What to bring to your first meeting with a financial advisor

Working with a new advisor can be daunting. In the first meeting, both parties have a lot to learn about each other. The advisor should make information about themselves and their abilities available to you through a website or mailing before the meeting. What they learn about you, however, depends entirely on what you decide to tell them.

What you need too bring will depend partly on what you hope to accomplish, but in general, the more information you give your advisor, the more specific and useful the advice you receive will be. Gather these important things and take the time to think about what you need:

• Your spouse. While both partners do not need to earn the same amount, or even participate equally in household finances, it is very important that you and your spouse understand how the other thinks about money.

• Account for all of your assets. Ideally, you will have statements for bank accounts, investment accounts and retirement accounts. In addition, know the value of your home and any other significant property you own.

• Tally up your debts. The important information about debt is the balance, interest rate and payment terms. At a minimum, write down the balance, interest rate, monthly payment and expected maturity date. Make sure to include everything you owe - credit cards, student loans, car loans and mortgages.

• Know your income and how reliable it is. Bring a pay stub if you have one that shows your gross pay and any withholdings. If you work a regular job, this is easy, if you work on a freelance, part time or contract basis, you'll have to do a little more work estimating what your income will be in the future.

• Know your specific goals. If you plan on buying a vehicle, home or college education in the near future, write down how much you expect that to cost.

• A notebook. Your advisor should send you a record of any actual recommendations they make for you. You should still take notes and have somewhere to keep your questions written down.

• Your story. Your advisor needs to work with you. They need to understand who you are in order to tailor their advice to you. Be prepared to talk about how you view the money you have and what you want it to do for you. While you don't have to bring in every transaction statement, a clear idea of where your money goes every month is critical.

In addition to these standard things, your specific situation or goals may demand more specific information.

• Tax returns. If you have complicated taxes, are meeting with a CPA, or are looking for ways to lower your taxes, bring a tax return. It will be useful for your advisor to see if you've missed any good deductions.

• Real estate information. If you are looking to buy a new home or move, bring information about what your new home might cost. Details about the area will be useful in helping determine what you can afford and how much your lifestyle and finances will be impacted by the move.

• Children or parents. If you are helping manage your parent's affairs, or looking to pass on wealth to your children, bring them. An advisor can help you determine what is appropriate information to share and provide factual information for the relationship.

Remember that an advisor cannot help you with things that they do not know about. The more information an advisor works with, the better your advice will be.

Finding the One

Finding the One

http://www.piggyplanit.com/#!Finding-The-One/b6954/5791035e0cf27c01035b647c

how to prioritize

This photo of a tree growing from the walls of the Tin Hau Temple in China was taken while on a recent CFA trip to Hong Kong.  Goes to show that with enough persistence, you can reach great heights.  Now, let's tie this in to personal finance.

Everyone has the same financial goals, just in different amounts. This article shows how people rank some key financial priorities. While posed as a generational divide article, it should actually pit generations against a more objective ranking of priorities. It says that Millennials are getting their priorities wrong, but it appears that Generation X does too.

Here is my ranking of how most people should prioritize these seven goals and some reasoning behind it. While everyone's situation is unique (if you don't plan to have kids, why save for their college?) this should be a useful reference for any financial plan.

1. Emergency Fund. Every plan starts with this. Period. Your emergency fund should be able to cover several months of expenses, a few months of minimum payments on any debt and insurance deductibles (health, home, vehicle, etc). Always have cash set aside before you start investing for other goals. I do not get paid for cash my clients hold at their banks, but I would never recommend they go without it. For those who really do not want cash, there are a few ways to reimagine the emergency fund: low cost lines of credit (credit cards or HELOCs) or this investment based emergency fund outlined by Betterment.
2. Retirement. This is probably the most expensive decision anyone will make. Even if you are one of the lucky 18% (and dwindling!) of workers covered by a pension, you may still need additional funds to maintain the lifestyle you want. For most workers, Social Security and their own savings is all they will have. Retirement savings should start as early as possible and always be taking place in the background. This is easy if your employer offers a retirement plan, but if not, it is on your shoulders.
3. High Interest Debt. People often wonder why this is less important than having an emergency savings. After all, paying 10-20% for old credit card debt is more expensive than the almost 0% interest you hope to earn on a cash savings account. However, if you have an emergency, more cash is more useful than less debt. I am not opposed to considering high interest debt your worst emergency if your financial situation is otherwise great.
4. House. Everyone needs to live somewhere. This is not a super high priority, however, because of all the options available for financing the purchase. While a 20% down prime mortgage may be the best option, first time buyer programs and 3% down FHA loans ease the burden a lot. Especially right now, money is cheap and buying a house shouldn't be all that difficult. However, if you never plan on owning a home, it is perfectly acceptable to leave this one out. If you plan on renting forever, you should have plenty of money set aside for future rent payments. If you already own your house outright, your emergency saving should take emergency maintenance into account.
5. Own Student Loans, Lower priced debt. If you have debt, keep paying on it!
6. Future Education Expenses. College is a big expense, no doubt. It is also a hugely stressful decision with a lot of complicating factors and media attention. However, it should not be a high priority for several reasons. College costs are actually very controllable, you simply have to pick a school in your price range. If you want to go to a more expensive school, there are ways to reduce that cost through public and private scholarships and work-study programs. Taking a year off to work, or getting started at a community college can not only reduce the cost but improve chances of getting merit based scholarships. Lastly, there are always student loans. Student loans are not ideal, but with income based repayment plans, forgiveness for some public service careers and reasonable interest rates make them a tool that deserves a good look. For those who have taken care of everything else, their state's 529 plan may be a good way to get a few tax advantages while getting an early start saving for future education expenses.
7. Future Health Care Expenses. By now, we're all supposed to have health insurance. While your plan may not be perfect, it should limit your out of pocket costs, keeping it to an amount that your emergency fund would cover in, well, an emergency. After taking care of ongoing healthcare costs, future expenses should be a pretty small consideration.

