Tag: ask the advisor

Debt: What’s Your Story and How Do You Feel About It?

Debt: What’s Your Story and How Do You Feel About It?

By Mike Desepoli, Heritage

In a recent study, half of Americans said their debt and expenses is equal to or greater than their income. 1 Revolving credit, particularly credit cards, is an increasingly significant part of the equation. According to the Federal Reserve Bank of New York’s Household Debt and Credit report data, Americans’ total credit card debt hit $905 billion in 2017 – an increase of 8% from the previous year. 2

The phrase “credit card debt” usually triggers red flags when we’re talking about long-term financial planning. And in fact, the average US household now carries $15,654 on their cards, and pays $904 annually in interest. 2 But debt, in and of itself, isn’t good or bad. Instead of making a value judgement about how you use debt, when working with clients we like to understand:

  • What is your debt story?
  • What are your attitudes about debt?
  • Why do you feel the way you do?
  • How are your debt levels affecting the Return on Life your money provides?

Having a deeper understanding of the above helps us do a better job positioning your money to work more effectively for you.

What’s the big picture?

Our current high debt levels reflect a previous generation of low interest rates, an active housing market, a robust credit market, and relative peace and prosperity. This meant more consumers with more plastic and more loans. Again, debt is not bad in and of itself, especially in a healthy economy. But from 2007-2009, many highly-leveraged people and companies were vulnerable to foreclosure and bankruptcy during the Great Recession.

People who were born between the Great Depression and World War II grew up in the daily realities of war and lean markets. Unsurprisingly, this group tends to avoid using credit cards when they can. Instead, they rely on the cash in their hands and the checkbooks they balance with pen and paper.

That credit-aversion seems to have skipped the Boomer generation, who, generally speaking, happily used credit cards and home-equity loans.

The current generation of young workers—Millennials—seem to be warier about carrying debt than their parents were.

Young people are entering the workforce at a time when household income is struggling to keep pace with the cost of living. They believe taking on debt would only widen that gap. In particular, the costs of medical care, housing, and food continue to grow faster than income. 2

Many underemployed Millennials are living at home into their late-20s, so they aren’t using credit cards to finance luxury items or buy first homes. Even for millennials who do find good jobs after college, many start their adult lives in the red because of student loans. As of September 2017, the average US household had $46,597 in student loan debt. 2

Millennials are less enthusiastic about investing in the markets. Growing up during the Great Recession shook their faith in the economy. Growing up in the shadow of 9/11 and terrorism, they’ve only known a world unsettled by global unrest.

Millennials are also a more conscientious consumer group than their parents were. They want to spend their time, and their money, on things that help to make the world a better place. They consider personal fiscal responsibility to be part of a greater good.

What’s your story?

While looking at big picture debt trends is useful for predicting where the economy is headed, your Life-Centered Plan is about you. Now would be a great time to take a minute to consider:

  • How do you feel about debt?
  • Why do you think that you feel the way you do?
  • Are you comfortable with your current level of debt?
  • Is your current level of debt causing any problems with one of your loved ones?
  • Do you pay off your credit card balances in full every month?
  • How do your attitudes about debt align or differ with those of your parents? Why do you think that is?

We encourage you to reach out to us and we can take a closer look at your financial situation and help you get on a more comfortable path. Together, we can create a financial plan that will improve your Return on Life.

 

Sources
  1. Half of Americans are spending their entire paycheck (or more) http://money.cnn.com/2017/06/27/pf/expenses/index.html
  2. Nerdwallet’s 2017 American Household Credit Card Debt Study https://www.nerdwallet.com/blog/average-credit-card-debt-household/

 

Managing Investment Risk

Managing Investment Risk

By Mike Desepoli, Heritage

If we know one thing about stock market investors it’s that the better the market performs, the less and less they think about risk. The first thing every investor should know and accept is that there is no such thing as a surefire investment. Risk is a part of the process. No matter what you invest in, there is always a possibility that you won’t turn a profit – or worse: you can lose some or even all of what you put in to it. You can manage risk, though, with a few proven techniques.

