Getting your financial house in order
By Joseph Hight / Photography by Erick Gibson
It’s like a colonoscopy. Delving into the details of your personal finances can feel like that. Many of us try to avoid it.
Eleanor Blayney, consumer advocate at the Certified Financial Planner Board of Standards in Washington, D.C., says, “This tax season, you have all those financial forms in front of you. Make them do double duty. The information needed for your taxes can be used for a household balance sheet and income statement.”
Kevin Keller, CEO of the CFP Board makes the analogy that going to a financial planner for financial health is like going to your family doctor for medical health.
Norman Kamerow, co-founder of Capital Financial Group/HBeck in Bethesda, Md., advises his clients to “make sure you have a budget, a listing of debt, adequate life insurance and disability income insurance. Have an attorney prepare a will or trust.”
When asked why more people don’t do any of this, one financial planner says it’s like asking why some people don’t exercise adequately.
Simple answer: It’s easier not to.
Might a personal financial advisor help?
With enough financial knowledge, time to do a financial assessment, some research and a capacity to be unemotional about investing, you can try going it alone. There is plenty of help for do-it-yourselfers.
There is easy access to online bank statements, credit card statements, invoices and bills. Personal finance software programs are available—some you can buy and some can be downloaded free. Stocks and mutual fund shares can be traded online. Books on portfolio management and on diversifying risk are abound.
Otherwise, you may benefit from a relationship with a carefully chosen personal financial advisor. A good advisor can help keep you level headed and focused.
For instance, Executive Vice President of Focus Wealth Management in Middleburg Helen Modly’s hard core Republican clients were thinking: “If Obama is elected, it’s a punishment from God for our wayward ways.” And her liberal Democratic clients were thinking: “If Romney is elected the world will end.”
“My job,” she says, “is to keep all of them calm and help them keep their emotions in check.”
John Wolff says it is natural for a client to be emotional about money. He tells his clients at Capital Fiduciary Advisors in Reston that it is his job, not theirs, “to not be emotional about their money.”
Stephan Cassaday, president of Cassaday & Company Wealth Management in McLean, says “Many investors have post-traumatic stress disorder from 2008 and refuse to take any risk. Though they know that choices like CD’s, money funds and bonds can’t help them reach their goals, they are unwilling to take any risk,” steering clear of investing in the stock market.
Fred Hecklinger, 72, has published books on career planning and given seminars on retirement planning throughout Northern Virginia and the D.C.-Metro area. Before Hecklinger retired from Northern Virginia Community College in Alexandria where he was coordinator of counseling and later dean of student services, he sought help from a personal financial advisor. For the past 20 years he has been meeting with his advisors at Ameriprise Financial in Fairfax twice a year. He says Jennifer Gallant and Kelvin Creyts at Ameriprise helped with investments, life insurance, long-term care insurance and with protecting equity during economic downturns.
Though he started with his advisors in his 50s, Hecklinger recommends starting much earlier, “In your 20’s,” he says.
Advice from advisors
Everette Orr, of Orr Financial Planning in McLean, recommends first paying down debt. “Debt isn’t just a problem for those with modest incomes,” he says. “Even high-income households can pile up debt.”
Orr recommends maximizing 401(k) contributions. “Employer matching contributions are free money that shouldn’t be left on the table.”
He also advises everyone to make a will and make sure you have adequate life insurance.”
Cassaday says, “The number one gift you can give your child is to not be a burden on them when you are older. Both parents should max out their tax-deferred retirement savings.” Then, if additional funds are available, he adds, Virginia has several plans for college savings that could be considered. Visit the website virginia529.com.
While contributions to a VA529 account are from after-tax earnings, the website advises that earnings on the accounts grow free from federal tax, and, in most instances, from Virginia state income tax. Withdrawals for qualified higher education expenses are also free from taxes.
The stock market rebound
Cassaday says through September 2012, “All major markets were up over 100 percent on a total return basis since March of 2009, assuming reinvested dividends.”
Stocks to watch in 2013
From analysts at The Motley Fool in Alexandria
It’s the world leader in sports equipment and apparel with an outstanding product reputation, giving the company modest pricing power. It offers investors global exposure with excellent growth prospects particularly in emerging economies. Management has done a solid job of returning value , with share buybacks that have brought share count down 15 percent and a dividend that will continue to grow.
Jason Moser, Senior Analyst
NxStage Medical (NXTM) This company is a force in the large kidney dialysis market. Their System One device allows a patient on dialysis to take control of their care and do their dialysis in the convenience of their home.
Charley Travers, Associate Advisor
Starbucks has more than 17,000 stores and room to grow. The coffee is just a gateway for the company to repeatedly sell customers an experience rooted in comfort, quality, health, community and conscience. Customers’ emotional ties to this are the key for expanding the reach of its brand into new products (Verismo single-cup brewers), new platforms (Evolution Fresh juice bars) and new brands (La Boulange branded foods).
