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Better Money Habits: The first 8 “good” money habits (1/2)

Financial Planning Dentist

Finding yourself in a healthy and happy financial life means practicing better money habits. And, putting you and your family in the best position possible. Raising your income, having income that not employment related, mitigating taxes and positioning your assets in a way to provide maximum benefit for your family are all a part of having “good” money habits. Following these eight very controllable tips will have a positive impact on your families outlook.

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. ~ Benjamin Franklin

By Kevin T. Taylor AIF® and Peter Locke CFP®

Pay yourself first

good money habitsFor many, money gets mentally earmarked as spending, investing, saving, and giving away.  For some, finding the right balance among these four categories is difficult but essential, and a budget can be a very useful tool to help you accomplish this. So, one of the best better money habits, is paying yourself first. This becomes the mantra for the most successful savers and is the fuel for a financial plan. Here is the two step “Pay yourself first” plan: 

First create a budget: The only way to start planning is to create a budget. Thinking about both the near-term and long-term financial goals and what a monthly spend looks like and what one you can aspire to have in retirement might look like. This will help generate a baseline for mapping out and putting other better money habits in place. But don’t make the mistake of using this formula, Income – Expenses = Savings. This is the source of most people’s failure to plan. Because it makes you and your future self come last, i.e. the end result of the equation. Create a budget with the future you in mind, that version of your future self is the most important part of the equation. That equation should look like Income – Required Savings = Expenses.  Then create a budget that is less than the expenses amount. Although difficult to implement, this is the priority that financially healthy people adopt.

Automate your savings: Making savings a priority in your budget.  Consider determining a specific amount and making a deposit on a regular basis. Think about your 401k or other company contribution plan where funds are taken automatically from your paycheck and deposited in an investment vehicle or savings plan with every run of payroll. Your personal savings plan should be no different.  In order to do this, you need to know your required rate (read and listen to our required rate podcast for more information) so you know how much savings you need to put away at your required rate to reach your goals. 

Know your tax plan

Good Money HabitsThe entirety of the IRS tax plan is complicated, full of loopholes and derived from years of bolting on special interests onto the code. Hence, the process of doing taxes reflects this. But, the second of the better money habits addresses this. At its core there are four main sources of income: Employment, investments, inheritance and windfalls. Each of these sources may be taxed in different ways and at different levels. Have a plan and control what you can control.  Have two plans for how you want to be taxed:

Tax plan today: You may not feel like you have a lot of control over how you’re taxed and at what rate. But if you take a step back, you will find you have far more control then you may be aware of. Lets build on the budget example.  If you know exactly what your monthly spend looks like, then you can have more control over the total that goes into pre-tax or after-tax savings options. Think about it this way, if you make $100,000 a year but your budget only requires $80,000, then by letting yourself accept all that income you’re likely surrendering somewhere between $5,000 – $9,000 to taxes of the remaining $20,000. This should be written down as a total loss of income that could have been prevented with the use of a budget and a tax plan. 

Tax plan tomorrow: Knowing how to mitigate taxes in your working years is great, but having a plan for after retirement may be more important. One of the most tragic events in retirement is being confronted with the risk of a short fall, well into retirement. Finding out that your shortfall was the result of poor tax planning and income management. Having a plan in place in your working years, for how you fund pre-tax, Roth, and post tax savings gives you options for controlling the amount you will pay in taxes in a given year in retirement. This helps elongate the timeline your cash will survive, and gives you flexibility for a changing taxation landscape. Additionally, having a diverse source of cash flow from investments is a better money habits you will develop. If placed in the proper accounts it helps confirm both the amount and source of income throughout retirement. Every dollar that is mitigated in tax planning in retirement, helps to elongate the plan, support measures for unforeseen risks, and adds to your legacy. 

Remember: Tax nuances exist in every area of wealth planning. There may also be opportunities to incorporate potential tax benefits into your plans but oftentimes there are also negative tax consequences associated with certain decisions. It’s important to step back now to have a vision for yourself, so you can plan accordingly.  

Additionally, when choosing the best investments for your circumstances, taxes should not be the only consideration.  It’s important to factor in the after-tax rate of return in determining tax-efficient investments. For these reasons, it’s crucial to consult with a qualified tax advisor to ensure your circumstances and needs are appropriately accounted for.

Stop living on borrowed time

Good Money HabitsAll borrowed money needs to be divided into two camps, accretive and erosive. When you borrow money you are borrowing from that money’s future potential. It’s time travel, and you are simply robbing the future you, for the benefit of present you. With that in mind, it’s essential that all borrowed money be for the benefit of the future you. So let’s discuss the two different ways money is borrowed:

Accretive: Debt that is for the acquisition of assets that will gain in value over time. The best example is a mortgage, and it’s knowing the difference is one of the better money habits we coach. You borrow money from your future self, to buy an asset that is both accretive to the future version of you, and give the present version of you a place to live. Any time that borrowed capital can grow at a rate faster than the cost you pay for it, you are generating wealth with leverage. When lending rates are low, and asset increases outpace them, it is positive to your net worth to borrow. 

