A Better Financial Blog

5 Tips for Investing for Beginners

Dean Vagnozzi — Mon, 14 May 2012 20:10:00 GMT

Last week I offered a post on investing for beginners, and something I read today motivated me to continue the thoughts. The article in question was on the Wall Street Journal’s personal finance section regarding the pros and cons of annuities. The article is a good read and the point counter point debate offers some interesting considerations from an investing for beginners perspective. While the article is a good overview of the debate, however, there is an element that is missing from consideration. And that is the fact that anyone’s personal savings portfolio absolutely must be structured in such a way that it serves to minimize risk while increasing return. Motherhood and apple pie? Perhaps, but the point is that investing for beginners requires a determination over the type of approach that one is willing to take to reach long term savings objectives.

The approach one decides to take is ultimately the compass by which any investor will make all their decisions. This is ultimately what we are focused on at A Better Financial Plan, the approach. And our approach runs counter to some of the prevailing wisdom being offered by self proclaimed financial gurus.

5 tips for investing for beginners

Understand the nature of risk: Today’s traditional investments for long term savings are tied to the performance of the stock market. This allows the investment to gain dramatically in periods of favorable stock market performance, but also exposes the investment to dramatic loses. The first investing for beginners tip is to take time to understand the simple concept of what loss is going to mean. To overly simplify the concept of understanding loss consider that a 30% loss of value on a fund in your 401k will require that the fund perform at over 42% in order to simply get back to where you were before the loss.

Understand actual vs. average yield: Fund managers like to demonstrate the average performance of the fund. When you are picking your 401k funds that will hold your money you pick from a menu of funds that show average performance over say five or ten years time. However the average performance really shouldn’t matter to you at all. What does matter is the actual yield of the fund. For instance suppose one of the choices for your 401k includes a fund that shows a 10 year average yield of 12%. While this looks reasonable, the actual yield of an investment in that fund would have performed at less than 1% . Why? Because of the dramatic downturn in 2008. The 2nd investing for beginners tip: Ask about actual returns over a 10 year period. (see investing for beginners tip one above for the impact that the 2008 losses have on that investment)

Slow and steady wins the race: The idea is to have your money make money and not lose. Too frequently the amount of return is the only subject that is discussed. The amount doesn’t really matter if the risk you are signing up for comes to fruition. The 3^rd investing for beginners tip: seek reasonable rates of return not incredible rates of return. There is much packed in this statement because it only works if there is consistency in savings and investing. So investing for beginners tip 3.a would be to make the discipline of consistent saving a top priority.

Truly diversify: Diversification is, unfortunately, discussed in a single context, diversifying within the stock market. This is really no diversification at all as any investment in the market exposes the investor to risk. Diversification must be approached from the perspective that a certain percentage of long term savings will be aggressively shielded from risk. This is the biggest mistake that novice inventors make. They forgo safety for bigger return. The 4^th investing for beginners tip: understand and own diversity and make it a part of your long term plan.

Make your safe money work: This next tip goes together with tip #4. Safe money has no good home today. People place that money in certificates of deposit, money market accounts, bonds, or even regular savings. The problem is that these vehicles do not earn that fair rate of return discussed in tip #3. The 5^th investing for beginners tip: Get at least 7% return on your safe investments.

We have not met a client yet who, when applying these simple rules, has not been completely thrilled with the results of their long term financial decision making. They lose less money and earn more. Their retirement accounts are larger and safer. Their stock market investments are well balanced by high return safe investments. It is for this reason that we take an approach to long term savings that many would disregard as too conservative. But we feel differently and have seen differently. Our aproach is both aggressive and conservative. Aggressively conservative is a good way to consider A Better Financial Plan.

Investing for Beginners: Why the Future of Taxes Must be Considered

Dean Vagnozzi — Thu, 10 May 2012 19:38:00 GMT

We are fortunate that at A Better Financial Plan we have the opportunity to serve a wide variety of people who come from just about every walk of life imaginable. While we speak with seasoned investors who are looking for creative alternatives to their current status quo, we also speak with a good number of people who would qualify themselves in the “investing for beginners” category. While their concerns and objectives are slightly different they absolutely share some similarities and we find ourselves offering the same foundation of advice when we begin working with them. So much, in fact that we decided to start to formalize content that is geared towards investing for beginners.

Regardless of age one of the first things that we’ll typically ask those who are just stepping into a more serious habit of saving for the long term, is whether or not they believe that taxes will be higher or lower in the future. If you find yourself here as a result of searching for investing for beginners then I would suggest that you mentally answer that question before going much further. So ask yourself. . .

Will taxes be higher or lower in the future?

If you said lower you would be in a very narrow minority. Most working adults, regardless of their political leaning candidly tell us that they sincerely believe that taxes will be moving higher in the future. Why is that? Probably because most Americans have concerns over the amount of debt that the US federal government has been accumulating over the last three decades. Again if you arrived here searching for advice for investing for beginners the tax question is an important one, and it is correct to give it consideration as it will help explain that gut feeling you have about over a future increase in taxes.

To illustrate let’s consider this clip from a recent documentary I.O.U.S.A.

Now while some will argue that the movie is politically motivated, if we are honest with ourselves the reality of the impact that the retiring baby boom generation will have upon social security is frightening. Is a Western-European-like austerity battle in our future? Perhaps, perhaps not, but it is not too much of a stretch to expect that to keep social security solvent there will, at some point, have to be some tax increases.

“Wait a minute,” you might be asking, “I came to this post for some advice for investing for beginners. . . why all this talk about social security and taxes?” Well for two reasons really.

First the social security system absolutely must be considered as a supplement to retirement income, it cannot be depended upon to fund a retirement lifestyle. In fact the advice we give to our clients is frequently, “simply do not count on any income from social security.” We are not being doom and gloom about the prospects of the entitlement, but it is more of an ‘expect the worst and hope for the best’ approach. The point is that if you are looking for advice for investing for beginners one of the first things to consider is that in the long term social security might not be there for you when you need it.

The second reason we are focused on a potential future increase in taxes is because most status quo investments today are tax deferred. Get tha? Deferred. As in deferred until a later time. And a later time is typically when you start to withdraw the funds in your retirement account. So today’s IRAs and 401ks are holding on to money that has the potential to be taxed at a higher rate tomorrow than it would have been taxed today. And while there are absolutely sound benefits to growing money in a taxed deferred fashion, too many we speak with simply do not consider the tax burden of traditional long term vehicles and never even consider 401k alternatives. Leaving them with a surprising tax burden in their retirement years.

Investing for beginners requires honest consideration of these issues. We are focused on long term financial health and our approach is structured to mitigate the effect that any severe increase in tax burden will have on a long term savings portfolio. We invite you to check back with us frequently as we continue to write about investing for beginners. And remember, no matter your current age or state in life it is NEVER too early or too late to get started.

Financial Planning Consultants Focusing Safe Investments

Dean Vagnozzi — Fri, 04 May 2012 14:28:00 GMT

Pleased to bring you another episode of the Long View today. For first time readers the long view is our occasional on demand video series that covers a host of topics that are oriented to better educate our clients and prospective clients on how to achieve their long term savings objectives. Today’s entry answers a frequently asked question that we receive. The question goes something like this “As financial planning consultants what is it that you are after from me? How much of my investments do you need”

It is a good and fair question, and the tone is almost always similar to the way it is written above. Candidly in our business we find that the majority of those who we talk to are generally skeptical of financial planning consultants or the self proclaimed financial guru. This skepticism tends to increase when people begin to learn that our approach at A Better Financial Plan is an alternative to what most financial planning consultants are offering. This is part of the motivation for putting together today’s episode. We want to make it clear that we understand this sort of skepticism and also that our initial focus with all of our clients is to take very conservatives steps that allow them to evaluate for themselves whether or not our strategies are a fit for their long term investment objectives.

The Topic: What Portion of Long Term Investments Does A Better Financial Plan Focus On?

[TRANSCRIPT]

Here is another common question that we are asked. “When we work with you, how much of your money needs to come over to us, in other words do you need to roll everything over to our firm?” Well the answer is no, I think over time you are going to want to. . . very confidently I’ll say that. . But if all you did. . . look we know that a lot of what you watch on our website, the ideas are different. We know they make sense and if you look at the testimonials of the clients on the website not only does it makes sense it works. We have plenty of clients who will tell you how they have saved a lot of money and minimized their taxes and received nice rates of return safely.

But that being said we also concede that the strategies are different than what most advisors are promoting. So if you want to take some baby steps with us, here is what I suggest. Think about this to yourself; ask yourself how much of your money would like out of the stock market. So in other words regardless of your asset size. Let’s say you had $100,000 to your name, how much of that would you like to see NOT tied to the stock market. So again in this $100,000 example, let’s say that you want to make sure 50% of your money has nothing to do with the ups and downs of wall street. Maybe it is 40% maybe it is 80%. Most people that look at that piece of the portfolio that is out of Wall Street for safe investments, but they are earning 1% or 2%, they are safe but not earning anything.

That is the money that you should let us improve for you. I will put the products and solutions against any stock market related investment out their easily, but the low hanging fruit for you and us is to let us help you improve the rates of return of the safe piece of your portfolio, and in the process you will not give up any safety but your returns will be significantly higher. This will bolster the overall return of your entire portfolio.

