All Things Financial Planning Blog


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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
HoyleCohen
San Diego, CA


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Low Rates You May Have Missed


This may come as a shock, but interest rates are near historic lows.    

Most of you have heard the above countless times over the last several years, but do you really know how to apply it to your life? Sure, if you have sufficient equity in your home, there’s likely no better time to refinance, substantially improve your rate, shorten your term and save yourself thousands of dollars in the long run. But, aside from that, most just observe the negative impact of low rates in the paltry earnings paid in savings accounts, money market funds and similar vehicles. 

The Federal Reserve has signaled that they foresee rates staying at or near lows into 2014. But, at some point, rates will march upward once again. Before that occurs, it’s important to consider various ways in which you can take advantage of low rates. Much like large companies have used the last several years to save, restructure and achieve some of the healthiest balance sheets in years, now is also a good time to make sure you’re in the best possible position moving forward. 

So, what can you do besides try and refinance that mortgage? Today we’ll focus on three areas impacted by the low interest environment that you may be ignoring.

Automobile loans

This is an area where refinancing is not often discussed. Car loans are short in term and rates rarely move enough to make it worthwhile. However, there are three instances now where I’d suggest taking a look at potentially revisiting an auto loan. 

  1. You currently have a higher-rate car loan and your credit or income situation has improved.
  2. You purchased a used car and didn’t shop for competitive rates.
    • If you’re a member of group one or two, now might be the time to look for a lower rate. Many banks and credit unions are offering competitive deals. For example, a local credit union in Cincinnati was recently offering rates as low as 1.79% over 60 months on 2009-2012 models with no fees for signing up. Even over a short term, interest savings can be substantial. Use this opportunity to lower your current payment or shorten the time it takes to pay it off.    
  3. You owe very little or own your car outright, but have other, high interest debt.
    • You may want to look at this opportunity as a way of borrowing cash to pay off higher interest debt (like that credit card bill). The lower rate will save you plenty and the short term will get you out of the cycle of paying minimums and force you to pay it off. The most important thing is to have the discipline to lock that credit card up and start living on what you can afford going forward.

Life Insurance

Premiums for life insurance rates have also fallen substantially over the last several years. Interest rates play a role here, as does the market overall. If your health hasn’t changed substantially, rates can be sharply lower despite your aging since you last priced your policy. Rates vary all over the place based on a number of factors, but the savings can be substantial. An important note, even after getting a new quote and passing the physical, never cancel an existing policy until the replacement has been signed, sealed and delivered.

Prepay for Services

There are any number of services, such as property & casualty insurance, lawn care, private school tuition, just to name a few, where a discount is available for paying in advance or in a lump sum. In a more typical interest rate environment, the thought is often to forego this offer as the interest you’d earn on that money alone is worth more than the discount. Not so these days. While ensuring not to damage your cash flow or any other savings, take advantage of these pre-payment discounts wherever available. The savings is likely to outperform your money market.

Low interest rates can feel like a drag on our ability to meaningfully grow our savings. It’s important while in this historically low environment to make sure you’re doing everything you can to position yourself for long term success by taking care of some of the advantages low rates offer too.

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


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10 Things to Do in 2012!


It’s time to get the checklist out again as we start a new year. You’re hearing this from a checklist fanatic. I’m always afraid that somewhere down the road I will drop the ball on something which is why I try to follow the logic of the book titled The Checklist Manifesto by Atul Gawande that was written to avoid simple mistakes in medicine. I’m putting together my version of the 2012 checklist for your finances, along with a little health and happiness thrown in because health and wealth habits are very similar. When it comes to New Year’s resolutions or checklists, I figure there are only 4 reasons things don’t get done:

  • They are really not important but they sound good on paper
  • You don’t know that you need to do them
  • You don’t have the time to do them (aka they are not a priority)
  • You don’t know how to do them (it feels too overwhelming)

I really wanted to title this blog The Big Things You Must Do in 2012. I had an epiphany as to how things actually get done. My epiphany was that big and important things often are put on the back burner because they are too overwhelming. Yet easy little things can be resolved when you do 1 piece at a time or even just a few minutes a day, especially by using a checklist. Just recently we’ve revamped the way that we correspond with our clients based on what we call their “to do lists”, which are all the things they know they have to do but they never seem to have the time to do it and often we can’t do it for them without more information. My mantra for 2012 and future years is to do the little things, not the big things! Our process is to be proactive with our clients about six times a year to try to get all those dangling participle items off the checklist. If we give someone five things to do they never get done but if we give them one thing, we have a better shot. It all comes down to the goals versus activities. Yet it is a series of smaller activities that get goals accomplished. So focus on the activities and try to adjust a few little things a day and they will ultimately add up to completed goals and a finished checklist if you don’t make the tasks overwhelming.