Asset Allocation

The first step in managing risk is to practice asset allocation. This means having your money in a variety of asset classes, which include cash, stocks, and bonds. Doing so is a protective measure – typically when stocks are doing well, bonds aren’t, and vice versa. Having some money in cash (or cash equivalents, which are extremely low-risk investments such as Treasury Bills and money market funds) makes sense, because outside of inflation risk – the slow but steady increase in the cost of living – your money is pretty safe.

Generally speaking, cash is the least risky of the asset classes, then bonds, and then stocks. Where you put your money depends largely on what type of investor you are, so be sure to allocate your funds according to your comfort level and needs:

• Aggressive Investor. 75% of holdings in stocks, 15% in bonds, and 10% in cash
• Balanced Investor. 50% of holdings in stocks, 25% in bonds, and 25% in cash
• Conservative Investor. 25% of holdings in stocks, 25% in bonds, and 50% in cash

Diversification

After you spread risk by investing in different asset classes, you can manage it even further through diversification. There are many different types and classes of stocks and bonds – some are much more risky (but with the potential for greater reward) than others. Therefore it is a good idea to divide your funds among a variety of investment vehicles with different risk and reward potentials.

For example, consider purchasing shares of stock in an assortment of different sectors. A sector is a subset of a market, and stocks are often grouped by the company’s type of business. Sectors include utilities, transportation, technology, health care, energy, and communications services. When you diversify your holdings among sectors, you spread risk – if one sector is doing poorly, another is probably doing well.
An easy way to diversify your holdings is with mutual funds, since they are comprised of many different investment types and classes.

Dollar Cost Averaging

Dollar cost averaging is another way of managing investment risk, and nothing can be simpler to do. You can practice dollar cost averaging by purchasing securities with a fixed amount of money at regular intervals. This way you buy more shares when the price is low and fewer shares when the price is high, thus reducing the over-all cost of the shares purchased.
If you have a retirement account through your employer, you already practice dollar cost averaging. You are having a set amount of money deducted from each paycheck deposited into your retirement account. And whether the mutual fund is doing well or poorly, the same amount of money is being invested. Done over many years, you ride out the highs and lows of the market.

Review and adjust your portfolio (your collection of investments) regularly. Even if you are comfortable with a great deal of risk, the closer you get to retirement, the more conservative your investment portfolio should become. The last thing you want is to have the bulk of your money – cash you are expecting to have when you stop working – in investments that have a high likelihood for loss.

Backdoor IRA’s for High Income Earners

Backdoor IRA’s – The Dirty Little Secret

By this point in the year, most of us have filed our taxes and the 2016 tax year is behind us. Not many people have taxes on the mind and they will probably put off re-visiting the topic until next year, however; there is no time like the present to plan for how you can save on your future tax payments. If you are looking to pad your retirement savings, a backdoor IRA may be just the remedy for you.

What you need to know

Roth IRAs are a very popular and attractive investment vehicle for many reasons, and they are a great vehicle to facilitate a backdoor IRA.  The accounts are funded with after-tax dollars, withdrawals in retirement are tax-free, and any earnings in the account are tax-deferred.  Unlike the Traditional IRA, Roth IRAs are not subject to required minimum distributions during retirement, which makes them very appealing when it comes to tax planning.

Unlike with a Traditional IRA, there are income limits to opening a Roth IRA which has left many people earning high salaries believing it is not an option for them.  The law states that a single person with an annual adjusted gross income of $133,000 or more, and a married couple making more than $196,000 cannot directly fund a Roth IRA.  Despite this limitation, there have been no income limits placed on converting funds to a Roth IRA.  This allows for strategic planning to have more tax-free money available in retirement.  For high income earners, this is a fantastic planning tool.

How to do it

This work-around is called a “backdoor” approach.  Most high-income earners are most likely contributing the maximum allowances to their 401k plans. This means additional contributions can be made to a non-deductible Traditional IRA.  The backdoor approach would then have these investors turn around and move/convert those dollars to a Roth IRA.  Because the funds are coming from another retirement account, they are not considered to be a contribution.  The advantage to converting these funds is the tax-free growth that is provided in a Roth IRA. Deploying backdoor IRA’s is a little used strategy because it is widely unknown. Make sure to consult your finance and tax professionals before deploying this strategy.

For more information on this and other strategies for high earners, visit us here.