Over time what generally happens is that our clients start with the safe piece of the portfolio with us and each year that goes by they slowly give us more and more of the, we’ll call it, equities piece of their portfolio. Because the performance of the strategies and products we’ve implemented with them have outperformed that stock market. But we don’t have to do that overnight; we can walk into this relationship rather than run into it.

So don’t feel the need that you will have to give us every single dollar that you have, let’s start with the safe piece of your portfolio.

The Best Way to Invest Money: The Long View [VIDEO]

Dean Vagnozzi — Wed, 02 May 2012 20:52:00 GMT

Today I am happy to announce the start of a new occasional series from A Better Financial Plan called the Long view. The Long View is a new on demand video series that will feature myself and other advisors from A Better Financial Plan to help communicate some of the insight that we have developed from having worked with many different clients. Our clients are always looking for the best way to invest money and make decisions based on their own research. We are committed to assist these efforts.

Here is today’s episode of The Long View. Again we seek to help anyone looking for the best way to invest money regardless of whether or not they decide to do business with A Better Financial plan.

The Topic: “What is the minimum dollar amount requires to take advantage of the strategies that A Better Financial Plan offers?”

The best way to invest money is hardly ever about the dollar amount being invested. The backbone of our savings philosophy is more about establishing the habit and discipline of saving and focusing on fair rates of return while eliminating risk. But still the question is asked, “how much do I need to take advantage of your strategies and find the best way to invest money?”

Simply put our strategies will work with anyone who is able to set aside as little as $200 per month comfortably.

This small amount and the right approach will lead anyone to the best way to invest money.

[Transcript]

A very common question that is asked of us what is the minimum dollar amount needed in order to work with an advisor from A Better Financial Plan. Again it is a common question and I think the answer will surprise you. Because we’re not necessarily worried about the dollar amount as much as we are commitment and the attitude or desire to improve your plan.

So we’ve got clients, well what you really need is one of two things. You need the ability to put away money on a regular basis or you need buckets of money that maybe you have already accumulated, say in an old 401k or an IRA or a roth, or maybe money sitting around in a money market or CDs that is under performing. We need buckets of money or cash flow.

To give you an idea as far as cash flow is concerned we have clients that save $5000 a month with us we have clients that save $2000, we have clients that save $300. So if you can put away $200 a month or more and can do so for a seven to ten year period consistently then some one from our organization will be happy to put a plan together for you on what to do with that money. So how is that for a minimum dollar amount per month?

What about the buckets of money, the money that you have already accumulated?

Again there we’ve got clients with millions of dollars invested with us but we’ve got clients with a lot less than that. $100,000, $400,000, $50,000. . . if you have $25,000 or more and do not need it for a seven to ten year period or longer then we’ve got places and strategies put together that can help you.

Alright? So it may not be me working with you but maybe one of our advisors based on again if you’re just say 23 years old and you are ready to get started give our office a call and somebody from our office would be happy to put a plan together with you, or if you are more seasoned a more established saver and you’ve got large chunks of money again it is the attitude that we are looking for, that you are willing to put a plan together, and stick to it for long period of time.

So hopefully that helps, and we look forward to talking to you.

Financial decision making in the Isolated World of Social Media

Dean Vagnozzi — Wed, 25 Apr 2012 18:58:00 GMT

What does social media have to with do financial decision making? How could a LinkedIn account help one to discover the best ways to invest? How does a 140 character tweet affect one’s decision over how they will manage their long term savings strategy? And what could be the connection be between the number of Facebook friends one has to how well their investments are performing? After reading a very popular article that appeared this week in the New York Times entitled The Flight From Conversation I’m convinced that there is much about social media that impacts our ability to truly investigate options and . . .well socialize them if you will, in order to help conduct good and sound financial decision making.

I’d encourage you to read the piece especially if you have teenage children. While I do
believe that it is a just a bit hyperbolic in order to increase views, a strategy that has worked for the NYT as this article was most popular of the day and has been shared and picked up all over the blogosphere, there is absolutely something to the notion that digital social communication is changing the very nature in which we interact. So if nothing else give the piece a read and seriously consider the contention that our always connected world in which we find ourselves is contributing to our feeling of “aloneness”.

But what of financial decision making?

Financial decision making is historically a very personal matter. It is something that most Americans reserve for only their closest of friends or family members. Financial matters fall into the same sort of category as religion and politics, a topic that is best left on the sideline in most social settings. The exception of course is the opportunity for someone to brag about the killing they made on some new investment. (NOTE: for every “I made a killing on xyz stock” stories you hear at a party there are at least 10 “I lost my shirt on abc stock” that probably negates all the gains of the former). As a nation we care about our finances, but we don’t necessarily speak freely about them. But most importantly we seek advice only from our most trusted sources.

Twelve years into the new century, however, digital social communication is making nearly everything easier to talk about, but as the New York Times article suggests, the ease of sharing is not creating a complimentary ease of connecting. Where our financial decision making is concerned this lower level of connectivity could inherently minimize both the opportunity for and the frequency of conversations that we need to have with trusted sources. For instance if one is seeking to sort out the complexities of minimizing long term tax burden without sacrificing the sort of investment return that is desired, it will probably not help a great deal to discuss in a a text message, Facebook post or tweet.

The value in today’s digital social communication is that it is not only bidirectional, but provides access to a broader array of opinion, perspective and information. Most of which has a person behind it willing to engage in some sort of exchange on specific topics. Our financial decision making must capitalize on the access to people and information, but that access must be enhanced by our willingness to open ourselves up to more meaningful conversations that are at least voice to voice but preferably face to face. This is why we try to meet with just about anyone regardless of whether or not we will be able to do business with them. We believe in the philosophies of long term savings that we have developed and also frequently experience the fact that the only way people can adopt them as their own is when they have opportunity to discuss them in detail. A Better Financial Plan believes in the value of digital communication, but is committed to ensuring that our digital conversation serves mainly to augment a more intimate discussion that serves to provide confidence in financial decision making.

Best Way to Invest in the Face of Mounting US Debt [VIDEO]

Dean Vagnozzi — Mon, 23 Apr 2012 19:00:00 GMT

The best way to invest is becoming a more difficult question to ask. It can be even more difficult in an election year. That once every four year event where those who have chosen to make a career out of politics spend literally billions of dollars on crafting a message that will propel them into power. Sadly as we watch the goings on of a presidential campaign through the heat of the coming summer into the early fall we are guaranteed only one thing, repetition. This side says the other spends too much and that side says the other doesn’t tax enough. All the while our national debt climbs at a breakneck speed, while entitlement programs are broken down on the side of the road with no mechanic in sight. This rhetoric might not do much to solve problems but absolutely impacts the decisions we make over the best way to invest for the long term.

These are frustrating days to be an American citizen, but even more frustrating for American citizens who seek to find the best way to invest and secure their financial future. For those in that category they seek to determine the best way to invest money so that their later years are well provided for. Yet a curve ball has been thrown at the US population in the form of a reality check regarding today’s most popular savings vehicles, tax qualified savings plans like the IRA or the 401k. Many in the US have taken a beating on these investments, and have lost so much that they are simply forced to accept those loses because the kind of market performance necessary to recapture them seems nowhere in sight.

Which turns to the topic of the US debt.

I came across this video below which looks to me like it is coming from sort of political action committee. I do not know the political leanings of the organization and nor is this post a statement of endorsement of any kind. That said the video is, in my opinion, pretty much spot on.

Seems as though it would be hard for anyone to disagree with these statements. The national debt is climbing and we only need look to Western Europe to understand what the potential outcome of uncontrolled debt will be. And even the most fiscally conservative among us would have to admit to himself that at some point in our future taxes will have to increase somewhere. Whether through modification to the tax code to eliminate loopholes, or the simple increase of rates, tax revenue will necessarily have to be increased somehow.

What does this mean? That the best way to save money for the long haul must consider the very real possibility of higher taxes when the long haul finally arrives . Already too few understand the tax burden of tax qualified plans to retirees. As distributions are made the assets are treated like regular income. Bearable under today’s tax rates maybe, but this might not be the case when today’s 40-somethings are turning 70.

Consider our thoughts on 401k alternatives when you get a moment. In the mean time understand that the best way to invest, especially for long term objectives, must absolutely factor in the possibility of an increased tax burden. Finding alternatives that aggressively mitigate this tax burden is essential.

Term vs Whole Life Insurance: 3 Considerations for Proper Evaluation

Dean Vagnozzi — Thu, 29 Mar 2012 21:53:00 GMT

The analysis of term vs whole life insurance unfortunately is frequently distilled to only consider the cost of each. This is ultimately an unfair comparison. First it is unfair to categorize whole life insurance solely as an expense. As we discussed in a recent post on term vs whole life insurance not only does whole life carry with it benefits that must be considered differently than what term delivers, the variations of whole life that exist today (universal life, variable life and indexed universal life) require a much broader consideration of the myriad of benefits against what truly is an expense for service in the case of term life. The distinction is critical and one A Better Financial Plan is committed to propagate.

The best way to invest money, as outlined in our 1346 plan, is to do so in a manner that ensures one will not lose money. However another aspect of our 1346 plan is underscore the incredible importance of financially protecting one’s family. In this context, term must be considered bad in the first sense and good in the second. Term is a money loser, but it absolutely delivers the benefit of financial protection for the family. Therefore it must be evaluated as such.

