Have you ever stopped long enough to notice how many tools we have to assist our road travel these days? From traditional traffic lights and road signs, to programmable electronic billboards, GPS, and a bevy of smart-phone apps for every conceivable situation one might encounter on the road. The sheer volume is staggering. We are better informed and more equipped for travel decisions than we have ever been before.

But what about financial signposts? How can we tell if we are doing the financial equivalent of driving the wrong way down a one way street? In a vehicle you’d find warnings from street signs, traffic flow, your GPS, smart-phone, and likely your passengers as well. But when it comes to financial decisions, we don’t typically enjoy the same amount of resources to inform us. Here are a few indicators that you may be travelling in the wrong direction with your finances.

Warning Signs:

– If you cannot tell how much you currently owe without having to look it up
– If you have rolled your credit card balance more than twice
– If you fund your vacation with money you will earn when you get back
– If you do not know how much you should be saving
– If you do not have 3 (preferably 6) months income in cash reserves

These are not condemnations, but rather they are things that should trigger some alarm bells for you that it’s time to address the way things are going. Just as if you were to turn the wrong way down a street, there are the indicators prompting you to take action before the situation deteriorates even further. To do something before it’s too late, and you are beyond the point at which actions can still affect the outcome. Remember that there is a difference between being on the road to financial ruin, and being financially ruined. There is a difference between turning the wrong way down a one way street, and continuing to travel in the same direction until you meet a collision that you may not be able to recover from. As an advisor, I have a responsibility to my clients to help you see the potential hazards down the road and make your financial trip a safe and enjoyable one. And while I’m not quite as ubiquitous as a GPS on your phone, financially speaking I might be the next best thing.

Let’s face it, we all buy things and we will need to buy things our entire life. It’s not necessarily what we buy, but rather the way we choose to pay for them that can have a lasting impact on our financial well being. Especially those things we call Major Capital Purchases. These are things that cannot be paid for in full with our regular monthly cash flow. Certainly things like cars, vacations, weddings are major but a new set of tires for many Americans could be a major capital purchase as well. If you can’t pay for it in full you are going to have to finance it.

Let’s take a closer look at this with the graph below:

The first thing I want you to notice is the black line in the center. This is the Zero Line, and represents the point at which a person has nothing or owes nothing. When you owe more than you have accumulated you are below the zero line. Unfortunately living above the zero line takes more than a good job.

Let’s begin talking about The Debtor (shown in Red)

The Debtor doesn’t have any savings or resources and is forced into borrowing. They borrow the money against their future earnings, and work toward paying it off and getting back to zero. They hope to have finished paying back what they owe before another need arises. They spend their lives working to pay for what they have already spent plus interest. The only way they can support their lifestyle depends on money they have yet to earn. This obligation on future earnings is one of the biggest problems with debt. It can be very depressing when you can’t see the way to even get back to zero. Another difficulty is that when you become a debtor to a creditor, you lose control. The creditor is then in control of your resources, not you.

The Saver (shown in blue)

The Saver, being well aware of the wealth transfers inherent in borrowing at interest, will postpone a purchase until they have saved enough to pay cash in full, up front. However, at the same time they make a purchase they also consume their savings and move back toward that zero line. A very precarious position indeed. A single unforeseen circumstance could lead to depleting their savings bringing them closer to the zero line. The saver constantly moves from having access to money and needing to save to get back to where they were before they had to spend their savings. They do not like to pay interest so the drain their accounts and kill compounding each time they do.

Paying cash seems to be the best way to pay for things because it avoids the necessity to pay interest but to pay cash you must also give up the ability to earn interest on those same dollars.

Another problem with paying cash is that first, you must save it which is not necessarily an easy thing to do. Depending on where you are saving those dollars, the government may also require that you pay taxes on the growth of that money. And when you do make a purchase not only do you consume those savings, but you also negate the ability of those dollars to earn interest because they have been spent. Many people choose to pay cash in order to avoid paying interest to a lender, which seems smart. However, the part that is often missed is that they are also losing interest they could have earned had they not had to pull dollars out of the account to make a purchase in the first place. But it’s not possible to keep the dollars in the account earning interest and still make the purchase, is it?