Erosive: This is debt that is borrowed from your future self, at the cost of your future wealth. Examples are credit cards or car payments, where the underlying assets do not appreciate over time, or worse yet, there is no future value of the asset. Think of putting a vacation on debt, there is both a long term handicapping of that money’s capacity to generate wealth and there is no long term asset for future you to settle that debt with.  

Invest for your plan

Good Money HabitsIdentifying your short- and long-term financial goals will help determine which types of investments and planning approaches will have the greatest impact on your financial plan. This will help govern the types of investment you seek out. Knowing your required rate will help you stay focused on the right type of investing. All too often people get swept up in the astronomical and often unrepeatable gains people have seen. This causes people to focus on the upside of an investment without accommodating for the downside. Additionally, this causes clients to drift away from the long term goals in favor of short term market swings. A successful plan and portfolio both have the same common denominator, a steady, and predictable cash flow. Companies that can produce a predictable supply of income, over time, will outperform. But uncovering that potential and pricing it correctly becomes the question. There are two ways to determine if the investments you have will lead to the desired cash flow you want for your goals. Having this as a part of your investment practice is one of the more nuanced better money habits. The two approaches to planning finances:

A simple projection: A simple cash-flow analysis that looks at short- and long-term goals relative to the timeline or investment horizon you have available is a great start. This will give you some idea of the presence of a shortfall in your investments. 

A detailed plan: A comprehensive wealth plan, also referred to as a financial plan, which helps guide individuals towards achieving more complex financial goals throughout their lifetimes and beyond. This takes into account more complex expectations for your wealth, the taxation implications, and uncovers more risks that may cause you to fall short. A financial plan becomes essential if a shortfall is anticipated.

More related articles:

Do I need life insurance?

Most likely yes.  Your financial and family situation will be the deciding factor. If you’re single, have a large amount of savings, and no dependents then life insurance may not be for you. The reason being, unless your savings cannot pay for your debt(s) and that debt would be a burden on the person (most likely family) that takes it on then you don’t need life insurance.  Life insurance is typically purchased if you’re the primary provider for your dependents and spouse. For example, if you own a home with a mortgage and your significant other make 80% of your family’s income, how would you pay your mortgage if they were to unexpectedly pass? If you have kids, how would you support your family? When people are young their debt is usually very high with student loans, car payments, mortgages, kids, etc so one major event or death would be devastating to a primary provider’s family.  For assessing life insurance needs, InSight looks at this math: Mortgage payoff + spending coverage – adjusted net worth = Life Insurance Need  The 30-year number enables us to be very conservative with our estimate and that is always adjustable. The 3.3% withdrawal rate is a safe estimate that the primary provider’s family can safely (withdraw a consistent amount without dipping into principal) for life.  Now the difference between permanent and term, how long you need the coverage, what riders you choose, etc will be up to your plan and goals and will need to be reviewed with a Financial Planner and Insurance Agent.  If you found this helpful please share it and/or leave a comment!

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December 31, 2020 No Comments
spending
Articles
Peter Locke