This is why the term vs whole life insurance discussion is so important, because it is far more involved than simply weighing one against the other. In full disclosure A Better Financial Plan has a very specific perspective, based the 1346 savings plan, which makes use of whole life derivatives. The reason we look more closely at whole life derivatives (see above) is that they offer greater control over the value in these policies beyond the death benefit. As such it is probably more important to consider term vs permanent insurance options from the perspective of exactly how the value of these plans performs against alternatives.

Here are 3 considerations for evaluating term vs whole life insurance oriented vehicles

Evaluate your long term savings plan: A Better Financial Plan focuses on the individual’s financial horizon, retirement and the need for an assured cash flow. As stated above the 1346 plan underscores the importance of having financial protection for one’s family firmly in place. If term is the only option it should be taken, however the better approach is to evaluate the projected estimate of retirement savings against a realistic consideration of drawing from retirement savings. This is critical because if one selects term insurance it is very likely that they will not continue the coverage into their retirement years. This changes the nature of how the individual considers their draw on retirement income

Understand tax implications: Nearly all of today’s retirement vehicles defer taxes. This is a frequent selling point of such vehicles, but rarely discussed are the implications of withdraw tax. Simply put even at today’s rates, which many believe are sure to climb due to the growing federal deficit in the United States, retirees can expect to lose as much as 30% of their income to income tax depending upon their rate. This is important because term life insurance alternatives offer a draw that is not taxed at all.

Evaluate discipline: One of the major recommendations of self proclaimed financial gurus is that the best course of action is to buy term insurance and invest the difference. The implication is that whole life insurance or derivatives of whole life ‘cost’ x and term costs y. Therefore buy term at y and invest w – y in mutual funds or stock. On its face this seems like a reasonable strategy, but two things are wrong. First it is incorrect to look at money directed to whole life or its derivatives as a ‘cost’ and secondly it assumes that the average person will have the discipline to place the difference in some other investment alternative. Therefore when evaluating term vs whole life insurance one must be sincere with themselves and evaluate whether or not they have the discipline to actually invest the difference. (NOTE: even if this is the case A Better Financial Plan does believe buy term and invest is a good strategy more on that in later posts).

The decision and evaluation of term vs whole life insurance (and more importantly variations of whole life insurance such as indexed universal life insurance) should be made carefully. These three considerations are an excellent starting point. As always we would love to have your feedback on this or any of our posts, and if you would like to discuss them in more detail we are happy to do what we can to help.

Term vs Whole Life Insurance is the Wrong Question to Ask

Dean Vagnozzi — Tue, 27 Mar 2012 01:25:00 GMT

If you are seeking to discover the differences between term vs whole life insurance the first consideration is to understand that this may be the wrong question for you to ask. While term vs whole life insurance is an issue that certainly deserves a conversation, the products and what they offer customers are similar in only one aspect; they both carry financial coverage for the policy holder’s family in the unlikely event of the policy holder’s death. Other than that term vs whole life insurance has much more to do with the nature of this similar benefit and the differences in how the benefit is accumulated and delivered. A better evaluation would be term vs permanent insurance.

This more clearly defines the way in which an individual’s cash flow is utilized to acquire the benefit of the insurance coverage. Term insurance is, as the name would suggest, essentially a temporary service that is constrained by some period of time. This is true not necessarily because term insurance carries with it some term limit, but because the expense of the policy becomes too large to justify or afford. Permanent insurance on the other hand is exactly what it states, a product that is wholly owned by the policy holder. In other words the policy itself has value where the term policy does not.

If this is news to you that the question of term vs whole life insurance is the wrong question to ask you are not alone. Turning to Google Insights, which shows the volume of search for specific terms, we see that since 2004 Americans sought to discover the difference between term vs whole life insurance with far greater frequency than term vs permanent.

AFTER HERE

In fact notice that prior to 2009 there was statistically zero traffic for the term “term vs permanent life insurance”. While it is difficult to determine exactly why the search numbers look like this there is one possibility that is worth considering. The financial collapse of fall 2008 decimated retirement savings for millions of Americans, and also left many with insurance premiums that maybe were seen as cumbersome in the wake of the financial distress. So it would not be a stretch to suggest that Americans that still wanted their insurance options covered but were now unwilling or unable to pay the premium would be searching for the difference between permanent and term life insurance.

What is sadly ironic about these search numbers and the increase after the 2008 collapse is that permanent life insurance is one of the better performing retirement vehicles that is available today, at least in terms of overall tax burden to those in their retirement years. On the other hand permanent life insurance, because it has value, is transferable. The resale of policies allows the policy holder to gain more than face value for the cash value of the policy.

Ultimately there are many aspects in the term vs whole life insurance discussion. We posted about some of the different alternatives here, and also provided a history of the development of the different permanent life insurance products that are on the market. Both will help you better evaluate the different products. If you have any questions over anything you read please drop in a comment or let us know how we can help you in your discovery process.

Financial Lessons Learned from Tragic Chapter in Popular Culture

Dean Vagnozzi — Fri, 09 Mar 2012 20:57:00 GMT

Today something a little different that I feel compelled to share. I've waited a little while before posting this because I didn't want it to seem as though I was capitalizing upon another's misfortune. In fact there was a fair amount of internal debate whether or not I simply skip writing about this at all. Eventually I felt as though it would be disingenuous to not cover it. You see our 1346 plan offers insight into the “why” behind our advice over ways to invest money. 1346 is literally the driving force behind why we are in this business and the manner in which we try to help our clients. (you can read about 1346 here). The four tenants of 1346 are pay yourself first, earn a fair rate of return, never lose money, and take action to financially protect your family. It is the last that I’d like to address today as a recent event in our popular culture underscores its necessity.

This past February the world learned the unfortunately not so shocking news that Whitney Houston had passed away. In the weeks following her death there was much written about Houston’s estate and the possibility that it was valueless. While this news was almost as unsettling as her death and even harder to believe, veteran of the music business Wayne Rosso penned a post in late February entitled “I Will Always Owe You” which details the facts that would indeed leave the Houston estate in debt. Perhaps the most telling line from that piece is this, “the Whitney estate doesn’t have the brain trust that Michael Jackson’s [had]”.

However the smartest thing that Houston could have done ironically requires nothing more than common sense. In fact Houston could have, as part of her personal financial management, found simple ways to structure options that would allow her to protect the financial future of her heirs. Consider this perspective from another entertainment celebrity Gene Simons. The clip is a little long and covers a number of topics (including some political commentary from Simons at the end if you are interested in his opinion), but I would encourage you to advance the clip to the 3:20 mark.

To be sure the product that Simons is pitching here is for high net worth individuals, more than the average American. Also most of us don’t have the sort of complicated finances as a world renown entertainer. Yet the simple move of protecting one’s family is consistent regardless of how much annual income is earned or the complexity of personal finances. This must be one of the lessons learned from this sad chapter in American popular culture, take action to ensure that your family’s financial well being is protected.

Term vs Whole Life Insurance a History Lesson

Dean Vagnozzi — Thu, 01 Mar 2012 22:27:00 GMT

To better understand the debate over term vs whole life insurance it is critical to take a look at the history of how permanent insurance has evolved over the last thirty plus years. Examining the derivatives of whole life insurance, as well as the events that moved America away from consumption of whole life as a fundamental element of personal savings illustrates just how much perception plays a part in the discussion of term vs whole life insurance. Additionally it is interesting to consider historical events of the life insurance industry in light of the ‘newer’ long term savings vehicles that were introduced at just about the same time.

Life insurance is at least as old as America itself, if not older. In fact founding father Benjamin Franklin is frequently credited for introducing insurance of all types including life insurance. Whole life insurance essentially offers policy holders bond like return on their money while also carrying a benefit in the unlikely event of the policy holder’s death. For years in the United States the insurance industry offered mostly whole life policies.

This reality changed, however, when in 1979 the Federal Trade Commission issued a report entitled Life Insurance Cost Disclosures focusing on the cost of life insurance and whether or not those costs were justified considering the return these policies offered policy holders at the time. The report essentially found that the costs were not well disclosed and that consumers were losing money due to poorly informed choices they were making when signing on to such a policy. The report had an impact on the industry and the term vs whole life insurance debate gained more attention.

While the term vs whole life insurance discussion gained momentum another event in the history of personal long term financial savings began to take root, the introduction of the 401k. Over the following decades millions of Americans would flock to the 401K as the quintessential long term / retirement savings vehicle. Ironically over the same period the savings rate in the United States began to steadily decline as fewer 401K alternatives received attention. These realities eventually set into motion a series of responses from the insurance industry that would ensure the term vs whole life insurance debate remained a lively one.

After the FTC report, the insurance company immediately responded with better fee disclosures and variations to their products. Once such variation, variable life, was to provide return on the cash value of the policy against the day’s interest rates. At the time this was an attractive benefit as interest rates were fairly high. But as interest rates began to decline variable life policies lost their luster. The response this time was to allow life insurance investors to use their cash value of their policy to participate in a well performing stock market. Good news while the market was humming along, but bad when the marketing declined. To mitigate this risk the insurance industry once again responded with equity indexed policies that aligned returns not against mutual funds but a prevailing index (like the S&P 500), and then cap gains and losses at pre-defined rates.