Like I said, this should be a useful reference for your financial plan. It is not tailored to your situation. How to meet these priorities and what accounts and tools to use is a whole different discussion.

What priorities do you keep the highest?

avoiding mistakes

Everyone makes mistakes. In much of life, we learn the most by making our own mistakes and figuring our way out of them. When it comes to your money, however, mistakes can get very, very expensive. Here are a few mistakes that are very costly, but easy to avoid.

1. Not getting started early. At an oft-quoted 7% annual return, your money will double roughly every 10 years. That means that your money will quadruple in twenty years, or increase 8- and 16-fold over 30 and 40 years. If you are saving for retirement at 65, putting money away at age 25 is twice as effective as waiting until age 35 and four times as effective as waiting until 45!
2. Getting into high fee products. Fees take a haircut right off the top of your accounts. So-called "Loads" on some mutual funds may take around 5.5% of your initial investment - which needs 6% returns to recover! Variable annuities and riders on them also rob your account and performance. Surrender charges of up to 10% keep you locked into restrictive products for up to 10 years and annual fees easily top 2% for even the most basic line. With fee only advisors, discount brokers and services like Betterment, there is no need to pay much at all to get your investments on track.
3. Not understanding debts. Debt is a double edged sword - it can be incredibly useful and sometimes the only way to afford something, but the extra cost of interest can sometimes become a unsustainable burden on its own. Keep your eye on interest rates - a 4-5% mortgage is some of the cheapest money available and it may not be worth it to pay off if your extra cash could be be earning more invested elsewhere. Introductory credit card rates may be attractive, but if they are hiding a high regular rate, make sure that balance is low as possible before interest kicks in.

While you may learn from making financial mistakes - they are much better avoided completely. A little time with a calculator and a knowledgabe financial advisor can show you how much these mistakes could end up costing you. It's better to see the risk of a hypothetical mistake before you actually make it!

when you're gone

Having beneficiaries on your bank and investment accounts is an important and useful tool for managing your estate when you're gone. Most tax deferred accounts, such as 401(k)s and IRAs, require a beneficiary be listed on the account, but it is possible to name beneficiaries for almost any account you have.

There are two types of beneficiaries - primary and contingent. You can designate any share of the account to any number of people under either of these types. For example, you may want to put a spouse as sole primary beneficiary, so that if something should happen to you, they get the entire account, and put children as contingent beneficiaries, so that if something should happen to you and your spouse, your children split the account.

It is important to review and update your beneficiary information to make sure it is relevant. If you have recently gotten married, divorced or had children, you should check and see who you have named as beneficiaries. Often, a young person starting a job may put a parent or sibling as a beneficiary. If this is not changed, children or spouses could be left out accidentally.

One neat benefit of using named beneficiaries on an account is that it avoids probate. While probate in itself is does not have to be a big deal, it is a time consuming process that can be avoided with a little bit of work now. To inherit an account a beneficiary typically just has to produce proof of ID and a death certificate. Be sure that your named beneficiaries are still the ones you want to inherit your accounts, as this is a fairly final act.

Some states require that your spouse either be sole primary beneficiary or consent to being left off. Mississippi does not require this, but check with the custodian of your account to be sure.

