If you are ready to take advantage of your new saving habits, there is a tried and true way to do this:   Dollar Cost Averaging.   It isn’t new and exciting, but many a millionaire next door has proven its success.  The best part – you don’t need a big stash of cash to get started.

Dollar Cost Averaging (DCA)

The principal behind dollar cost averaging is this:  You put the same amount of money into the same investment on the same day each  month.   Those months when the investments’ price is going up, your set amount might not buy very many shares.  But when the investment’s price dips (as they all do from time to time), you get to buy more shares at a cheaper price.  Guess what?  When the price goes back up, all those shares you bought cheaply will have made you some money.  Those shares you bought when the price was high will look good, too.

There are a few reasons to invest this way:

1. It takes the guesswork out of trying to predict what the stock market is going to do (aka timing the market).  As long as you feel good about this company, you DON’T CARE what the stock market is doing day to day.  In fact, you are celebrating when the market is down on your investment day, because you are getting to buy more shares of a company you think has great long term prospects.  And you are celebrating again when the market is rallying because all your shares are more highly valued.  Isn’t that great?

2. It creates a disciplined approach to building wealth.  You are now on a path to save and invest regularly, building wealth one month at a time.  Yes, we have all read about those hot stocks that made someone rich overnight.  But for most of us, it’s going to take a working lifetime to accumulate our wealth.

3. You can do this for as little as $100 per month.   In fact some mutual fund companies, like T Rowe Price,  will set up a DCA for as low as $50 per month.  You don’t need thousands of dollars to get started or to continue your dollar cost averaging plan.   So, no excuses!

Some Do’s:

1. Do Your Research.  Make sure you are picking a stock or mutual fund (yes, you can DCA into either one) that you feel has strong long term growth potential.   Go to your local library – they will often have a ValueLine subscription.  Or get an online subscription to Morningstar.  If you already have a brokerage account, find out which stocks or mutual funds they offer for DCA – they can also provide you with their own research opinions.

2. Start with a monthly amount that won’t break your bank.  This is money you won’t miss on a monthly basis.  Ask your broker or mutual fund company for their minimum DCA amount.  Don’t have an investment account yet?  Check out ING’s Sharebuilder to get started with an online account.

3. Do work up to a DCA approach into multiple stocks across industries.  If you are doing a DCA into a mutual fund you will have some diversification built in, but if you are buying an individual stock, you want to eventually own five or more to reduce your dependence on one performer.  

4. Commit to a DCA program of AT LEAST 12 months.  It takes time to build wealth and see the results of your efforts.

Some Don’ts:

1.  Don’t wait for the price to go up or down, nor vary the amount based on how much is in your savings account that day.  Set it up for the same day, same amount, same stock – good times and bad.

2. Don’t stop it when the market takes a nose dive.  If you still believe in the individual company, keep investing.  Remember, in a down market you are buying more shares, cheaply.

There are some market pundits who say Dollar Cost Averaging is dead.  They will show charts and graphs proving that if you had done a DCA over a certain period of time instead of putting a lump sum into the market on a certain day you would now have less money.  And they would be right.  But you know what they say about hindsight….Who knew that was THE day to invest in the market? 

This approach is about BUILDING wealth.  Steadily, consistently, with discipline over time.  It’s about creating and strengthening good money behaviors.  When you’ve done this for ten years and see your accumulated balance, you won’t care that you missed the best day in the market  in 2011.

Already a DCA investor?  Let me know how it’s worked for you!

If you too have already started backsliding on your own resolutions, consider this: Experts say it takes 21 days for a new habit to form. Personally, I think it takes at least 3 months to change your behavior when it comes to personal finance. No wonder most people give up on saving more money or spending less!

 So, how do you make significant financial changes in your life that will stick? Ironically, a New Year’s financial resolution starts with your desired long-term result, not your current behavior. Figure out how to change what you are doing now AFTER you ask yourself the following questions.