All four products exist today and the result is that the term vs whole life insurance considerations are far more in depth than ever before. The benefactor of all of these changes is the consumer. They now have at their disposal multiple types of life insurance for long term investment options that provide the benefit of the policy as well as full control over how the policy will perform, and the degree of risk they are willing to accept. Making a decision that fits one’s needs, therefore, requires not only an understanding of the different types of permanent life insurance policies, but also a little bit of history of where and why they were created.

Photo Credit: Chealion

Term vs Whole Life Insurance

Dean Vagnozzi — Tue, 28 Feb 2012 20:06:00 GMT

A frequent question that we receive concerns term vs whole life insurance. Term is a popular option while whole life insurance, and derivatives of whole life insurance, seem to many investors to be a little antiquated. There are reasons for this of course, but in this post we’ll focus on discussing term vs whole life insurance and whole life insurance derivatives.

Why is this important to understand? Because the ability to discern the benefits of term vs whole life insurance is critical in having the ability to intelligently select investment options that will help you plan out your long term savings plans. Remember, at A Better Financial Plan we employ our 1346 savings strategy, you can read up on it here, but the long and short of it is 4 simple steps; pay yourself first, don’t lose money, earn a fair rate of return and protect your family.

In the interest of full disclosure we are not big fans of term life insurance, BUT we absolutely do believe it is imperative to have your family protected. Therefore even though term violates our 1346 philosophy if you have no insurance and term is the only thing you think you can afford then get some for yourself immediately (A Better Financial Plan can help you with this ). We will illustrate, however, why in the term vs. whole life insurance debate whole life, and more importantly the products that were derived from whole life, is the hands down winner (NOTE: we’ll use whole for the purpose of simplicity but will cover the many life insurance vehicles that include an investment component.

Term vs Whole Life Insurance

Term: The simplest way to describe and understand term life insurance is that it operates as what one would expect of an insurance product. There is a monthly or quarterly expense (to pay the annual premium) in exchange for delivery of a benefit that is payable in the event of the policy holder’s death. There is no value at all associated with the policy, just like there is no value associated with your car insurance policy. Term insurance, for those that qualify (e.g healthy individuals) can expect to pay a very low premium cost for a fair amount of coverage. For example a 30 year old nonsmoking man can probably get $500,000 worth of coverage for less than a $500 annual premium (about $41 per month).

To understand term vs whole life insurance it is critical to know the alternatives to term. And to identify that whole is not only merely a single alternative, but not always the best option.

Whole Life Insurance (and derivatives)

Traditional Whole Life: Whole life insurance delivers a benefit in the event of an unexpected death, but also offers a small investment component. Each premium payment that is made is distributed in one of two ways. First a portion of the payment is used for the stated coverage of the policy while the remainder is accumulates in the policy’s cash value. The benefits of the cash value varying depending upon the type of policy, but ultimately traditional whole life offers bond like yields. That is you can expect your cash value to earn about the same sort of return as an investment in a bond product.

Universal: Universal policies also operate on a cash value concept. There is a debit from the cash value for the cost of the actual insurance, and an interest rate, typically tied to a derivative of the prime rate. Interesting when interest rates are high, but not very rewarding when they are low.

Variable Universal: Variable policies are similar to ordinary universal but offer policy holders greater control over where the cash value is invested. The cash value of the policy can be placed selected investments such as mutual funds or stocks. This also allows the policy holder to vary the monthly premium payments, but also exposes them to greater investment risk. If investments lose money the premium payments will increase to keep the value of policy (i.e. the death benefit) whole.

Indexed Universal Life: Indexed universal life is the middle ground between universal life and variable universal life. The cash value is invested and performs against an index (e.g. S&P 500), but the gain is capped at a specified amount and there is frequently no risk of loss. This protects the cash value from loss, but also guarantees that a well performing stock market will deliver increased return to the policy holder.

As we stated at the beginning of this post, our 1346 savings plan has a component that is squarely focused on the financial protection of one’s family. For this purpose we urge you to make sure that you are properly insured, and we would go so far as to suggest that you do so with term insurance even though that means a loss of money thereby violating our 1346 ‘don’t lose money’ tenant. That said we firmly believe that there are significantly more intelligent options regarding financial protection for one’s family. Therefore we are committed to continue the discussion over term vs whole life insurance, and will offer clear insight into what we believe is the appropriate way to consider term vs whole life insurance.

Please let us know what questions you might have below and we’ll be sure to answer them along the way. In the meantime check back frequently to continue to educate yourself on how and why insurance is a must have component of a health 1346 directed savings strategy.

Photo credit: michaelstyne

401k Alternatives - Don't Wait for the Government

Dean Vagnozzi — Fri, 24 Feb 2012 20:47:00 GMT

At a better financial plan we are committed to promoting options for personal savings that not only empower our clients, but ensure them that they are placing their hard earned dollars in vehicles that will consistently perform, never lose value, and deliver a tax free income. Our approach is an ideology that we call the 1346 plan (you can read more about 1346 and new ways to save money in our latest ebook ). The plan focuses on some very basic fundamentals and is essential to adopt before fairly considering 401k Alternatives. Why is this the case? Because despite the existence of the 401K as a primary long term investment vehicle, its introduction coincided with a dramatic drop in the savings rate in the United States. As we have written before, A Better Financial Plan believes that this is not only no coincidence, but has ushered in an era of personal fiscal illiteracy.

1346 is an antidote to this state, and focus on 401K alternatives. It is common sense steps (pay yourself first, earn a fair rate of return, don't lose money, protect your family), that will guarantee that a person of almost any means can take control of their financial destiny and secure the financial that they long for.

Recently, however, some have challenged our 401K alternative approach. So this evening I was doing some research on 401K failure and came across this excellent piece from 60 minutes that aired in April of 2009. I've embedded the video here below and I encourage you to not only take the 13 minutes to watch the entire piece, but share it with anyone and everyone you can. As you will see the 401K was introduced not as a cure all for long term retirement savings, but was intended as one leg of a three legged long term investment plan. The other two being company pensions and social security.

At the time this was certainly reasonable, and the American people didn't necessarily need a 401K alternative, but as you will see disappearing company pensions and a nearly insolvent social security system leaves people that are a mere 10 years away from retirement age exposed to massive amounts of risk. Surely those featured here would have been better off with safe and trusted 401k alternatives.

Here is the 60 minutes segment

What is interesting is that the legislation discussed in this clip regarding 401k fee disclosure has since been passed (we wrote about it recently in this post: My Retirement - will the 401K Fee Disclosure Make a Difference?) I would encourage you to give that a read because it discusses another reason why you should care about seeking 401k alternatives, retirement tax burden. But in addition to that topic what I think must be learned from the fact that the legislation is now a reality is that it doesn't really do much of anything. How many of us pour over our annual prospectus from our 401K provider? How many take time to read the disclosures that are frequently sent our way? I will shamefully admit that I was never in the habit of reading this material. The point is the government is not going to protect you from the pitfalls of the 401K. It was introduced with good intent but the course of growth in the United States lead the 401K in a different direction. The financial institutions? Don't count on them either, they are in business to be in business and want you to keep your funds with the.

The only recourse for the average investor? Investigate 401K alternatives. They are out there and they absolutely provide a completely different perspective. We'll continue to do our part in educating our readers about them, and we hope that you will share what you learn along the way with those you know. Lets face it, the majority of us want a certain degree of control over our long term savings, but don't want the effort required to be too cumbersome. 401K alternatives exist that give you both control and peace of mind. Stay with us and we'll show you the way to A Better Financial Plan.

Finding Better Ways to Invest Money Requires New Perspective

Dean Vagnozzi — Thu, 09 Feb 2012 16:40:00 GMT

Today we are happy to announce the release of our first eBook, "Establishing New Perspective: The Personal Savings Philosophy for a Better Financial Plan.” (click here to download) It is an excellent resource for anyone seeking new and better ways to invest money. In addition the eBook offers up a more discrete look at the mission of A Better Financial Plan and the approach that we take with our clients.

We’d like to offer up here a preview of the eBook and hope that you’ll take the time to download it, give it a read, and let us know what you think.

In seeking to identify better ways to invest money many begin on a path that will never lead them to a new alternative. What is called for is a kind directional guidance for identifying a new path which will uncover new ways to invest money that probably have never been considered before. Our 1346 plan is that guidance, or more accurately that perspective that one should take when seeking to discover alternative ways to invest money.

To learn new ways to invest money this perspective is, we believe, essential. Why? Because status quo long term savings plans are strong in some areas but horrifically weak in others. They expose investors to too much risk, sometimes fail to deliver acceptable rates of return, and carry with them a tax burden that can be unmanageable. This is why A Better Financial Plan developed 1346 as a long term savings strategy.

1346 is based upon 4 of the 7 ‘cures to a lean purse’ that can be found in the personal finance classic The Richest Man in Babylon.

Pay yourself first
Earn a fair rate of return
Do not lose money
Financially Protect your family

To lock in on better ways to invest money, one must pass every investment decision through the filter of 1346 by asking the following questions

Will this investment help to foster better habits of savings?

Will I earn an acceptable and fair rate of return on this investment?

Is my investment protected from risk of loss?

Will this investment help me to establish a more secure financial future for my family?

A Better Financial Plan offers that any investment made should adhere to at least three of the four keys. If an investment only answers two of the four criteria than serious consideration must be given as to whether or not the investment should be made at all.