Bryan Hinmon, CFA, Analyst
Arcos Dorados (ARCO)
Arcos Dorados (“Golden Arches” in Spanish) has the exclusive right to own, operate and franchise McDonald’s restaurants in Latin America. Through Arcos Dorados we get exposure to the top fast food brand in one of the most attractive economic regions of the world.
Charley Travers, Associate Advisor
Baidu (Nasdaq: BIDU)
While the internet boom seems like a thing of the past, internet-related technologies are still unfolding in emerging markets. Think of Baidu as the “Google of China.” It takes what we now know is one of the best business models in technology and applies it to China with its greatest economic growth story of the last 25 years. Patient investors should see impressive growth from Baidu.
Andrew Tonner, Technology and Telecom Sector Analyst
Denbury Resources (DNR)
Denbury is a different kind of oil company. Instead of searching for oil, it buys existing oil wells that are in the late stages of their lives. It injects carbon dioxide into the wells to push out the oil that’s been left behind. It owns the only naturally occurring carbon dioxide deposit east of the Mississippi, giving it a competitive advantage over traditional oil companies.
David Meier, Associate Advisor
General Electric (GE)
Whether it’s in energy, healthcare or infrastructure, size really does matter. Recognizing the opportunity, GE reached into its deep pockets and acquired key players in each of these industries over the past few years. At the same time, GE is making long-term investments in research and development. Projects like natural gas fueling stations and a smarter energy grid are in their infancy now, but will pay off in the years ahead.
Isaac Pino, Industrials Analyst
“The financial markets in October 2012 were at, or near record levels,” adds Capital Financial Group’s Kamerow. “Those who were fearful of getting back in the market lost a lot of leverage. The 2008-09 melt down caused most investment portfolios to lose 48 to 52 percent of value, but my clients and others who used professional financial planners suffered losses in the 15 percent area, and were whole again in eight or nine months.”
Most Americans haven’t regained their taste for stocks. As late as August 2012, U.S. stock trading volume was at its lowest level since before the crisis of 2008-2009. In October, Bloomberg news was reporting third quarter 2012 trading volume 14 percent below the same period a year earlier.
Wolff says investors are still scarred by the crisis. “Retail investors are missing out,” he says.
Local housing values quick rebound
Building equity in housing has always been a way U.S. households built net worth. And, the housing bust of 2006-2007 put a dent in that option. But housing values may have bottomed out in 2012. The Associated Press reported that a measure of U.S. home prices had jumped 4.6 percent over the year in August 2012, the largest increase in six years.
But the report also stated that home sales, housing starts and prices all remained below healthy levels.
Lisa Sturtevant, of the Center for Regional Analysis at George Mason University, says Washington area housing has performed better than others. The turnaround in housing prices in greater Northern Virginia began in 2009. By September 2012 prices had returned to more than 80 percent of peak levels. Alexandria and Arlington prices were nearly back to full peak values. Suburban Maryland housing began its recovery later, but by September 2012, Maryland home prices had risen to nearly 70 percent of their peak levels.
So where are Americans putting their money?
Federal Reserve data in October 2012 showed Americans funneled a record $6.9 trillion into savings accounts that pay interest rates less than zero after factoring in inflation. That’s like paying banks and credit unions to borrow your money.
This is what undo fear of risk can do to money management. The key to managing risk is diversification, not what amounts to putting money into a mattress.
Modly admits there is a lot of uncertainty. She says no matter who ended up winning the election in November, she can’t believe that Congress wouldn’t have moved to avoid the ‘fiscal cliff’ of tax increases and spending cuts that loomed for January 2013. “If they were to take effect, it would absolutely take the air out of our recovery balloon.” Congress probably will not have solved the long-term budget issues, she says, but at least they will have “kicked it down the road another year.”
By the time you are reading this we will know if Modly was right. But taxes may be going up. For example, she says beginning in January 2013, new taxes on higher income taxpayers related to Medicare take effect, as mandated under the Affordable Health Care Act.
Your personal debt-to-income ratio, explained, calculated
Most of us have a fairly good idea of our cash flow. A personal debt-to-income ratio, or DTI, can give a more precise indication of current finances. The first number needed is annual gross income as reported on your tax return or added up from a year of pay stubs. Annual income is divided by 12 to get a monthly gross income (MGI).
Add up monthly payments on installment debt, including monthly minimum payments on credit card debt, other revolving credit or loan payment obligations. The best source for this is your credit report. Don’t forget child support payments, if applicable. Don’t include any credit cards on which you pay off the balances every month, since these are living expenses, not loans. Add up monthly housing costs, including mortgage principal, interest, home insurance, taxes, mortgage insurance and housing association dues. The sum is your monthly debt payment obligation, or MDPO.
Divide MDPO by MGI and multiply by 100 percent to get your DTI.
When deciding to approve a loan, many lenders use this number along with a more limited DTI which is simply monthly gross income divided by monthly housing costs. Lenders look for these ratios to fall within certain considered safe ranges, which can differ depending on the lender and on the reason for the loan.
Know your FICO score, commonly referred to as a credit score, as reported on a credit report. It is used by banks, issuers of credit cards and other lenders when deciding on loan applications. FICO stands for Fair, Isaac and Company, the firm that first developed the credit scoring system.