Assume it is 10 years from now:

 1. Do I want to be living in the same place?

 Maybe your goal is to live in the same house but not have a mortgage payment. Figure out how much extra per month you would have to pay to get it paid off by a certain date. Or maybe you really want to retire to a warmer climate – how much is it going to take to live there with the lifestyle you want? Will you have enough equity in your current home to fund a new one in your retirement locale? If you’re not sure, maybe you need to focus on paying off that home equity line or refinancing that mortgage.

2. Do I want to be doing the same job with the same company?

 My bet is most of you might answer with a resounding “no” to this question – unless you’re self-employed. So…how do you make that career change affordable? Maybe your goal should be to stockpile some extra emergency money so you can take some time off to look for a new job or reduce your salary in a new field. Maybe your spending habits need to change now so you have more flexibility around salary later.

 3. Where will my kids be?

 Chances are at least one of them will still be in college. Don’t assume financial aid is going to pay their way at the college of their choice. Start a 529 plan or some other savings account to help ease the burden of escalating tuition costs.

4. Where will my parents be?

 If they might be with you, better start planning now! If you have no idea what their financial situation is to take care of themselves as they age, your goal should be to sit down and have a candid conversation with them. Make them show you the money. Be forewarned – you WILL be the “parent” of at least one of your parents one day and you want to be prepared.

5. What happens if I’m dead?

 I know, I know. No one wants to contemplate this in the next ten years. But will your loved ones have enough money if you were to die tomorrow? If you don’t know, make a resolution this year to figure out if you need more life insurance. If you’re self-employed, you might also need disability insurance. Don’t assume you won’t die. And while you’re at it, make sure you have a will along with other basic estate planning documents in place.

 Look at it this way – if you get this done now and you don’t die in the next ten years – you can come up with something else to work on in 2021!

Socially Responsible Investing, or SRI, has been around for a long time now.  Its definition has broadened as it has also become more clearly defined, but if you are going to take an SRI approach to your own portfolio, here are some factors (or screens) that many of the well-known SRI managers use to evaluate companies:

Corporate Governance & Ethics

 Oh if we had a penny for every company we thought was ethical….only to be proven wrong.  Yup, this is a hard one to ascertain but more and more research services are giving corporate governance a grade on the analyst’s report.   Is company management aligning their interests with you, the shareholder?  How much are they paying themselves?  Are they dealing with major compliance or legal issues in their industry? 

 Environment

What exactly is the company’s impact on the environment?  Are they actively trying to improve that impact?  If the EPA has set up camp outside corporate headquarters, that may not be a good sign…

Workplace Safety

This might be one screen where you’ll need to rely on the experts, but if the company has a record of frequent employee accidents or a lack of established safety programs, I’d look at another candidate.

Product Safety

This is where all those beer & tobacco companies get excluded.   Is the product safe for the consumer?  Do they use animal testing?  Beware of being too strict here – some companies who are doing a lot of good have to use some animals for testing, but have very specific standards for humane treatment.

Human Rights

Pretty basic, huh?  Maybe here in the U.S. it’s a given, but what about overseas?  Are they in cahoots with governments that ignore basic human rights? 

Diversity

What’s it like to work there?  Are they a country of old men or a Coca-Cola commercial?  Everyone seems to have a diversity policy these days, but are they committed to promoting women & minorities?  A quick peek at the Senior Management photo in the Annual Report can give you a clue to their diversity, or lack thereof.

Community

Is the company a good corporate citizen in their local community?  Funding local events is a start, but are they actively trying to help those who are underserved?  Do they encourage employee participation?  Again, many companies pay lip service to community support, but what are they really doing and is it with money, time or both?

Some of these screens may be more important to you than others – and that’s okay.  It may take some digging through analyst reports, 10-Ks and proxy statements to get a feel for the answers.  And many people start their SRI investing through mutual funds that do the research for you.   

But here’s the most important screen of all:  Scrutinize those performance returns just as you would any other stock or mutual fund; after all – you still want to make some money on your investment, right?

So why do so many employer plans offer supplemental life insurance for your children?  It might be a way for the insurance company to make a little more money, but I suspect the root of this particular employee benefit may go a little deeper.    So I did a little digging (can you see I’m missing my garden work these days?)