The Wealth Creator (shown in green)
The Wealth Creator utilizes a unique approach. They also save, but when it is time to make a purchase they use their savings as collateral to secure a loan, preferably at a lower interest rate than they are earning on their money.. Now, there are a couple of key benefits here. The first is that this strategy keeps you from having to deplete your savings to make a purchase. At the same time, it allows those savings to continue to compound interest without interruption. Secondly, while the Wealth Creator does pay interest on the loan, they can often do so at negotiated rates. As the loan is repaid, the amount of savings available to be collateralized increases proportionately until the loan obligation is met. Compound interest works best over time uninterrupted. Resetting compounding on dollars we remove from accounts that are earning interest is not an efficient purchasing strategy.

We all want to make the most of the resources available to us; to be as efficient as we can be while also avoiding wealth transfers. Once a decision has been made to part with our dollars, it is permanent. Since we can never have those dollars back again, it makes sense to spend them wisely. To spend them in a way that fosters the creation of wealth, not the relinquishing of it. Let’s spend some time together to discuss how we might improve your purchasing efficiency

There once was a blind man who was miraculously given his eyesight. For his entire life he had accomplished everything he needed to do without the benefit of eyesight. Instead of utilizing his vision, he leaned heavily on the use of his other senses.

When he was suddenly able to see, he had nothing to relate his new eyesight to. What was once familiar was now strange and complicated. He was seeing things for the very first time, and he did not know how to travel his daily path by sight. In the beginning, even with his repaired eyesight, he still relied heavily on all of his other senses to guide him. But eventually he was able to use his new perspective to inform his other senses about things he was already familiar with from another angle. He was able to see old things in a new way, and was ultimately more informed and better equipped to handle everyday challenges with his newly broadened scope of understanding.

As an advisor, a lot of what I do revolves around helping people to see things from a different perspective than they have before. Many of the concepts we cover are either brand new, or at the very least approached from a new direction. Like the blind man adjusting to his newfound eyesight, it can sometimes be difficult to adjust to a new perspective. And that’s ok.

After all, you don’t know what you don’t know, and you can’t see what you can’t see. But that doesn’t mean that there aren’t things out there that could have a significant impact on your future. My role is to help you to identify threats as well as opportunities, and broaden your understanding with added perspective so that you can address financial challenges with more resources than you have ever had before.

For many people, the term 401k is synonymous with retirement preparation, and sometimes represents the full extent of their preparedness. Such accounts are often included as part of a benefits package provided by employers, and chances are if you have one, most of your retirement savings are being deposited into this account. Given that it can play such a prominent role in our financial picture, it is imperative that you fully understand exactly how these plans work.

So what do Qualified Plans do exactly?

Most people will be familiar with the fact that they defer taxes, which is true. But this term “defer” can often lead to a misunderstanding about what is actually happening. Some people fall victim to the misconception that “deferred” taxes are taxes they are “saving” because the taxes do not have to be paid; which is not true. These are not tax savings plans but rather tax deferred savings plans. The government did not say that you don’t have to pay taxes on the dollars in your Qualified Plan; they said that you don’t have to pay the taxes now.

If not now, then when? Well, later obviously. The key difference between now and later though is relative to your tax bracket. What bracket you are in now, and what bracket you will be in when you decide to take the money out of the account. If you defer the tax and you are in a higher bracket later than you are in today your share of the account will be less. If you are in a lower bracket when you take the money than when you put it in you will get more. The IRS is not going to ask you what tax bracket you were in the day you made the contribution to your account. Their only concern is going to be what tax bracket are you in at the time of withdrawal. Because this is true you will need to make an informed decision about which option is best for you.

The Check Story

“Let’s assume that you call me one day and want to borrow $10,000. I hand you the check, but before you take it you are going to ask me two questions. The first is how much interest am I going to charge you, and the second is when do you have to pay it back?

Suppose I said to you, I am doing fine right now and do not need the money, but there will come a day when I need it, and when I know how much I need we can figure out how much interest I need to charge you to get how much I need.”

Would you cash that check? Probably not, but you are standing in line to do exactly that with the federal government in your qualified plan. They did not say that you don’t owe the tax; they said you can pay us later. At what rate? Now that is a good question.