Now that you understand the little things are big things and that activities are just as important as goals, then let us move on with my top 10 list you will get done for 2012:

  1. What do you have? This is a way to figure out what you own and what you owe to determine where you are. Basically you just add up the worth of your home, cars, bank accounts, investment accounts, retirement plans and even your tangible assets. Those are things in your house like your furniture, your jewelry, your coin collection, or anything else that you feel has some material value if you decided to sell it. Then add up everything that you owe which includes your mortgage, student loans, credit cards and personal debt from relatives, friends and bookies. The result is you Net Worth.
  2. Do a budget check up. Of course that makes the assumption that you have one, which unfortunately most people don’t. If you want to take the time, watch this Budgeting Webinar. You’re trying to get some sense of how much money is coming in and how much is going out. The difference between the two should be your savings or you’re overspending and not living within your means. Of course you’re going to forget stuff, which is why you can use this budget form as a guide. Just remember that your financial life needs to start with a positive cash flow to be sure you are saving!
  3. An insurance review is a critical part of financial planning. The events that could cause dramatic changes in your financial position are usually if we become disabled, have our homes destroyed, have somebody sue us, have healthcare problems, and of course dying. One of my previous blogs talked about the biggest risks we face in life and about half of them can be resolved by insurance.
  4. When is the last time you did a will? I try to make sure that clients take a look at their estate planning documents every 5 years or more frequently if there are any major changes in their lives like divorce, deaths and healthcare issues. If you don’t have a will at all, then it’s time to get on the stick because they are really important things to have unless you want the court system and people you don’t even know to manage your affairs. If your life is a little more complicated then you might also want to have a durable power of attorney that allows others to take care of your affairs if you are incapacitated or out of the country, a healthcare proxy if you end up under life support and maybe even some trusts if you are single, have children with special needs or have a an estate that’s worth more than $1 million.
  5. Check your credit report. You can often find some crazy little things in there that you might want to clean up, especially if you are planning to get a loan sometime in the future. If you see your credit score under 600, then you probably have some work to do to clean things up. Your report is free at least once a year from all the three major agencies and there is absolutely no need to pay to get a look at your report.
  6. How risky is your money based on where it is right now and how much risk do you think you should be taking? Most of the traditional planners use some type of asset allocation to figure out how much risk you’re taking based on your mix of stocks, bonds, international stocks, real estate, commodities and anything else you may own. If you really don’t know what you’re doing, it’s probably time to ask for a free second opinion about your portfolio from a trusted advisor of someone you know. The benchmark is the volatility of the Standard & Poor’s 500 stock index, which has something called a beta, which is 1. That simply means if your beta is .5 after someone does the analysis, you have about half the volatility or risk of the S&P 500 stock index. If you’re taking more than that, it’s probably time to make some changes. If you absolutely can’t find someone to do this, then try Morningstar or check this link.
  7. Are you paying too much in taxes and what are you going to do about it? Most of us aren’t certified public accountants or have the knowledge and desire to figure out the 72,536 pages of the tax code (which started with 400 pages in 1913). Just like it’s hard to determine your risk, you probably do need a professional here. Again it’s time to sit down with your tax person if you have one. If not, find a friend or co-worker that has one and see if you can get a free consult. Some accountants may even do it as a courtesy to their current clients in hopes you may work with them as a paying client in the future.
  8. Check out refinancing as we have some of the lowest rates in history. I am not just talking about your home; you might want to consider your car, a personal loan or any other loan that sits out there where you’re paying more than 4-5% to borrow the money. When I did a recent analysis of my client’s mortgages I noticed that a very large percent of people have mortgages higher than 5%. Unfortunately real estate prices have dropped about 30% from their highs, so you still need to have equity in your house. Preferably you should have more than 20% equity so that you don’t have to buy private mortgage insurance or have to pay down the mortgage with your savings and investments. That reminds me about credit card debt. It may make sense to take money out of savings and investments if you have a high interest rate and you’re getting very little from your portfolio or savings accounts. The simple explanation is that if you are paying a 15% rate on credit cards, you’re not likely to get better than a 15% rate on your portfolio. So paying off the credit cards is the same as getting a 15% rate of return. When it comes to your mortgage refinancing, ask how long it would take to break even on the new mortgage and figure out if you plan on staying in the house that long. Getting a 1-2% better rate in today’s world can mean saving thousands over the life of a 30 year loan. Be sure to shop around and get competitive rates that include the closing costs and any points as well.
  9. Ask for a raise or think about a career change. One of the best ways to improve your financial life is to make more money! Unfortunately people are uncomfortable negotiating with their boss to get a raise. Even worse is that we’ve had record job losses over the last few years and that can really wipe out years of progress when you have to live on unemployment checks. Since the recession began, we have lost almost 9 million jobs and only 2.2 million new jobs have been created. So you need to be proactive in two ways: First you can go to your boss and give her/him a program that is a win-win where you do better for the company and get a raise for it as well. The second thing is to retrain for another job that gives you better opportunities. This too is uncomfortable and may even require money to take courses. Making a change is never easy, but jobs aren’t guaranteed any more. Your human capital and earning power are probably the best single investments you have in your financial life.
  10. Mend a relationship and get healthier! There is a theme in my blogs over the last few years of the direct link between wealth, and health and happiness in life. People should have balance, so maintaining discipline in these key areas is critical. Here again I urge you to make these small daily changes in life to meet your big goals for a happy, healthy and prosperous life. One of the best ways to be happier is to spend more time with the people that make you feel better and a reconciliation with someone you really care about may be the best resolution you accomplish in 2012.

Okay your top 10 is out, get to it and turn the little things into the new big thing this year.

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