Turns out, insuring children started way back in Roman times.  Those clever Romans were in the habit of forming “burial clubs”, a way for low-income folks to pay for the burial of a loved one.  To belong, you paid an annual fee to the club AND you made a contribution of wine each year.  Hmmm…I guess if everyone in the club drinks enough of the wine, someone is bound to need burying….After awhile, society figured out it might be better to separate the wine-drinking from the burying and the concept of insurance was born.

In the U.S. life insurance began in earnest in the late 1700’s.  Before the Civil War, many plantation owners took out life insurance policies on their slaves, including any children working those cotton fields.    Like key-man policies today, the death of a slave would have meant a hit to the revenue stream.

But is insurance on your child necessary today? 

 Since most policies offered through employers have a maximum benefit of $10,000 per child, it’s clearly designed as that old Roman concept of covering the burial costs.  As tragic as it would be to lose a child – for lower-income workers, funeral costs can be prohibitive and one could definitely argue that insuring for such financial risk is prudent. 

As for the slave-owner concept of child insurance – well, as much as my own children complain about the chores around the house, they are not actually contributing any revenue  to the household. Therefore, the typical reason for buying life insurance, i.e. as income replacement in the event of catastrophic loss, doesn’t really seem to apply. 

The insurance companies who sell these policies make the argument that it is an inexpensive way to provide your child with life insurance for his or her adult years.  This may be a persuasive argument under two conditions:  1. The policy you are being offered is a portable, permanent life insurance policy building cash value each year; and 2. The health of your child is going to be compromised as an adult.  The first is easy to ascertain, although many employer plans are term only, with no cash value.  The second is, in most cases, very difficult to know.  Will your child have diabetes or breast cancer that would prevent them from getting a reasonably priced policy later?  You could certainly look at your family history and make some guesses, but is a $10,000 term policy really going to help them down the road?   

As irrational as it may sound, I suspect part of the reason 15% of employees purchase insurance policies on their children is to FEEL some protection against the possibility of losing a child.   We all know the insurance won’t literally protect the child from harm but having it somehow makes us feel a little more secure.  We know that the payout won’t ease our sorrow or compensate us in any way for what we have lost.  In most cases, it won’t replace any income.    And yet, by having it we somehow feel we have done our duty to provide the maximum protection we can to our families.

So, during this open enrollment season, when you are tempted to check that box that will take an extra few dollars out of your paycheck each week for child life insurance, consider why you are really doing it. 

• If you want to cover burial costs, it may make sense.

• If your child is a prodigy already earning money, it may make sense.

• If the policy offered is a portable, permanent policy with cash value build-up, it may make sense.

• But if you are doing it because it’s cheap and you believe you are providing your family additional protection, reconsider.   Put the money towards their college education instead.

Creative Commons

Bigger kids mean bigger toys.   I don’t know about you, but the weekly allowance I’m doling out doesn’t seem to be going very far these days.    I’m beginning to wonder if this whole allowance idea is really teaching my kids how to manage their finances.   Or if it is just enabling a behavior I’d rather not reinforce – that someone else pays for the “big” stuff…

Don’t get me wrong.  I do think that giving a child an allowance is an important component of teaching our kids about money management.  But it is not enough.  As we move into a cashless world of online ordering, mobile banking and pay by PayPal, how are our children going to learn what it’s like to really save or budget the increasingly abstract concept of money?

If you are struggling to instill a sense of fiscal responsibility in your child, here are three ideas you might want to try:

Budget your next vacation TOGETHER.

 You may know roughly how much you can afford to spend on your holiday trip to Disney, but does your child?  How many times have you planned a wonderful trip only to be met with complaints from your kids upon arrival?   They do not make the connection between the size of the hotel room and the ability to have lunch with the Princesses. 

So sit down with them and create a budget for the trip.  Give them choices – which hotel should we stay in? The one with the fancy water slide or the one with the bigger rooms?  List out your costs: getting there (car versus plane), rental car (SUV or sedan), hotel, family activities, dining options, etc.   This exercise becomes a math puzzle.  You only have X to spend on all these Ys…

You will be accomplishing two goals that might make for a more pleasant trip. 