A December to Remember

https://www.youtube.com/watch?v=WcEylCwkSxEYou may have heard some of these eye catching sales promotions where a guy buys a new car and puts a giant bow on it to surprise his wife. First, under no circumstances should you buy a $50k car without the verbal and emotional consent of your spouse. Second, you should immediately review the glossary of basic sales techniques these commercials employ:  0% APR for the first 12 months Only $2,999 down and $399 a month Free charging for one year on new Tesla Model 3 or Model Y if you buy before the year’s end! Financing for as low as $50 a month for 24 months Enroll in our Rewards Program with our Credit Card and save $200 today on qualified purchases It’s the “buy now, pay later” sales technique that’s been working for decades. Since we live in a consumer world, large corporations know how to make us purchase goods and services we don’t need and can’t afford with creative financing options. If you’re guilty of falling for it, don’t worry we’ve all been there or at least been very tempted by it. Here’s how to not fall victim to sales promotions that seem like a great deal.  Point of sale finance or lending is a way to appeal to all consumers. Those that know what they want now, those that are on the fence, those who didn’t even know they “wanted or needed” something, and those that like flexibility and options instead of traditional purchasing options.  For Dental Practices, offering third party financing for elective procedures or even non-elective expensive procedures where insurance only covers a portion, is what we’ve typically seen from Point of Sale (POS) financing. But now that big banks offer credit cards that are globally accepted pretty much everywhere instead of private label (like a Best Buy) credit card, we’re seeing it pop up pretty much everywhere. For example, I was asked to either pay for or finance a $499 TV? It’s called instant financing. No approval needed. So why are retailers doing this and why should you care? Let’s say you’re looking like I was to buy a new T.V. You go into the store and you were planning on spending no more than $500. You’ve been saving and your old TVs is really small and outdated so it’s time for an upgrade. You go in and you start seeing huge TVs with big red sales signs! Your eyes light up as you go right to the TVs you can afford. You somehow aren’t nearly as excited because guess what? Right next to your $499 TV there is a huge 75 inch brand new 4k, ultrathin, curved TV for $899! The sales representative approaches, you dodge him like he’s trying to sell you girl scout cookies when you just started a diet.  Ten minutes go by and you are suddenly underwhelmed with a lack of excitement due to your 55inch TV that is in your budget being all of a sudden so small and boring. You go back to the huge TV that’s seemed to get louder and brighter. Planet Earth is playing some beautiful scene and you cannot get your mind off of it. All of a sudden the sales representative comes back and somehow this time you’re suddenly almost ready to give up on your “diet”, or budget, as this just looks too good right now. The representative asks you what you’re looking for and before you know it you’re dreaming about this 75in TV being in your family room. He then says what are you looking to spend? You softly say around $500. The representative says well if you buy this TV you’d be saving $300 as there is a big sale right now and on top of that if you sign up for the store’s credit card you’ll get 10% back for future in store purchases. They then tell you that you can finance it at just $30 a month for 30 months.  All of a sudden, you’re sold. $40 a month for 30 months is nothing! But you think to yourself well I need a sound bar if you get this huge TV because the representative just told you that if you buy this TV you get $100 off a new sound bar. He turns up the soundbar and you’re immediately sold. You grab your cart, load the TV and the sound bar and go to the checkout. They offer you the credit card and you say no as if you’ve just saved yourself from a bad decision and then the little cashier machine says $1,185. You then tell the cashier that you’re doing the finance deal and they tell you how great of a deal it is and you feel a little bit better about what you know is a bad decision. Let’s recap. You had a $500 budget and you spent nearly $1,200 in the blink of an eye. This is POS financing at it’s best. You increased your budget 2.5x by just walking into the store but this happens whether you’re online or in person unfortunately.  Now, on top of your new TV you have your mortgage, Netflix, utilities, new furniture, financed computer, car, new coffee machine and all of a sudden your monthly income is being withered away quickly. Well if we look back into our Savings 101, what is rule #1? Income – Savings = Expenses. What are you doing? Income – Expenses = Savings. Now unfortunately, instead of saving $250 a month you’re saving $210 a month. What did we learn in investing 101? The difference of $50 a month can mean hundreds of thousands of dollars later in life.  Don’t let convenience or monthly costs drive your financial decisions. Make saving your priority and what is left is your disposable income. Understand what is truly valuable and what you need vs. what the store/ media makes you think you want.  Guess what? If you think you’re beating the system

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December 14, 2020 No Comments

Investment Bias: Confirmation

Confirmation bias is the natural human tendency to seek specific supportive sources, or overemphasize information confirming our decisions. People will often come to a conclusion, then seek information confirming the decision. Think about buying a car, once you bought the car your brain starts to highlight all the other similar cars on the road. Surely we are not conceited enough to think “there are more of this make and model because I bought the car” and yet your brain helps to draw it into our registry. It might seem backwards, but the seeking alpha and motley fools of the world know this and generate searches and lists confirming your already held conclusions. Confirmation bias can lead investors to be overconfident in an outcome, and as a result over allocate to a position and under hedge a risk. The investment consequences of this confirmation bias may also couple easily with some of the other biases we have discussed, most easily anchoring, endowment, and loss aversion. These “price point biases” are only entrenched when an investor seeks out other support for their price point. Here is a great example of this in action: Open a fresh google search and type in “is (insert company name) stock a”, and stop. Now look at the results, it will likely say “buy”, “good buy”, “good time to buy”, this is a feedback loop Google knows searchers want. Notice the lack of objectivity in the results? Our brains work similarly. We have a conclusion, then seek the supporting evidence to justify it. This overconfidence can result in a false sense that the decision is correct, and risk is not being properly rewarded. Which increases the likelihood of a misstep. A series of psychological experiments have confirmed that in our decision making process, we expel contrarian view points early and to the detriment of rational. We carry a tendency to test ideas in a one-sided way, focusing on one possibility and ignoring alternatives. Explanations for how our brain alters the observed includes wishful thinking and the limited human capacity to process a high volume of conflicting information. Another explanation, and one that might be more insidious, is that confirmation bias helps protect us (at least our ego) from the costs of being wrong.  Rather than investigating in a balanced, objective, and scientific way our brains protect us early from the possibility of having made a mistake through confirmation bias. This is an obvious investment bias. Being overly critical of criticism, and overweighting the value of consensus is not unique to investing. It happens with all of our strongly held beliefs. But investing carries the permanent impairment of wealth. I’ve even heard investors say, “this is why I get a diverse range of opinions, and use several brokers.” That doesn’t solve the bias however. It isn’t the range of options, or the volume of ideas you are evaluating. Recall that Google result was broad, and deep in its sourcing. But it’s the way the brain fabricates a positive or negative weighting as it processes that information that is the root of the bias.

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December 17, 2020 No Comments

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