The law allows one free credit report annually from the three credit reporting agencies, Experian, Equifax and TransUnion. You can get the reports online at AnnualCreditReport.com, or by calling 1-800-322-8228 or by mail, after downloading a form from AnnualCreditReport.com.
Consumers have the right to a free copy of their credit score if they are turned down for a loan, or if they are offered a rate other than the rate that the lender gives its best customers.
The FICO score is built as experience with credit accumulates. The key to a good score is to pay on time. If you miss a payment, get current as soon as possible. Try to keep balances below 25 percent of the credit limit on accounts. This means you can sometimes raise your FICO score by asking your credit card issuer for an increase in your credit limit.
FICO scores range between 300 and 850. A score above 650 generally indicates a very good credit history.
401(k) vs. IRA
Retiring with a 401(k) retirement account? Leave that nest egg as is? Roll it over into an Individual Retirement Account (IRA)? There are benefits and drawbacks to both. Modly says the rules are complex. If you leave your employer for any reason after you are 55 or older, distributions may be taken from a 401(k) without the 10 percent premature distribution penalty. With IRAs you must wait until you are 59-and-a-half to escape the penalty. But IRAs provide more investment options.
Cassaday says, “We always recommend a rollover because of the additional flexibility and greater investment options.”
Getting financial advice moving through life stages
Not all of us can profit from or afford wealth management and high end investment advice. Capital Fiduciary Advisors’ John Wolff says there is help no matter what your circumstances.
Individuals or young couples starting out should have good tax preparation help, preferably working with a certified public accountant. They should look for a financial planner to help set long-term goals and strategies, including saving for children’s college and a secure retirement.
They should be maximizing contributions to their retirement accounts. Many employers offer assistance in choosing the best investment options in the company 401(k) for risk tolerance and age. As assets accumulate, they should seek out a financial advisor for investment advice and portfolio management.
If they are fortunate, as wealth accumulates, they may need high-end wealth management services and finally, an estate attorney.
“That pretty much covers it,” Wolff says.
Orr makes it sound even simpler. He says building wealth is not complicated, “Live on less than you make and invest the difference.”
Create a monthly budget. All it takes is some paper and a pencil, but using a spreadsheet can make it more formal. A Microsoft website offers a template that can be downloaded to an Excel spreadsheet. office.microsoft.com > templates > Excel
Where to look for savings:
Homes and mortgages
Homes mortgage interest rates at the time of this writing were at or near historic lows and were projected to remain low through 2013 and beyond. If you haven’t refinanced a home mortgage recently and can qualify, check out the pros and cons of refinancing now. If you don’t own, 2013 may be a good time to buy, and for sellers, a good time to put a home on the market.
Life insurance and auto insurance rates have been falling. Look for savings by bundling home and auto with one insurer. Term life insurance offers the most insurance per dollar of premiums.
With the low interest rates, offers on refinancing car loans abound. Check Pen Fed Credit Union, Wells Fargo or your own lender. Grocery store offers of gasoline discounts can be real savings. For commuting into Washington, think carpooling or taking advantage of the ‘slug lines’ to and from commuter lots.
Use grocery store coupons and check with coupon sites on the web. Check out the website slickdeals.net, which calls itself “a user-driven deal sharing site,” providing tips and deals offered by users. Those items you bring to the cleaners, do they really need dry cleaning or will simple laundering do? Big box wholesale or discount shopping can save money if you have a large family and can buy in bulk.
Many studies have found no additional health effects from expensive nutritional supplements over a healthy diet with plenty of fresh fruits and vegetables. In season, compare prices at farmers markets to grocery store prices. Think of adding a home freezer and buying meat in bulk.
Cable TV bills can be a source of savings, scrutinize to see if you are using all the services you are paying for. Check for discounts when bundling phone, TV and internet services.
Check your cell phone bill. Are you paying for more minutes than you are using? Do you need all of that texting and data service? Can you do with that old model smartphone? (When the Apple iPhone 5 came out, Verizon Wireless was offering a free Apple iPhone 4 to customers.) Can you use a pre-paid cell phone from a grocery or drug store?
In winter, turn down the thermostat at night, or install one that can be programmed to do it automatically.
Check to see if dining out spending is too high. Tickets for professional sporting events can be expensive. Think minor league baseball in Prince William County, high school or college sports for better prices. Look at county parks for recreation and lesson opportunities at good prices. For vacation savings think closer to home and off season.
Painting, putting in a fence, patio or deck? Think ‘do-it-yourself.’ Replacing those old windows on your house? Yes, it can save a modest amount on heating bills but the savings are paltry compared to the expense of installing new high quality windows. So make the decision on factors like looks, convenience, reducing the need for painting and the feeling of draftiness in winter.
If you are offered interest-free transfers to a credit card account, be sure to factor in the one-time transfer fee, which can be as much as four percent or more of the balance transferred. If you make the transfer, be sure to pay off the balance before the end of the n- interest period or you could be hit with a large back interest charge. Similarly, be sure to make the required monthly minimum payment.