Take a moment to think about your estate and what will happen when you are gone. Naming beneficiaries eases the transition process, but just make sure it is going where you want it. This is your last chance to have a say in it!

the long term

Investment Advisors like to talk about returns in the long term. By long term I generally mean somewhere between "more than 10 years" and "pretty much forever." We talk about the long term for good reason. In the short term, stock investments can swing in any direction - from the dark days of 2008 (S&P 500 down 37%) to the bounce the next year (up 28%) to a boring 2011 (barely up 2%) to the puzzlingly exhuberant 2013 (roaring up over 32%!). It just doesn't make sense to talk about what might happen in the next year or two. Looking back further the S&P 500 is generally cited to have average returns of about 7% a year (that happens to be bang at where returns have been for the past 10 years). But again, we don't know what will happen in any given year, only that the long term has been good.

We also talk about the long term because your biggest financial decision is a long term decision - retirement. The decision to end your income and rely on what you have saved is a huge decision that you can look forward to from your first paycheck.

It is also the long term that is your greatest helper when trying to reach that goal.

Returns can vary year to year, but thanks to compounding, having a positive return for a longer period is always better than that same return over a shorter period.

For example, at the oft-cited 7% return, $1 saved up for 20 years would turn into $3.87. If that is short of your savings goal, you need to adjust one of two things - the return or the time. To double this in the same time period, you would need a return near 11%. While the stock market has had plenty of 11%+ years, the long term average is still only 7% and you are unlikely to find 4% of outperformance that persists for 20 years.

The easiest way to double your money is just to wait. At the same average return on 7%, waiting another 10 years - or better yet - starting 10 years earlier, would turn your original $1 into $7.61. Chasing higher returns not only improbable, but is probably risky as well - but fortunately, time is on your side.

So there you go - the easiest way to double your money is just to wait. The more time you give yourself to save, the more you will have. Get started saving and investing as soon as possible!

paying off debt

Last week I paid off the last of my student loans. I did not have a lot to start with, so finally getting rid of them after only 4 years was not a difficult task.

Paying off debt can be a huge emotional relief. It seems like it would be a financially savvy move too - but that is not always the case. Let's look at when it makes sense, and when it does not. The general rule of thumb is that you should pay off debt when the interest rate is as high as, or higher than what you could earn on that money elsewhere. For a point of reference, I generally look at long term investments earning 6% or more (over 10-20 year periods).

Mortgages are the biggest debts Americans owe. These are very long term debts and money is cheap right now! With my mortgage at 3.5% I am in no hurry to pay that off, as I expect my long term investments to earn a premium over that. However, even at these low rates, there are special cases. There are various thresholds which may benefit the homeowner to be under:

• Paying a little extra off before you refinance may help put you under a threshold to get a better rate. Namely, prime rate mortgages generally require 20% equity or more, so if you owe $121,000 on a $150,000 home, paying an extra $1,000 might translate into big savings on interest. 
• Certain loans may have Mortgage Insurance Payments which go away once you hit a certain threshold. For instance, FHA loans typically require 22% equity before the mortgage insurance payment goes away. The insurance payment will vary with the program, so check with your mortgage servicer to see where your threshold is.
• Refinancing. If interest rates are lower than when you got your mortgage, look into refinancing. Though the monthly payment may be higher, a shorter term loan may have a lower interest rate, and the faster amortization will mean you pay less interest overall.

Credit Card debt is a big problem. While this is some of the most flexible debt you can obtain, you pay dearly for that flexibility.

• Check your interest rate. Rates on credit cards are typically variable and if you carry a balance, will probably only rise. Average APR right now is over 15%, though cards with rates from 20-30% are not uncommon. With an interest rate of 18%, every $66 you owe translates to about a dollar of interest a month - that's money you never benefited from.
• Many cards come with an introductory 0% APR. If you need to, take advantage of this, but you will want to pay down the balance aggressively before the interest rate shows up.
• Lower your total credit utilization. This is a question of thresholds again. Your utilization ratio is your total balance outstanding to your total credit available. This total is from all of the cards in your name - 50% would mean that the sum of all of your balances is half of the sum of all of your credit limits. The recommendation is to keep the ratio under 30%, but the lower you go, the better. This accounts for almost a third of your FICO credit score, so it may be worthwhile to pay down even a low or 0% interest card if you need your credit score to drift up.

Student loans are in the headlines in very scary ways lately. Rising use of student loans has been in a vicious cycle of being needed to pay ever higher tuition while also making it easier to bid up the cost of said tuition. In general, student loans are a great idea - it is some of the easiest debt you can get, and you expect to earn enough to comfortably pay for it when you graduate. The problem now is that people are not getting payed quite what they expected. Government program loans are typically fixed rate and for a 10 year term while private loans are have variable rate options and different terms. The lowest rates are for undergraduate loans, but graduate and parent loans are a much higher rate that may usefully be paid off early. There are repayment programs available to help ease the cost of the loans when you first start paying them back.

Debt can be intimidating, but that doesn't mean it can't be useful as well. The decision to pay off debt is just as important to consider carefully as the decision to take the debt on in the first place.