Understand that Qualified Plans do two things:

1. They defer the tax, AND
2. They defer the tax calculation

Ultimately, the impact these plans can have on your finances either positively or negatively, depends on a number of factors. The first and most fundamental of these is your understanding of the rules of the game, and secondarily the strategy you use to play the game.

Tic-Tac-Toe

You may not remember the first time you played tic-tac-toe, but you can probably guess who won. It was likely the person who showed you how to play the game. The game has only a few simple rules, one is the X, the other O, three in a row wins. As we first learned this game as children, we lost routinely until we learned the strategy of the game. If you have dollars in a Qualified Plan, you are already playing the game. As an advisor, my job is is helping clients employ a winning strategy by better understanding the rules of the game.

Imagine that there are four people in line to purchase tickets at the train station. One after the other, they each purchase one ticket of the same class, on the same train, bound for the same destination. As they board, they take their seats next to each other and after exchanging pleasantries they begin to compare the price of their tickets. They are shocked to discover that they had all paid a different price for what was essentially the same ticket, and none could have realized their own situation without having compared it to the others. Their tickets, all identical, each carried a different total cost to reach the same destination.

Prudence would dictate that you would want the lowest cost if available. However, I can guarantee you that the punch-line hits pretty hard for the person who paid the most for their ticket, and they won’t be laughing. Neither will you if you are unfortunate enough to be caught in the same situation when it is time to pay the taxes that have accrued on your investment accounts.

Buying the Right Ticket

Most people are aware that their investment dollars will grow over time through the power of compound interest. They will either appreciate or depreciate and over time experience both. While attention to gains takes center stage the increasing tax liability on those gains often goes unnoticed. The way you choose to handle this tax liability can have a significant impact on the price of your ticket to be on the investment train. Your tax liability will determine one of the costs you will pay for your ticket. By the time you determine you paid too much it is usually to late.

Rolling earnings into the same taxable account increases the account value and the tax liability. Your partner the federal government is excited about your gains and looking forward to their share of your profits. There are three options to help reduce the tax tax liability on these type of accounts.

1. Flat Tax Strategy: : Move only the earnings. The problem is not the investment account but how the government taxes the account. Keep the principal in the taxable account, earn the interest, and pay the tax on the gain. Move the after tax gain to a tax favored account where those dollars can compound interest uninterrupted by taxes.
2. Immediate Paydown Reducing tax strategy: Move the entire taxable account to an account that compounds interest with not tax on the gains. While this option does have a positive impact on your tax liability it will probably impact your access to the money. You will need to weigh the benefits of each option before choosing this strategy.
3. Reduce account over a period of years: Take a portion of the principal and interest and move it into tax favored account over a period of years that best suits your financial circumstances. The taxable account decreases in value with every withdrawal and the tax favored account the dollars are deposited to continues to grow tax deferred and withdrawn tax free.

What is important to understand is that regardless of which method you choose, the account balance is going to be the same at the end. The only difference will be the cost associated with accumulating that balance along the way. As Benjamin Franklin once remarked: “In this world nothing can be said to be certain, except death and taxes.” We are all going to have to ride this train, but that doesn’t mean we should pay more than we have to for the ticket. The issue is to determine which option best suits how you would like to solve the problem of compounding interest in taxable accounts.

It is likely that during your lifetime you will allocate more dollars to the place you are going to sleep than anything else. As such, the potential to transfer your wealth away unknowingly and unnecessarily as a result of decisions made surrounding your mortgage is just as high. There is a great deal of misinformation and misconception concerning this topic, and often our decisions are made based on hearsay or commonly accepted perceptions, what others have done, or even media influence, not what is necessarily correct.

Choosing a Mortgage

There are so many options available; it can be daunting which option is best to say the least. It is no wonder that making the right choice can be very confusing, and it can be easy to doubt that you have made the right decision even after the choice has been made. Ask yourself this. If the mortgage lending institutions made the same amount on every mortgage option, how many options would there be? Obviously, there would only be one. Since there are so many, it can be helpful to have someone on your side that is more knowledgeable about the subject to steer you clear of the pitfalls.