One: You have now figured out how much the trip is really going to cost.  Of course, as the parent you always have veto power (I am NOT sleeping in one small hotel room with my spouse and three kids – ever.  No Princess is worth that.)

Two: You now have buy- in from your kids about everything.  No complaining about sharing a bed, going to swim with the dolphins, squeezing three into the backseat of a sedan.  Those sacrifices were made for a reason – sitting next to Beauty instead of the Beast. 

Turn Off Those Lights!

Our electric bill soars in the winter time.  And we have oil heat not electric…for the simple reason that my children leave lights on wherever they go in the house.   All day.  Even when they are at school.  If you are tired of yelling at the kids to turn the lights off, show them the monthly electric bill. 

Create a contest – “If we can reduce the bill by 10% we will go to the movies.” (Thus using up someone else’s electricity, but a minor point, right?)  Make sure the contest spans a few months since it takes 60 days to develop a new habit.     Get them engaged in ways to reduce the bill beyond turning off the lights. 

Move on to the heating bill or the cable bill (do we really need The Poker Channel?)  Since no one ever answers the home phone except Mom, do you really need a landline?  The point here, of course, is not to become Frugal Fanny, but to help your kids understand they do have some control over spending choices.

Not going on a holiday trip this year? 

Then try creating a Gift Budget.  I don’t know about you, but I’m tired of slapping my kids’ names on Christmas gifts that they didn’t even pick out.  With gift budgeting, each family member is allotted a certain dollar amount for gifts.  It can be a separate amount per family member or if you want to get really tricky, just a total.  In a family of five, this requires some serious thought for a seven-year old.  Should she spend it all on Mom (hint, hint) or try to dole it out equally?  What if there is money left over – can she keep it?  I guarantee the gifts will be memorable if not appreciated…

Already tried these ideas?  I’m sure there are many more ways to drive home the importance of making wise financial choices.   Have you found a creative way to reinforce smart financial behavior by your kids?

To answer that question, ask yourself this question first_ Do I want my kids to be responsible for this endeavor in any way or is this my gift to them?  Too many parents skip this philosophical first step to education planning.  And many parents disagree with their spouse on this very topic.  Some believe that having the child pay something towards their education gives him some skin in the game and he is less likely to screw it up.  Others may have been saddled with student loan debt for years after college and don’t want to replicate that situation for their own kids.  

My friend Jane viewed the first two years of her private university education as one long frat party.  Needless to say her parents pulled the plug after sophomore year.  Jane then spent the next year working full-time and trying to save enough to finish her college degree.  When she finally made it back to school, she went on to graduate with honors and a student loan payback schedule.  When I asked her what she was doing to save for her own daughter’s college, she told me she’s opting for a mixed approach – some savings and some financial aid.  And the state university system.  We’ll see how that works out in a few years.  

Whatever you decide philosophically, the way I look at it we really only have two choices:  Accumulate Assets OR Take on Debt to pay for Junior’s education.

Since I prefer earning interest rather than paying interest, I’ll start with the argument for continuing to save for college even when it feels hopeless.  You may disagree and can skip to the “Taking on Humongous Debt” section below.

Saving When It Feels Hopeless

The average cost of state university tuition, room and board is $20,000.  If you have a five-year old, they will be making their first tuition payment around August 2023.  According to my handy college calculator, if you put away $700 per month between now and then in an age-appropriate asset mix of stocks and bonds earning an average 7% per year, you should have enough to pay for four years of college.  

But what if you can’t put away $700 per month?  What if you don’t earn 7%?  And what about saving for retirement at the same time?  The old adage “There are lots of ways to pay for college, but only one way to pay for retirement – what YOU save between now and then” still rings true.  Make sure you are saving adequately for your golden years first.  What’s left over can go to the college savings plan.  And if it’s going to a tax-protected 529 plan, at least you won’t be taxed on the earnings whatever the return may be.   Bottom line: Even if you can’t pay the whole enchilada, the more you save, the less debt you or your child will need to take on down the road.

Taking on Humongous Debt

Now some would argue taking on debt at record-low interest rates allows you to accumulate assets (that earn a higher return) for some other goal (ahem_ like retirement).  But is that really happening?

