and individuals. A 2009 Harvard study found that medical expenses contributed to over 60% of US bankruptcies. Within my practice I have personally counseled a client who was considering a possible bankruptcy due to medical expenses and felt frustration with another client in her early fifties who simply could not buy insurance after her deceased husband’s plan would no longer insure her. She remained uninsured for several years until she qualified for Medicare. Most financial planners are intensely aware of the need to consider substantial health care costs within a financial plan. Will the Affordable Care Act provide a level of financial security and medical coverage that so many currently do not have?

There are many provisions to the law as detailed at Several provisions that have been most popular have already been implemented such as…….

  • Young adults can stay insured on their parents’ health plan until the age of 26. It is estimated that this provision has insured approximately 3 million young adults.
  • Children with pre-existing conditions cannot be denied coverage.
  • Insurance companies cannot rescind your coverage due to an application error or other technical mistake.
  • Lifetime limits of coverage are eliminated. A family will not have to worry about exceeding their benefit limits in the case of a catastrophic or long-term illness.
  • Small business tax credits have been established to help employers provide insurance coverage for employees.
  • A menu of free preventative services is now available.
  • Prescription drug discounts for seniors.

Many additional consumer protections will be implemented over the next 18 months. The final provisions effective on January 1, 2014 will include prohibiting discrimination due to pre-existing conditions or gender and eliminating annual limits on insurance coverage. Learn more about the timeline of the Act’s provisions.

With the Supreme Court decision, Americans will be required to purchase health insurance or pay a tax for non-compliance. Individuals of limited means will receive assistance under the law. Some may call this personal responsibility; others may say this provision of the Affordable Care Act is unconstitutional, – but no matter one’s opinion, it seems that the ACA is law.

As a financial planner, I am anxious to see how this law may impact the financial lives of my clients. Will health care become affordable and easily obtainable for American families – will insurance claims be paid when submitted – will buying health insurance really translate into “health care”? I am optimistic. Our current system has left many behind – I hope this new Act will actually provide “Affordable Care”.

Pamela SandyPamela Sandy, CFP®
CONFIANCE, LLC, Financial & Investment Advisors
Cleveland, OH


Should You Keep the Marital Home as Part of a Divorce Settlement

A home is typically the toughest asset to divide when it comes to divorce. There are memories, dreams, and a sense of familiarity tied to it, which can influence decision making. Many times, divorcing spouses tend to let their feelings guide their thought process. They consider the emotional stress that could be caused by uprooting their children and their lives by moving to a new place, and conclude that the best choice for their family is to stay put. However, basing the decision to stay in the home on pure emotions can actually cause substantial financial damage and larger amounts of stress.

The decision to keep or sell the marital home should be part of an overall financial plan. Prior to agreeing to a settlement, the following financial aspects need to be evaluated:

Actual Costs of Staying in the Home: While you may be able to afford the monthly mortgage payment, remember to also evaluate the additional costs that come along with the home. These include items such as property taxes, homeowner’s association dues, maintenance, home owner’s insurance, repairs, monthly utility expenses, and lawn and pool services. Do you have funds available to cover these costs? If the total expenses will stretch your budget too thin, it may be best to consider alternative options.

Proceeds from the Sale of Marital Home: Be sure to get a current appraisal of the home and then evaluate what proceeds would be available net of transaction fees and commissions. Could the proceeds be used towards a smaller home or monthly rent payments?

Capital Gains Exclusion: If you’ve lived in your home as a primary residence for 2 of the 5 years prior to selling, you will be able to exclude up to $250,000 of capital gains on the transaction, and will owe taxes on any appreciation above that amount. However, if you choose to sell the home while your ex-spouse is still on the title, you could each utilize the exclusion for a total of $500,000. This is important to keep in mind if your home has appreciated by more than $250,000. Be sure to understand if you can afford the taxes on any excess appreciation.

Lifestyle Change: How will your life be different once the divorce is finalized? Would downsizing or moving to a different location make sense? How will your expenses change and where will your free time be spent?

Refinancing the Home: In order to lower monthly payments, a refinance of the mortgage may be discussed. Ensure that the spouse taking over the payments can qualify for the new loan based on their own income.

Trade-offs: What assets are you giving up in exchange for keeping the home? If you are giving up cash or retirement assets, what plans do you have in place to build your reserves back up? Keep in mind that the home is not a liquid asset and that you are not guaranteed any one price for it in the future. Ensure that you have a well thought out plan in place for funding your retirement and sustaining your day to day needs.

Overall, emotions will always play a part in the decision of whether or not to stay in the marital home. However, it is the financial aspects which must be the focus. By evaluating the above items, taking steps to put a detailed transition plan in place, and seeking out professional advice from an attorney or financial advisor, you’ll ensure that your own financial security is taking precedence, while preventing the stress of over extending yourself.

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