Most importantly 1346 is a long term view on wealth. The strategy is not intended for short term savings, but is structured to reward one’s working years with a well funded tax free retirement.

This is just a teaser of course. We are proud of the new eBook and if you are looking for help in identifying a new approach and new ways to invest money, the eBook will get you started in the right direction by offering up a new and likely different perspective on investing.

The best way to invest money? The Question begged by the Facebook IPO

Dean Vagnozzi — Mon, 06 Feb 2012 17:35:00 GMT

Big news this past week was that Facebook has finally filed for its initial public offering. It is news for a number of reasons, but mostly because it is likely to be the largest tech IPO in history, dwarfing Google’s 2004 offering by nearly 6x. There has been plenty written and discussed about the looming event, but it begs the question, is this individual stock the best way to invest money?

Let’s take a closer look at the Facebook IPO itself to see if, for those lucky enough to gain access and buy shares, it would prove to be one of the best ways to invest money. Turning to an article this past weekend in the Wall Street Journal, by Jason Zwieg, we see that if Facebook sustained the growth of their user community that it has had to date, that community would be approximately 22 billion in number. . . which is 3 times the entire global population.

The reality is that what Facebook will have to achieve is sustained profitable revenue growth, one of the few metrics that Wall Street will reward. Taking a closer look at this reality, Zwieg points out that Facebook would have to sustain a cumulative annual growth rate of 26% to simply match the annual revenue and net income of one of their closest competitors, Google.

A sustained, uninterrupted growth of 26% is challenging to say the least. Especially considering that there are almost no companies that prove themselves to be immune to certain unpredictable factors that make market risk a reality. Zwieg also shares that even if growth is sustained the valuation for the company is likely to have grown by only 90% which would net out to an approximate annual average return of 6.8%. The question, is getting your hands on Facebook shares the best way to invest money, seems more and more valid, no?

Of course there is no way to know what Facebook will do, nor whether or not the 100 billion dollar valuation leaves any room for dramatic growth or not. The point is that for the average Joe, Facebook stock is probably not the best way to invest money. Not that any average Joe’s will be able to get their hands on it anyway. So what is the best way to invest money? Well as we consistently preach here at A Better Financial Plan it is to make sure that any and all investments follow the 1346 approach:

SAVE: Ensure that all investment choices foster and nurture a habit of consistent and disciplined personal long term savings. Picking up a single stock in hopes of big gain doesn’t feel like discipline, it feels more like gambling.
EARN A FAIR RATE OF RETURN: Is the potential for huge return possible Facebook stock? Sure, but it is anyone’s guess. Hoping for dramatic returns is not a personal finance strategy. Investing for the everyday individual should be more like ‘small ball’ as it is called in baseball. That is don’t swing for the fence at every at bat, but get walks, singles and steal bases. Manufacture runs. Same thing here. Forget the potential for huge upside, find a consistent return between 7% and 10%.
DO NOT LOSE: Facebook very well may have ridiculous growth, but they won’t be immune to things beyond their control. If the US market is rocked by say unrest in the Middle East, Facebook stock will most certainly take a hit as well. In other words there is no guarantee that Facebook stock will not lose money.
PROTECT YOUR FAMILY: Investing in Facebook stock, as I mentioned earlier, seems more like a gamble for the individual rather than a smart investment plan. And will a gamble be there for your heirs? Will a gamble protect your family in the long run? Probably not.

Is Facebook stock the best way to invest money? You need to be the judge. This is not to say that there isn’t potential for it to perform very well. But the valuation for the company may prohibit the average individual from benefiting from any gain of significance and the downside may be too great. It will be interesting to watch the IPO, and to see how Facebook performs in the long run, but no matter how well it performs, a single share in Facebook stock will never adhere to the 1346 approach on which we have built A Better Financial Plan.

photo credit: kenteegardin

The 5 Different types of investments

Dean Vagnozzi — Wed, 01 Feb 2012 00:19:00 GMT

While there are many different types of investments they typically fall into one of five categories. It should be stated that any investment is better than no investment. In fact if you are not investing any money in any way at all the different types of investments might not be the first consideration for your financial plan. Learning how to save money might be a better question to ask. Once a habit of saving money is established then considering the different types of investment make more sense.

Regardless of the type of saver you are, answering the question of where should I put my money begins best with at least a cursory understanding of the different types of investments. Each has its own properties and the different type of investments have different benefits. And while some will argue this next point the list below is displayed in order of preference. Each successive different type of investments in the list is more powerful than its predecessor.

The Five Categories of Different Types of Investments

Tax-able: Taxable investments mean that anything that is earned from the investment (interest or dividends). These investments can include simple interest on checking or savings accounts to money invested in mutual funds or stocks that are NOT part of a tax qualified plan.

Tax-deferred: There are essentially two different types investments that can be tax deferred. One allows money to be placed before any taxes of any kind are taken, the other accepts money that has already been taxed (usually as regular income). Regardless of the type the benefit is that interest gained in these accounts do not have capital gainst tax applied (pre-tax-deferred accounts have benefit of avoiding income tax when placing the funds as well as the capital gains deferment). It is important to understand that these investments are not tax free. The different types of investments that are tax deferred ultimately have a tax requirement; typically on withdraw of the funds.

Tax-free: There are different types of investments that do offer returns on a tax free basis. That is the structure of the vehicle is such that the value of the investment is treated differently that other different types of investment. Some insurance vehicles fall into this category. The gain on the investment is tied to the value of the policy rather than the interest performance.

Tax-free and tax-deductable: Mortgage interest is tax deductable, but real estate obviously carries with it a notable tax burden in at least property tax. However structuring equity in a home can allow it to actually be invested in one vehicle that falls into the tax free category, while continuing to provide the tax shelter offered by the mortgage interest deduction.

Tax-free, tax-deductable and tax credit: While not necessarily a different type of investment vehicle, there are effective investments methods that allow gain to avoid being taxed, include a tax deduction (similar to the mortgage interest deduction above), but also provide the ability to apply applicable tax credit. We’ll discuss more of these in detail along our journey because while each different type of investment mentioned previously is fairly standard, a tax-free, tax-deductable and tax credited investment requires a little more orchestration.

photo credit: aeroix

My Retirement – Will the 401k Fee Disclosure Make a Difference

Dean Vagnozzi — Tue, 31 Jan 2012 02:29:00 GMT

Recently the U.S. Labor Department, in an effort to have 401K plans better disclose the associated fees with managed funds, have pressed for changes to 401K administration which will require investment companies to fully disclose management fees. If you are like most Americans the fact that your company 401k, one of the only federally endorsed retirement plans available, carries with it a fee that you are in some way responsible for, may be news. Most Americans simply take the benefit of the company offered and matched 401k as a ‘free’ benefit. But in reality participants can be paying anywhere from 0.5% to 1% annually. So the big question is how the new laws will affect my retirement savings plan. If I consider that a 1% fee on an average annual investment of $10,000 over 30 leaves me about $91,000 less in my retirement account I quickly realize that it can make a significant difference indeed.

The biggest impact to my retirement will most likely be a flood of advertising from funds that seek to capture their share of the over $4.3 trillion currently tied up in 401K savings. It is likely to be similar to direct to consumer advertising that pharmaceutical companies took up shortly after the FDA, in 1997, quietly modified a single sentence regulating the advertising of prescription medication. This new 401K advertising will focus on my retirement and those of people my age in an effort to create a groundswell of demand for a particular fund, in hopes that the groundswell will be directed at employers who in turn will pressure their 401K providers to offer feeless funds.

Ironically what the new 401K fee discloser regulations will not do is protect my retirement from the looming tax bill that is inherently tied to my retirement savings. In fact perhaps this is a better disclosure that should be mandated. Tax deferral in qualified plans benefits me today two fold by avoiding the tax bill of my investment today, and the gains on those investments over time. Of course my retirement dollars in a 401k are tax deferred, and when the day comes that I begin to withdraw these funds it is treated like regular income. My retirement lifestyle may very well not live up to potential. And while having money is in no way a guarantee that I’ll have a happy retirement, lack of it is sure to make things in my retirement years a little more challenging.

The initial response is typically a so what sort of opinion that the 401k is the only option. That if I place my retirement savings in anything but a tax deferred account I will actually lose money because of the capital gains that I’ll be forced to pay out over the lifetime of investments. In fact, most will point to the 401k maximum investment and use it as justification for why the rest of their savings activity lies in plans that are taxable. Of course there is a better way for my retirement to be managed and that is what we are all about at A Better Financial Plan.

We’ll continue to cover the topic more and check back frequently to discover 401K Alternatives that offer greater control over retirement planning and could very well lead to a tax free retirement.

Saving Money Blog - The Reason We are Here

Dean Vagnozzi — Tue, 24 Jan 2012 18:37:00 GMT

Since we launched A Better Financial Blog in late December many of my clients have asked me why we decided to publish a saving money blog. I have been asked the question so many times that I decided to post our rationale. Enjoy.

I have heard it said more than once that readers are leaders. It makes sense if you consider it for a moment. Reading, the right material of course, expands perspective and knowledge. In the right hands this knowledge can be used to educate, to present perspective, and to share gained insight. This idea of leading by reading was an important element in what lead to the introduction of A Better Financial Blog. As I began to learn the techniques that I now offer my clients I read just about anything I could get my hands on.