As of yesterday, the market was up 4% year-to-date.  For the last twelve months, the return is closer to 13%.  Some people are refinancing their mortgages with rates around 3.5%.  That would seem to validate the idea of borrowing against the equity in your home to make college tuition payments.  You could put all your extra cash into the market and come out ahead. 

But a lot more people are still paying 5-6% for mortgage loans and accumulating any extra cash in a savings account paying .01%.  Increasing your debt load now and making 5% interest payments doesn’t make a lot of sense when your other money isn’t earning more.  Planning on borrowing in the future?  Chances are interest rates will be higher than where they are today, making this scenario even less appealing.

A related question I often get is, “But if I save for college, won’t it reduce my chances at qualifying for financial aid?”  There are a few answers to this question, including a couple I can’t print here.  (I have never understood why it’s better to rely on someone else’s money to pay for your kid’s college than your own.)  The reality is 70% of college costs are paid (according to the College Board)  with loans not grants.  So, even if you are completely relying on getting financial aid, chances are you are still going to come up short.

And those student loans?  Here’s the average undergraduate student loan debt upon graduation: $20,000.   Average starting salary for those undergrads lucky enough to find a job: $40,000.  Here’s how long it’s taking kids to pay off their student loans_   10 years. 

Accumulate assets or take on debt – you decide.

If you really don’t like your advisor, by all means – pick a new one.  There are plenty of brokers/advisors/planners out there that want your business.  But before you start asking the standard interview questions of different advisors, ask yourself this question first _

Have I been a good client?

I’ll let you in on an industry secret – Advisors spend more time on their good clients.  Shocking, isn’t it?

Of course,  some advisors will define “good client”  by the dollar amount of assets they bring to the relationship.  There’s only so much you can do about that.   But most advisors have a broader definition.   If you want to have a meaningful and rewarding relationship with your current or next advisor  here are essential actions you should take:

1. Trust

You need to trust that your advisor does have your best interest in mind.  Certified Financial Planners are held to a fiduciary standard that requires this, but what I’m suggesting here is more subtle than that.  Do you really trust your advisor to give you the advice that is best for you and your situation?  Don’t be taken in (or put off by) sales pitches.  Do you trust the person or not?  Because you should.  And if you don’t – then why not?  I’ve seen many people mesmerized by an advisor’s reputation, size of office, client list (does the name Bernie Madoff ring a bell?) but they didn’t trust their own instincts.    Remember, to get the most out of this relationship, you are going to be divulging your innermost financial secrets, hopes and dreams for your money.  If you don’t trust the advisor, then you won’t tell them all that and then they may not give you the most appropriate advice and then you are going to be disappointed that things aren’t working as well as you ‘d like and come to a conclusion that the advisor steered you in the wrong direction.  See how this works?  You have to trust your advisor enough to give them your complete picture.   

The flip side of this action item is that if you can’t muster up some trust for your advisor – you need a different one.  That you do trust.

2. Listen

At some point your advisor is going to ask you to do something with your money that you may not agree with.  That’s okay.  But until that time comes,  listen to her advice and ask questions if you don’t understand.  Good advisors spend time thinking about what their clients need, researching the options and summarizing the action items.  That’s why you are paying them.  If you are not willing to listen to their advice, why are you there?   If you argue about every recommendation, even the best advisor will eventually give up.   Notice I didn’t say FOLLOW, I said LISTEN.   Acknowledge the work and experience behind the recommendation being made.  Advisors love clients that ask questions and strive to understand their advice.  It’s a dialogue, but it’s not an argument.

3. Return their phone calls

Most advisors have many clients.  If they are calling you, it’s for a reason and usually one that is time-sensitive.  If you wait to call them back, an opportunity may be lost, a deadline may have passed. 

If you feel you are being pestered with phone calls, set some parameters with your broker.  No one likes sales calls, so tell your super salesman of a broker that you only want to hear about certain investment ideas or you only want to hear from him once a month…As long as he knows the boundaries, he will usually respect them.  If he doesn’t – get a new broker.