People tend to maintain different staunchly held views about which mortgage is “best,” and as a result it can be difficult to have an open conversation about it. After all, nobody wants to hear that the decisions they have made might not have been the best ones. What’s more is that these decisions have not been made haphazardly, but with great care and effort. We make decisions based on the things we “know,” which we also think are true. But what if what you “know” turned out not to be true?

The Mortgage Quiz

Let’s run through the mental exercise of taking the following true/false quiz:

1. A large down payment will save you more money over time than a small down payment
2. A 15-year mortgage will save you more money over time than a 30-year mortgage
3. Making extra principal payments saves you money
4. The interest rate is the main factor in determining the cost of a mortgage
5. You are more secure having your house paid off than financed 100%

Chances are you answered most, if not all of these questions with a reasonable degree of certainty. However, if you have made mortgage decisions based on what you thought to be true, and it turns out that the answers are different than what you thought, you could be negatively impacting your wealth potential as a result.

• Does the value of your house go up when you make extra principal payments?
• Do your payments go down?
• Can you easily get to the money in your house after you put it there?

These are just a few of the questions we will discuss together and help you determine which mortgage option is best for you. If what you thought to be true about mortgages turned out not to be true, when would you want to know?

Throughout the years, I’ve found that people tend to have a wide range of expectations that come to mind when they hear the term “Financial Advisor.” And it’s no wonder that sometimes even the advisors themselves have differing opinions on the term, and certainly different approaches to serving their clients. I’d like to outline what it means for me to be a financial advisor for my clients, and it’s not dissimilar to the relationship a golfer has with their caddie.

The Caddie’s Role in Golf

For a touring pro, there is a very unique relationship between them and their caddie. Not only does the caddie carry the players bag, but they also carry with them a wealth of wisdom about the course, the weather conditions, the player, the field, and the game in general. Perhaps more importantly, they also carry the player’s trust to give solid, actionable advice even in tense situations when the stakes are highest. A good caddie provides a reliable sounding board for the decisions ahead, and is often the voice of reason in difficult situations.

My role as a Financial Advisor

While there is no official rule that states a golfer must use a caddie, playing without such a valuable resource can put the player at a competitive disadvantage. Financially speaking, trying to “carry your own bag” by making your own investments and financial decisions might not be the best idea either. The financial advisor, like the caddie can lend a special knowledge of the course, the dangers, layup positions, club selection, and the sucker-pin placements. It’s handy information to have when trying to decide whether to go for it or hold back, especially when everything is on the line. They are also there to help you to eliminate mistakes and avoid unnecessary penalties or even disqualification. A trusted caddie with intimate knowledge of all of the factors surrounding a golfer’s next shot is just as valuable as a good financial advisor when it comes to evaluating your next financial move. And, it can make all the difference in determining where you finish.

Fuzzy Zoeller, after winning the 1979 Masters at Augusta remarked:

“I never had any thought the whole week. I figured my caddie (Jerry Beard) knew the course a lot better than me, so I put out my hand and played whatever club he put in it. I’d say “How hard do I hit it?” He’d tell me and I’d swing. The guys who come down once a year and try to get smart with Mr. Jones’ course are the dumb ones.”

Glittering generalities aside, sometimes the smart play is to simply take advantage of the resources available to you.

If you have had any previous experience with a financial advisor, chances are the conversation revolved around how much money you have, where it’s located, we can do a better job. It would seem that most investment firms share the same singular focus of trying to find better products that earn a higher rate of return which often take more risk. For all of the fancy analytics and mathematical acrobatics available today, nobody has yet figured out how to predict the future. Earning higher returns is certainly not a bad thing, and something we can help you with as well, however we believe we should help our clients avoid money they could be losing unnecessarily before considering options that require more risk. Return is not the only thing to consider when evaluating the efficiency of your own personal economic model.

There are three types of money

The money used to secure your financial future must somehow come from these three areas. Accumulated money represents the dollars you currently have invested and are currently saving. You could focus your attention on these dollars in order to find better investments that potentially pay higher rates of return.

Lifestyle money represents the dollars you are spending to maintain your current standard of living: where you live, what you eat, where you vacation etc. For many people, this is where the conversation ends. While everyone wants to solve their financial problems reducing their current standard of living is not a popular option.