Admittedly, this fact did not immediately translate into sharing my learned insight with clients. In fact early on I was hesitant to actually share what I had learned, even keeping it to myself in an almost miserly fashion. While I can’t pinpoint the exact reason why this was I believe that some of it has to do with the nature of the business that I am now in. No independent financial advisor with A Better Financial Plan gets paid on a percentage of assets under management, which essentially means they have to continuously build new business. For an independent financial advisor in this compensation model sharing information can feel like giving away opportunity. So why start a saving money blog that gives away all the value.

But overtime this became an antiquated notion. As social media began to take firmer route in the way that we communicate and buy products and services I began reading about how to leverage these platforms. The consensus from the experts in the fledgling field of social media all says the same thing. Content is king in the development of trusted relationships.

Sharing content to build trust? A completely foreign concept to me, but the more I read the more I understood that in today’s age people seek information, lots of it, before they make any sort of decision of import. This reality helped us decide to launch a saving money blog oriented towards educating anyone who wants to be educated on A Better Financial Plan.

We deal with ideas on how to save money, sharing insight on the best way to save money, or the keys to living a tax free retirement nearly every day. We are passionate about the methodologies that we’ve identified that have consistently helped our clients, and we sincerely believe there is purpose to advancing the education of individuals to be able to use these methods to improve their long term financial position. As this is the case we began to feel as though it would be negligent to not share this information. And so A Better Financial saving money blog was born.

It is our hope that you will find value in our words, videos, and other educational assets and that you’ll share them with your friends and family. We would love to be able to help you with the methods we discuss, candidly it makes us money when we do help. But our gain is ultimately inconsequential. What matters more is that the information is made available so that it can somehow be put to good use.

There are plenty of saving money blogs out there, and each has its own intent. This is ours and we hope you come to consider that A Better Financial Blog is one of the best saving money blogs available. Let us know how we are doing along the way please, and never hesitate to let us know if you have questions or would like certain topics explored in more detail.

Photo credit: Laenulfean

How to Budget and Save Money - 5 Important Steps

Dean Vagnozzi — Fri, 20 Jan 2012 14:01:00 GMT

There are times when the writing here at a Better Financial Blog gets a little tricky. We serve clients of all walks of life, all level of income, and at varying stages in their investment efforts. It can become difficult at times to write posts that span this audience. But during those times I am reminded of something that a trusted friend told me long ago. Long before I even entered into this line of work. He said that the fundamentals of anything worth mastering can never be heard too much. His point was that the fundamentals are such because they build the very foundation of the thing that we are trying to master.

How to budget and save money. That question is why I even bring the above up. I get asked how to budget and save money in my dealings with my clients, potential clients, and friends or family that may or may not be clients but always try to look for some insight from my experience. Believe it or not the question of how to budget and save money comes not only from those just getting started on their financial plan, or from those who have maybe been recently derailed, but also from clients and acquaintances who have been saving for years. Admittedly this latter group’s perspective is slightly different, but the core of the question over how to budget and save money is the same. And ultimately it comes down to a single element. Cash flow.

Control is what people first think of when considering how to budget and save money, but it isn’t necessarily control that is at the heart of the issue, but rather the mastery over the nature of cash flow. Understanding the details of where every penny is headed in your day to day, and more importantly the nuance of how those pennies flow, provides the individual with a greater sense for what their cash flow truly represents. What does discretionary spending look like, what is the tolerance for minding cash flow in any one direction or another, how are monthly expenses managed. What I try to do with my clients is not try to exercise control over their cash flow but rather to increase their confidence and knowledge of their cash flow. These 5 steps help to answer the question of how to budget and save money.

Monthly Reconciliation: Even my most financially successful clients can fall into a trap where they are not habitually reconciling their cash flow each month. When they do they quickly discover the categories of their expenses at a much more discrete level, allowing them to direct their money better towards their financial goals.

Automate Payment While it is a common cliché to say ‘pay yourself first’ it is not often said how one should pay themselves. If a certain amount of income is not automatically placed towards savings each month then the likelihood that it will ever make it there decreases. Automating payment to oneself is the best way to answer the issue of how to budget and save money.

Feel the Budget: It would be easy to say the answer to how to budget and save money is to actually have a hard copy of the budget up on the refrigerator that you use as your monthly compass or guideline. But too many drop this habit more quickly than a new year’s resolution. Instead what successful savers tend to do is to commit to a period of time where they live strictly by the budget in a way where they learn what it feels like. Three months is what my clients say it typically takes. Once the ‘feeling’ of living in the budget is established this instinct tends to keep people on track.

Have a savings plan I know sounds obvious, but when people want to know how to budget and save money, the best approach is to actually have a plan. And it is not enough to have a plan that is static in nature, rather it should be laced with contingencies, and a pragmatic look on factors that are uncontrollable like taxes, inflation or interest rates.

Do Not Isolate: Savings plans should not be an approach where the different techniques are completely isolated from one another. Savings must act in concert. So while obviously it is wise to have differentiating investments, those investments must operate in a complimentary fashion.

These five steps should help anyone learn better how to budget and save money regardless of how mature they currently are in their current habits. It is more like fitness than it is say just knowing how to ride a bike. The latter, as is commonly said, is mastered one time. The former, however, is something that continues with commitment.

photo credit: HeedingtheMuses

Happy Retirement Disrupted by Technology - 5 Keys to Avoid Disruption

Dean Vagnozzi — Wed, 18 Jan 2012 16:50:00 GMT

This past weekend there was an interesting article in the Wall Street Journal about the cost of upgrading high end audio visual equipment in homes. You should check out the article Cutting Edge Today Passe Tomorrow when you get a chance, but the long and short of it that as tech evolves more quickly the cost of embedding that technology in one’s home is far greater than it was say ten years ago simply because the cost to replace it is dramatically higher. If you are not the full blown integrated AV in your home type consider this article. The point is that rapid and continuous onslaught of new tech means getting the latest and greatest impacts your happy retirement planning.

When most are planning out their happy retirement fund, they probably don’t evaluate how the role that improving technology has over their investment strategy. Consider the first HD television purchase you made. If it was say 4 years ago it is likely that that television is considered ‘obsolete’ and not worth even a fraction of what you paid for it. The depreciation on the television and the monthly expense of the cable service is all cash out of your pocket. Ten years ago most Americans were content with their televisions and the owned them forever, didn’t even think about replacing them until they didn’t work any longer. For those of us born before 1970 we remember such a thing as a TV repairman. The life of the television was extended for a small service fee.

Televisions are not the only area where technological advancement impacts our happy retirement savings. Think about the smart phone you may be carrying around. New smart phones, even ones that come with some rebate to get you to extend your carrier service, come with a price tag of $150 plus. And they get old fast. Two to three years after purchase there is a later and greater model that does things 10x better than the one you are carrying does.

The point is that while a happy retirement can be planned for from a fiscal perspective, far too many mitigate the impact that things like technology advancement has upon their ability to bolster their retirement savings. So what to do in the face of technology advancement? Here are 5 keys to managing technology disruption so technology disruption doesn’t disrupt your happy retirement plan.

Take the better deal: I mentioned cable services above. It is a commodity. Always take the cheaper deal even if it means you have to learn the new channel configuration every time you switch services.

You’re Probably Not a Videophile: If you don’t know what all the numbers letters and specification on a television's features list means than they don’t matter to you. A great majority of consumers simply want a decent picture and sound. Therefore don’t pay for features and functionality that will not mean anything to you or that you won’t even be able to identify. It is like wine. The best wine connoisseur simply drinks what they like. They don’t worry about drinking the most expensive bottle.

Apply the Five year rule: Regardless of the speed of technical innovation most tech hangs in there for at least five years. It is a good rule of thumb to not replace technology, ever, before it is 5 years old.

Pay for “good” Service plans: For some of the higher tech items the service plans will extend the value of your purchase (much like the TV repairman did in the 60s). Evaluate the plan and if it offers full replacement for a wide variety of issues then it is probably a good buy. I did this recently on a Digital SLR camera. The service plan covers just about everything you can imagine including one of my kids dropping it in the pool. The length of the plan? 5 years.

Understand total cost of ownership: Too many evaluate new technology for the latest and greatest feature and functionality that it will deliver. But to access that functionality it is likely that the list price of the main product is not going to be the only expense. Cameras need memory cards, Phones need service plans, and tablet computers need internet access. It adds to the total cost of the device. Always factor that into the cost of your purchase decision.

Stick to these five steps and technology disruption won't disrupt your happy retirement plan.

photo credit: schmilblick

Your Independent Financial Advisor Should Empower Not Control

Dean Vagnozzi — Fri, 13 Jan 2012 21:35:00 GMT

The other day I wrote about a thought I had concerning what the average independent financial advisor things about the occupy Wall Street movement. (Here is a link to the post that asks what your financial guru thinks of occupy Wall Street). After writing that and discussing it with some of my peers it became clear that part of where some of the anger over financial institutions is coming from is, perhaps, a the lack of understanding over how the financial game works. It is easy for one political party or another to co-opt the resentment over the financial ruling class for their own political gain. After all their job is to get elected so they can enact legislation that they sincerely believe to be right for the populist (I’m clearly giving politicians the benefit of the doubt here mind you). But much of the anger seems to come from an overwhelming feeling of no control. The everyman gets the short end of the stick while the ruling financial class and the independent financial advisor continue to get paid. What this calls for is not misplaced anger but greater control.