The flip side is if your advisor NEVER calls you and you’d like to hear from him more often.  What do you want to know?  How frequently?  Fee-only planners tend to call clients less than commission-based brokers.  Discuss those expectations with the advisor and make sure it works in their type of  practice.

4. Go to your review appointments

Advisors don’t want to chase you down month after month to discuss their recommendations.   If you are not prompt, the recommendations get stale and lead to disappointment.  Again, understand the expectations up front.  Are you meeting quarterly, semi-annually, or just once a year? Does the advisor’s review schedule work for you?  Or do you really need someone who meets more or less frequently?  Whatever timetable you decide upon, stick to it.

5. Don’t wait until a crisis to ask your advisor to jump through hoops

If the only time you call your advisor is when you needed something yesterday, guess what?  Ever hear of The Boy Who Cried Wolf?  If you are following the advice in 1-4 above, however, chances are the advisor will stay up all night to help you.  Remember, the advisor has other clients, other work, vacation and oftentimes a family.  If you repeatedly call with a “must have immediately” need at 6:00 pm on a Friday, the advisor will stop answering the phone. 

6. Pay your advisor – fairly and on time.

A simple but effective way to stay on the “good client” list.

With fee only advisors, the bill comes when the work is done.  Pay it.  But this action item also applies to relationships with commission-based and Assets Under Management (AUM) brokers as well.   You may not have to write a check, but find out how much compensation your advisor has received from you each year.    If you work with a commission-only broker and you aren’t doing any investing, chances are they aren’t going to have a lot of time to spend with you.

A general rule of thumb – if you pay your broker/advisor/planner between 1-2% of the value of your investments over the course of the year, the cost of their advice is probably reasonable.  If you haven’t spent 1% or you are spending more than 3%, you might need a different fee arrangement.  Do you really know how much you are paying your advisor?

7. Refer them to your friends

Advisors love these type of clients.  If you become a good referral source, an advisor won’t care if you ever do another trade with them. Carry a couple of her business cards, follow up on the referrals and generally be a vocal ambassador for your advisor. You will move to the top of the “good client” list in a hurry.

8. Separate the quality of the advisor from the quality of the market environment

Even the best advisors can’t control the stock and bond markets.  Make sure you don’t blame them for market movements.  Unless you are specifically with an advisor that specializes in market timing, your advisor is probably focused on the longer term.  Therefore, the advice he gives should weather multiple market cycles.    Read #1 again.

9. Don’t rate shop.

If your broker  performs the research and provides you a prompt answer, don’t shop for a slightly better rate somewhere else.  You may find  a better CD, a better insurance quote, a better performing fund.  But if you’ve asked the advisor to spend time researching that investment and taking care of your financial well-being, don’t put your money somewhere else for a tenth of a percent. 

If you’re inclined to want the best deal no matter what, then do the research yourself and consider the impact on your commission-based broker.  Maybe you’re better off with a product-neutral, fee-only advisor who charges for time spent doing the research, not products sold.

10. Say thank you.

So simple, but so effective.  Advisors usually have a pretty thick skin.  They are steeled for rejection and can usually handle upset and angry clients with aplomb.  But they are human too, and need a little positive reinforcement once in a while.

To have the most rewarding relationship with your advisor, make sure you are a GOOD CLIENT.

I, for one, surely hope my spouse and I can continue to travel through this hectic life and arrive at retirement ready to implement all our grand plans together.  After all the ramen dinners,  scraping for that first down payment on a house,  playing rock-paper-scissors to see who changed the next diaper, I’d like to think when we reach 40 years of marriage we would be high-fiving  each other….not turning our backs.

But, given that 50% of marriages end in divorce, I guess it’s best to be prepared.  And thus, in the next few posts, I’m sharing a few gems I’ve learned from my divorcing clients.  In this week’s post, I’ll give some tips for those of you, female or male, who may be thinking about divorce, worried about divorce or who just want some motivation to get more organized…

Get Your Financial Papers in Order

In many ways, this is actually the easiest step in any divorce process, and yet is often left too late.  Everyone should have their financial papers in order, no matter what their marital status.  Of course, there’s usually one spouse that knows where everything is already and one that has no clue.  Don’t be the one that has no clue…

1. Find the bank, brokerage and retirement account statements. 

And I mean, ALL the accounts – not just the ones with your name on them.    If you’ve never seen a statement for your spouses’ 401k, now’s the time to get a copy.   I know, I know, this could actually be a sensitive conversation, so now is also the time to make a list of items you think might exist but can’t verify…it will come in handy later.