What if there were a way to address the issue without having to incur more risk or impact your present lifestyle? I’m glad you asked!

Transferred money represents the dollars you may be transferring away unknowingly, and unnecessarily. Such as:

How you pay for your house,
– What you pay in taxes
– How you fund your retirement accounts
– Non-deductible interest
– How you pay for major capital purchases like cars, education, weddings, and other large expenses.

There are really only two ways a financial advisor can be of help to you:
1. By finding better products that pay higher rates of return requiring more risk
2. By helping you be more efficient by avoiding unnecessarily losses

I believe that there is more opportunity to serve my clients by helping them first avoid the losses, before trying to pick the winners. My focus with clients begins with eliminating the involuntary and unnecessary wealth transfers. Consider this. There are two ways to fill up a bucket that has holes in it. One way is to pour more in, and the other is to first plug the holes, then the bucket will fill up even if the flow is just a trickle. Which strategy more closely resembles the way you are currently approaching financial management?

One of the tools we are able to utilize when discussing the best course of action to secure your financial future is known as the Personal Economic Model®. Much as a medical doctor would use an anatomical model to convey medical concepts, we use the following model to convey financial concepts.

This model offers a visual representation of the way money flows through your hands. On the left, you will notice the Lifetime Capital Potential tank which illustrates that the amount of money you will control during your lifetime is both large, as well as finite. Once earned your money flows directly to the Tax Filter where the state and federal governments extract tax dollars due from earnings on your monthly cash flow. The after tax balance is then directed to either your Current Lifestyle or your Future Lifestyle determined by your management of the Lifestyle Regulator. Determining the balance of cash flow between your current lifestyle desires and your future lifestyle requirement may be the most important financial decision you will ever make.

Here’s why.

Each and every dollar that is allowed to flow through to your Current Lifestyle is consumed and gone forever. The goal is to accumulate enough money in the Savings and Investment tanks so that by the time you retire, the dollars in those tanks can then be used to satisfy your future lifestyle requirements. Position A would be to have enough in the tanks to live like you live today adjusted for inflation and have your money last at least to your life expectancy. That’s a win, but the icing on the cake would be to accomplish that with little to no impact on your present standard of living, and that is exactly what we strive to help our clients to do.

In working together, we can help you to address the following:
– Optimize the balance between your Current and Future Lifestyles
– Improve efficiency in your current personal economic model
– Design, implement, and execute a plan to secure your financial future
– Limit the impact on your Current Lifestyle dollars (maintain your current standard of living)

It’s a funny thing about advice. Everyone seems to have an overabundance of knowing what others should do, and they have no problem telling you about it, especially when monetary gain is a motivating factor. However, there also seems to be an equal dearth of understanding about who such advice is given to. If you’re anything like us, we do not believe that advice for a “target market” is also solid advice for an individual whether they can be classified as a part of a specific target market or not. Everyone is unique and different individually and with regard to their financial lives, but also in the way they make decisions about their finances as well. We feel that it is prudent to first understand our clients, their individual situations, and what motivates their decisions before offering advice of any kind. This provides a framework within which to begin helping our clients answer the four toughest financial questions they will face.

1. What rate of return do you have to earn on your savings and investment dollars to be able to retire at your current standard of living and have your money last through your life expectancy?

2. How much do you need to save on a monthly or annual basis to be able to retire at your current standard of living and your money last till life expectancy?

3. Doing what you are currently doing, how long will you have to work to be able to retire and live your current lifestyle till life expectancy?

4. If you don’t do anything different than you are doing today, how much will you have to reduce your standard of living at retirement for your money to last to your life expectancy?

The answers to these questions can be given in our first ten minutes together, and they will give you an indication about where you find yourself currently with regard to securing your financial future. Our specialty is rooted in helping folks to improve their current financial position, preferably without impacting their current lifestyle, Our clients can often solve the issues uncovered in the above four questions by focusing first on dollars one could be losing unknowingly and unnecessarily without taking on additional financial risk.

We begin with the seemingly outlandish premise that a solid relationship should be the foundational starting point.