Regardless of how much money one earns if they are a decent saver (to determine the type of saver you are check this post out on answering the question of where should I put my money), then there is no reason you cannot increase the level of control that you have over the money you work hard to save each month. The average independent financial advisor gets paid to control your money if you let him, and unfortunately in many cases he gets paid whether you are making money or not. When most people think of an independent financial advisor they are thinking of one that is paid on a percentage of assets that the advisor has under management. An obscure concept to most, but why is it that the sheer volume of cash under management is of value to the independent financial advisor and the vehicles that he is pushing? Not only is the answer fairly simple but it underscores why anyone can exercise greater control over their savings.

The answer lies in the way that financial institutions are able to apply interest multipliers that money can earn in greater volume. So where an individual could expect a return of x% the financial institutions, and the independent financial advisor that serves them, can earn 4 to 5 times x% return on the same dollar. Now admittedly this is dramatically oversimplifying the matter, but the concept is what is important to understand. The dollar you hand over and expect some interest on is used repeatedly by say the bank to gain interest multiple times. In other words your money is going to work harder for your independent financial advisor (or more accurately the institutions from where the investments he sells comes from) than it is for you.

Control. The status quo encourages you to hand over that control to the bank, the insurance company, the broker, or the independent financial advisor. This is where A Better Financial Plan begins, by resting control away from others to put it back into your own hands. We’ll continue to write, speak and educate about just how you do that. I sincerely hope you learn something along the way, and please feel free to enter a comment if you have one.

photo credit: bredgur

Type of Saver You Are Answers "Where Should I Put My Money"

Dean Vagnozzi — Thu, 12 Jan 2012 15:34:00 GMT

In the category of questions that I am frequently asked, another would be, “where should I put my money.” Of course this question tends to be early in the process when determining if A Better Financial Plan is right for someone and it is absolutely the right question to ask. But as with most things where your personal finance is concerned the question of where should I put my money is nuanced depending on a number of factors. One these factors that determines the answer to where should I put my money is to determine what kind of saver you are.

The types of savers can typically be broken into three categories, three star, four star and five star. The answer to where should I put my money is different depending upon which category you believe you are in. For instance a three star saver is categorized as someone who is very responsible with their cash flow, knowing with a fair degree of detail where money is to be allocated each month. Their monthly expenses are not a burden but do consume a large percentage of net income. The three star saver has a retirement account through his company’s 401K plan as the main investment vehicle and is able to lay aside anywhere from $100 to $300 a month in cash comfortably. The three star saver typically wants to save more and wants to know if the answer to where should I put my money is something that will help achieve savings goals.

The four star saver has many of the attributes of the three star, but slightly more of a foundation. They have the 401K and are likely to have at least one other type of tax qualified savings account like an IRA. Their contributions to their retirement vehicle may or may not be at the max that the law allows. In addition the four star saver has at least $500 in cash that they can comfortably put away each month. This additional monthly cash is typically invested with a broker that they are familiar with, one that they trust and is distributed across mutual funds or broker selected stocks. The four star saver wants to know if the answer to where should I put my money will give better options already in use, and if investment performance can be improved.

The five star saver, as you would imaging, is like the four star but their IRA and 401K contributions are being contributed to at the max amount. Additionally their monthly cash savings amount is frequently $1000 and above. This monthly savings, much like the four star saver, is most certainly placed with the broker that they have been doing business with for at least 5 years, and is a mixture of stocks, bonds, and mutual funds. The question of where should I put my money, for them has more to do with longer term fiscal goals for self and family, but most importantly the five star is seeking alternatives. The answer to where should I put my money, they hope, will provide better protection over the volatility of the stock market but deliver the kind of return that they expect.

It is important to note here that while cash flow certainly affects the star rating where you find yourself it is also true that individuals with the same exact cash flow can be either a three, four or a five star saver. So after reading this you find yourself at say a four but wish to be a five, that is possible. But knowing where you are and where you want to head is critical when asking and finding the answer to where should I put my money.

How to Save Money: Put Yourself in Training

Dean Vagnozzi — Wed, 11 Jan 2012 13:42:00 GMT

At a better financial plan we can typically categorize those we see in two ways. The seasoned saver and the would be saver. The former didn’t necessarily learn how to save money, but report that it was simply always a part of how they conducted themselves. They frequently relate stories of running the lemonade stand as most children do, but socking away one or two dimes for every dollar they brought in by their lemonade selling efforts. I ask them why they did that and surprisingly they can never really articulate the specific reason why, but there is a common theme in their response. They communicate a sort of desire to simply have the extra dimes on hand so that they could dream about the next big day at the stand.

The would be savers, on the other hand, never report a taste for saving, and while some report that they were taught how to save money they rarely can identify what their practice is for doing so. For the would-bes learning how to save money was just not something that took root. This is not to say that it hasn’t been a goal for them, but learning how to save money and doing it the right way just never presented itself to them.

This post is for the would-bes. The seasoned saver has a different set of opportunities before them, but the opportunity for the would be savers is exercising the right muscle saving memory, learning how to save money by putting the discipline in practice.

Nearly everyone has heard the expression of paying yourself first. Frequently the amount that is suggested to pay your self is about 10% of your gross income. That is for every dollar that you earn one dime should simply be placed aside. The problem for would be savers that have been earning for years but not practicing this discipline is that the dime per dollar seems like an extraordinary hurdle. This burden serves to help the would be avoid what seems like perceived pain of savings much like someone without a tooth ache fears the dentist. The two have much in common. The former eventually needs the resources that a savings plan would afforded them and the latter ends up in the dentist chair one way or the other.

“But”, the would be laments, “10% of my gross is simply not doable for me.” This is another obstacle to actually learning how to save. Jumping from zero to ten percent would be tantamount to some who has never run a mile in their life entering the Boston marathon. Not only would they be very unlikely to finish, quitting after the first couple of miles, they are very likely to hurt themselves. Learning how to save money and paying yourself first doesn’t start with one dime for every dollar, but one penny.

Think about it. If your goal is to eventually run a marathon the first step is to simply run that first mile on that first day of training. Learning how to save money has to start in a similar fashion. You must begin to put that one penny aside every time a dollar comes your way. Where it goes is simply not important at this point in your learning how to save money training. You can put it in a jar on the shelf, under the mattress, or in an old coffee can. The where or the amount is not important. What is important when you are learning how to save money is two things. First that the money is put aside and secondly that it is not touched.

This is the first step in learning how to save money, simply get started with any amount. And mentally place that money in a restricted area that is inaccessible for any reason. And, just like training for a marathon, begin to increase that amount in some methodical fashion. You see once you start learning how to save money you will discover clarity over your discretionary spending. That extra stop at the coffee shop will no longer look like a simple little treat or break from your daily routine, but instead an alternative to increasing the amount going in the coffee can.

Learning how to save money is not an easy task if it isn’t something over which you’ve developed a habit. But the habit is easily formed by simply getting your training started.

photo credit: Martineric

5 Keys to a Happy Retirement

Dean Vagnozzi — Tue, 10 Jan 2012 14:54:00 GMT

Let’s assume a couple of things. First money most certainly cannot buy happiness, and having more money in your retirement years is not going to ensure a happy retirement. Secondly most Americans are not actively thinking about their retirement. And thirdly, while the first two are absolutely true having enough savings in retirement to allow you to confidently maintain the lifestyle you are used to without the fear of outliving your income contributes to a happy retirement.

It is important to reread those three assumptions because they are in the order in which we ought to consider them. Today’s culture would lead many to believe that if only I had enough money my troubles would be far behind me. However there are not many messages about responsibly saving money in order to secure your desired retirement lifestyle nor helpful hints on how to live a happy retirement. If you think that is inaccurate take a close look at the advertisements you see for financial planning for the average American, and the messages that are communicated to the varying demographics of the country (twenties, thirties, and forties mostly) about their long term plan and what it will take for them to live a happy retirement. What you’ll find is that investment advice is almost completely relegated to discovering the better mutual funds to invest in, the IRAs that you can roll your money into, the service levels of those that manage money in either location. Regarding long term savings you’ll not see much in the way of targeted marketing. The marketplace for investments that will return acceptable yields with very minimal risk seems to be practically nonexistent. Keeping in mind our assumptions above, the question must be asked, why is there seemingly no focus on saving in a disciplined fashion to gain reasonable rates of return in order to ensure a happy retirement?

It is this question and the answers that have helped me become so passionate about what we do at A Better Financial Plan. There are alternatives to the status quo that, if applied, will absolutely help individuals of all income levels transform the manner in which they accumulate savings to deliver to themselves a happy retirement, at least from the perspective of maintaining lifestyle without the fear of outliving income. If you are trying to determine whether or not your current investment plan will deliver to you a financially happy retirement here are 5 keys to make sure you are on course.