And if you’re just doing this to get organized….

THE ORGANIZING BONUS?  You can now easily provide the total value of your assets when you buy that vacation home in retirement.

2. Find the tax returns.

Assuming you filed jointly, you had to sign these returns.  Where are they?  If prepared by a CPA, they can get you a copy.  If done in TurboTax or filed by hand, the IRS certainly has a copy!  The tax return is usually where the rubber hits the road in terms of spousal income, so you want to know this number ahead of time.

THE ORGANIZING BONUS?   You can now respond quickly to the IRS when they audit your return from five years ago… (Okay, not exactly a happy bonus, but a time-saving one nonetheless)

3. Request credit reports. 

For various reasons divorce is often damaging to your credit score.  Make sure you know your score pre-divorce and scour (and I do mean scour) the credit report for any red flags, unfamiliar accounts or delinquent payments.  Make sure you resolve any discrepancies or issues on your own credit report pronto.  You can request a credit report from www.experian.com

THE ORGANIZING BONUS?   Improve your credit scores so lenders expedite that low-interest loan on your vacation home in retirement.

4. Inventory your physical assets.

Ugh.  This might take a while, but knowing what you own, the estimated value of each, and identifying which assets were brought into the marriage versus bought after the marriage will facilitate an equitable split (notice I didn’t say equal) when the time comes.   Oh, and by physical assets I mean things like  furniture and cars and the Fiesta ware you inherited.  Inventorying your other type of “physical” assets comes later, post-divorce and is a blog post for another day and probably a different kind of  writer.

THE ORGANIZING BONUS?  This comes in VERY handy for insurance purposes when your house burns down and you have to move to the vacation home early. 

5. Understand all of your Employee Benefits. 

Especially if you are on your spouse’s plan.  This would include health insurance plans, pension plans (who has those anymore anyway?), flex spending plans, life insurance coverage, etc.  These things cost money if you have to provide them yourself in a post-divorce world.

THE ORGANIZING BONUS?   Wouldn’t you want to know this anyway?

Maybe after you do all of these steps to get your financial papers in order, the temptation to divorce your spouse is lessened (hey, the majority of divorces happen because of arguments about finances).     But if you’re still on the fence, watch for the next post on Preparing a Divorce Budget….

WISE IDEA #1.

 Pay down your credit cards.  If you carry a balance from month to month, pay it off with the refund, tear up the cards and start living within your means.  Harsh, yes – but you’ll get a clean slate and a load off your mind.  If you just commit to going six months without carrying a new balance on your cards, you will have kicked the spending habit.

Can’t quite bring yourself to write that check?  Download your credit card statements and take a look at the interest you paid the credit card companies last year.  Those $100 shoes may have turned into $200 shoes… If not now, when?

WISE IDEA #2.

Fatten up your emergency fund.  Credit card balances are what happens to people without emergency funds.  Calculate 3-6 months of living expenses and make sure you have that separated into an interest-bearing checking or savings account ONLY FOR THIS PURPOSE.  You need it to be liquid, safe and accessible, but not too accessible.  And no, being the first to own an IPAD does not constitute an emergency.

WISE IDEA #3. 

 Contribute more towards your retirement.  Make a Roth IRA contribution if you are eligible.  Make a non-deductible Traditional IRA contribution if you’re not.  Buy an annuity.  Very few people have saved enough for retirement and all of those ways to save come with tax benefits.  If you happen to get your refund before April 15, you can make a 2009 contribution AND a 2010 contribution at the same time.

Why delay your gratification?  The power of compounded growth pays for a lot more  than just one new vacation when you are older – oh, and have time to enjoy it.

WISE IDEA #4. 

 Send your kids to the college of their choice by making a contribution to a 529 plan or a custodial account.  They won’t thank you now, but someday they will…hopefully.  With tuition costs increasing 6% or more a year, don’t count on financial aid covering all your college costs. 