Understand Post Retirement Taxes: Most are well aware of the tax deferral benefit of investing in tax qualified plans like a 401K or IRA. However not many stop to consider what their tax burden is going to be when they begin to draw money against those plans. In fact there are a fair number of people that are unaware that their eventual 401K or IRA withdraws will carry with them any sort of tax at all. This is a mistake and might lead to a happy retirement that isn’t so happy. It is critical to understand what your targeted savings in these vehicles will be and exactly what the cash flow from them is going to be after taxes.
Know the truth about ‘living off interest: If you are in your twenties or thirties you probably haven’t once given much thought to whether or not you’ll have enough money saved to live a happy retirement. That is the ability to maintain a lifestyle you are used to without the fear of outliving your income. If you are in that category ask your parents if it is a concern or thought of theirs. I would be surprised if you didn’t get a much more realistic perspective of the issue from them. Again to be clear a happy retirement isn’t about the money you have on hand, but can be affected by a high degree of stress over this concern. The answer that many see as a proper way to mitigate that fear is to ‘live off of the interest’ of retirement savings. A fair idea, but two things are likely to occur. The first is that the aforementioned tax burden is surprising to most seeking to live a happy retirement and the second is that the interest they seek to live off of is simply not enough to maintain the lifestyle they are used to. Consideration must be given to the reality of living off interest.
Taxes are life after death: Taxes, unfortunately, do not stop after one’s life does. The government has a huge and dependable revenue stream from taxing the estate of the dearly departed. What this means to the average American is that if they have been doing everything right, have saved well, have lived off the interest to ensure they won’t outlive their savings, they are rewarded by Uncle Sam with a big fat tax bill upon death. So if part of the happy retirement plan includes leaving a little something behind for your family, be sure to understand how much the fed expects.
Understand the Risk of the Market: It is likely that we all know someone who’s savings were all tied into a 401K or IRA just before they approached the would be happy retirement age of 59 in the middle 2000s, hoping for an early departure from the corporate world. Many of these folks are still at work and still trying to accumulate savings for their happy retirement because when the bottom fell out in 2008 their savings went right along with it. The argument might be made that these folks should have had their money moved before then, but n one anticipated the worst economic climate since the great depression so let’s give them the benefit of the doubt. The point is that a happy retirement from a financial perspective must be planned by not only understanding the risk of the market, but educating oneself to know the alternatives.
Protect your family: What if you don’t make it to the happy retirement. I know it is morbid, but again if you are a twenty something or a thirty something go ask a forty or fifty something if they ever consider their own mortality. Or ask them how many people they know from their 20 and 30s who have passed on. The answer will be pretty sobering. The point is this, a happy retirement can’t be confined to just getting there and living it out, for some a happy retirement will be spent in some other place all together. What about those that don’t make the trip with you? Does your happy retirement plan have a contingency in place for this scenario? Be honest with yourself on this one.

Like I said in the beginning money most certainly does not buy happiness, but it does buy a certain degree of peace of mind. A happy retirement must be considered from multiple perspectives and these five steps will help you navigate to your desired destination.

photo credit NeilsPhotography

Answering the Question: Where Should I Put My Money

Dean Vagnozzi — Mon, 09 Jan 2012 22:42:00 GMT

“Where should I put my money” That is perhaps one of the most common questions that I get from people that discover that I help people putting together a better financial plan. The answer is almost always the same, “start by understanding why that is the wrong question to ask.” If that is a puzzling response and leaves you wondering how the question itself could be wrong then it is a good idea to give these words some consideration if you are asking yourself “where should I put my money.” The placement of money is ultimately secondary to understanding, and I mean truly appreciating, how your money ought to work.

This is a topic I am absolutely passionate about. So much so, in fact, that annually I teach a course in a local middle school for children in the sixth, seventh and eighth grades on the idea of truly understanding how one’s money ought to work. The children respond to the lesson very positively and are visibly excited at the prospect of having greater control over their futures. I don’t necessarily believe it is the control over their finances that they are elated about, but rather the idea that their adulthood is not too far away and thinking about how their money works instead of asking themselves ‘where should I put my money’ is empowering. It is interesting that this sense of empowerment is something that the children pick up on, because avoiding the trap of asking ‘where should I put my money’ and instead evaluating just how your money ought to be performing is very liberating indeed.

The top 5 reasons why “Where should I put my money” is the wrong question to ask.

Financial actions and economic reactions: The decisions that you make every day on the products and services you buy and more importantly how you plan to pay for them have consequences over how your money performs. Too many keep their investment decisions separate from their consumer decisions. This is a mistake. The latter can radically alter how the former performs.
Systematic Transfers of Wealth: For most, their financial lives have affixed a price tag. That price tag is in the form of taxes, fees and interest paid. Regardless of one’s lifestyle, any sort of borrowed money requires an interest payment. These payments, the taxes of all sorts an individual must pay, and any other related financial service fee of any sort, ultimately transfers wealth away from the one who created it.
The price tag is incorrect: The systemic wealth transformation is, unfortunately, made possible on the flawed acceptance of these fees as unavoidable. To be sure managing wealth in a way that frees an individual from all interest burden requires discipline, but acquiring the skills to master the discipline is relatively easy.
Simple Formula: Every individual should be well aware of their bottom line performance. By looking at interest earned against interest, taxes and fees paid anyone can immediately estimate whether or not their current course makes sense. To summarize Interest Earned – (Interest paid + Taxes Paid + Fees Paid) = bottom line financial performance. HINT: most living the status quo are in the red on this one.
Care about Future Value: The price tag that is interest is the cost of using someone else’s money of course. The reward for this someone else, banks for instance, is that they are in the money business for the value of money not just today but tomorrow as well. The interest that you hand over to the bank will perform, for the bank. It is critical to evaluate what the future value of money is when you are making a decision to take on any loan that will require any sort of interest payment.

Asking ‘where should I put my money’ doesn’t address any of these five reasons above. In fact the question of where should I put my money keeps interest earned and interest paid almost completely separate. Understanding these five points will being to help reshape the way the way you consider how you are managing your financial actions. With a proper evaluation almost anyone can transform their desire to answer the age old “where should I put my money” into a more confident and controlling ‘how can I improve my money’s performance?”

Lack of 401K Alternatives Lead to Decreased Savings Rate in the U.S. Part 2

Dean Vagnozzi — Fri, 06 Jan 2012 22:40:00 GMT

Yesterday I wrote a post on a recent New York magazine article and multiple blog post response regarding how well the American population saves. In looking into some of the stats I came across a fairly startling report that illustrates the continuous decline in the individual rate of savings in the United States since the early 1980s. This period of time happens to coincide with the introduction of the 401K replacing the company pension as the go to long term retirement solution.

This is the second post on examining the startling decrease in the individual savings rate since the introduction of the 401K as the go to method for long term retirement savings.

While there is perhaps too little data to determine whether or not the replacement of the company pension with nothing the 401K sparked the dramatic drop in individual savings in the United States, there certainly are some elements that deserve a closer look. These 3 factors may help whether or not the negative savings trend is in anyway related to the disappearing pension and the hugely popular 401K and a lack of 401K alterntaives.

Inaction yielding value vs. Action Decreasing Earnings:

Before the 1980s the standard retirement plan was to depend upon the company provided pension. The pension plan was a pretty good deal. It was simply a benefit of employment, carried with it literally no cost in most cases, and required hardly any action on the part of the employee. The move to the 401K, and the decreased popularity in 401K alternatives, however changed that landscape dramatically. Rightly or wrongly employees initially viewed the necessity of investing a part of their take home pay in their long term savings plan as something that decreased their week to week earnings. The voluntary nature of these plans left the decision up to the employee on whether or not to contribute. And if they did contribute that money was now locked under the threat of heavy taxation and early withdraw penalties.

Locked in with no liquidity: Increased responsibility on the part of the employee and a very real impact to cash flow may have compounded perhaps the biggest perceived problem with the 401K, zero liquidity. Liquidity is not a problem of many of the 401K alternatives available today. So not only did these pension raised employees begin to see their take home pay reduced, the dollars were now held them hostage under the threat of steep fees and taxes if they were withdrawn early. Again regardless of whether or not this is an appropriate perspective, it could explain why some employees were perhaps hesitant to give up the right to control and access their money in a manner to which they’d grown accustom. In other words there may have been an extremely slow mental adoption rate.

Easily Accessed Credit: The decline in savings really accelerated with the economic recovery in the middle 1980s. This coincides with a changing landscape in consumer credit. The consumer credit industry began to take off and the BankAmericard and MasterCharges of the 1970s gave way to newly improved and expanded offerings from more banks as a result of consolidation. Simply put in the 1980s credit became a huge consumer business that the banks quickly capitalized upon and got consumers hooked. The acceleration of credit access did not, in fact, slow until the 2008 market crash. So for nearly 30 years consumers were gaining access to more borrowed capital than ever before in the history of the united states. All of this credit obviously means more interest to pay and more interest to pay means les money to save. A newly trained consumer hesitant to invest in his 401K now had a little more disposable income and a host of easy credit options.

Again it must be stated that the fact that individual savings began to decline in the United States when the 401K is introduced is not enough information to make the case that the 401K and lack of 401K alternatives, helped America get hooked on credit and forget about savings. What is fact is that many Americans today are feeling the pain of failing to plan for their futures. And worse those that did adopt the 401K as their long term strategies have become painfully aware of the level of risk that they are exposed to by placing their long term financial stability in the stock market. What lie ahead for today’s investors remains to be seen, hopefully the first step will be more disciplined savings. The second? Safer investments.

photo credit: SqueakyMarmot