WISE IDEA #5. 

 Make your year end charitable contributions now.  Many non-profits get the majority of their donations in December, so contributions now are usually pleasant surprises and much appreciated.  You still get the deduction and have more to spend on gifts for the holidays!  Everyone wins!

And one more –

Treat yourself to a comprehensive financial plan or at least a quick financial tune-up with a fee-only financial planner.  Getting a better plan in place for your financial future is definitely money well-spent.

What are you doing with your tax refund?

According to the US Department of Agriculture (not sure why THEY were doing this survey, but so be it) it costs the average household approximately $15,000 per year to house, feed & clothe a healthy, active 17-year-old.   So imagine what the cost might be to house, feed, clothe, bathe, drive and medicate a frail parent.  Are you adding  at least $15,000 a year to your projected annual expenses in retirement?

What Exactly Are the Costs You Need to Consider? 

1. Basic living expenses

Food and Shelter are the minimums, but think of all the other incidental increases in cost that happen when another body lives in your house, eats your food, uses your utilities.   For example’s sake, let’s use that $15,000 per year.  If you need to move your parent to an assisted living facility, the costs go up exponentially.  Check out the various types of housing available for seniors at the AARP.org website:  Housing Options.

2. Health care

Routine visits to the doctor are probably covered by Medicare, but who takes care of grandma when she’s got the flu or a broken leg?  What about the non-prescription extras she may need every week?   Does she have private medical insurance to cover the gap with Medicare coverage?   Even seniors with Medicare and private health insurance may not have all their medications covered on an annual basis.  The cost of your time aside, let’s add another $2,000  per year for incidental medical expenses not covered by insurance.   For more on Medicare coverage and out-of-pocket costs, visit Medicare’s website, www.medicare.gov.

3. Transportation

Most elderly lose their ability to drive at some point.  So who’s going to get them to all those doctor appointments or the Senior Center?  Do you need a third car, a car service or just some extra gas?  Add another $1,000 for help with transport.  For senior transportation services in your area, check out the National Association of Area Agencies on Aging website.

4. Paperwork

For some, the financial matters of aging parents are pretty simple.  They may have a couple of sources of income and minimal expenses, but I’ve yet to meet an older person who doesn’t feel overwhelmed by the amount of paperwork they have to complete on a regular basis.  Again, just paying the bills & filing a tax return takes time.  Do you hire someone or take the time to do it yourself?  Cost of tax preparation/bookkeeping= $500 per year.  Many local senior centers offer simple tax filings for minimal or no charge, but if you need more help consider a Daily Money Manager.  Find one at www.aadmm.com.

5. Accessibility of Your Home

Many elderly get unsteady on their feet as they age.  Do you need to build a ramp or grab bars in the bathroom? Will you need a Personal Emergency Response System (pull cords in case they fall)? These costs range from a few hundred dollars to six figures for a complete renovation.  Let’s budget $500/year for renovations, security systems and routine maintenance.  Everything you need to know about modifying your home for an elderly parent can be found at www.homemods.org.

6. Time

Ah.  The hardest to quantify.   Many of the items mentioned above may not require cash out-of-pocket, but will require someone’s dedicated time.  Is that going to be you?  Do you have the flexibility in your workplace to take off for all these activities?  If you are already retired, how does this responsibility fit in with your long-awaited travel plans?  If you do plan to travel, you’ll need some coverage – add another $500/year.  A great service I have used with my own aging mother is Right At Home, located in most states.  You can contract for a few hours a day, a weekend, overnight care or round the clock supervision.

Total Potential Costs?  An extra $20,000 per year  is not unreasonable when your parent moves in with you. 

Wait, you say!  But my mom can pay her own way.  Yes, your parent’s Social Security and Investment Income may cover all or most of the incremental costs, but many parents who move back in with their children are doing so because they may not be able to afford all the help they need living independently or in a managed care facility.  Make sure you really understand your parent’s finances before you are faced with this decision on the eve of your own retirement.

In the meantime, run those retirement projections with an extra $20,000 or so in additional living expenses in mind!