Do I need a Financial Plan? part four - Investments

July 14, 2017

Do I need a financial plan?

I have a bias on this topic and with good reason. Most people don’t know what financial planning is or what it accomplishes. To build yourself a financial plan, you first need to go through the financial planning process, which is where the real value is found!!

The first part was on Cash Flow/Budgeting here, second was on Insurance here, and last week was Tax Planning here.

Hopefully, through these examples, you can learn a little bit more about what the financial planning process can accomplish and a few red flags you can look for when going through your own finances.

#4 Investments.

Investments are usually the most exciting topic because investing always sounds sexy.

Expenses!!!

The mistake: Not looking at the internal expenses of the funds in your portfolio, random expenses of your 401k plan, management fees, or the cost of an up-front sales charge on A-Class mutual funds.

The risk: Expenses detract from the returns you will be receiving from investing. This is one of the few areas you can control when it comes to investing.

Example of a fund with 0.68% in annual expenses.

The fix: First thing you need to do is find the expense ratio of your existing funds in your portfolio. Grab one of your statements and look for the ticker symbol of each fund. Enter the symbol into the search engine of your choice, I find that yahoo finance works well. You will be able to locate the expenses of your fund noted as the “Expense Ratio”. If you’re investing in index funds you should have an expense ratio under 0.15% (lower is better), if you have actively managed funds, look for expense ratios under 0.50%. If you can find a morningstar link in your search, it should show you where the expenses of your fund fit compared to other similar funds.

Example of a fund with 1.29% in annual expenses.

The cost: This is huge! If you are comparing two large cap funds and one is 1.15% and the other is 0.15%, you can switch to the lower expense fund and save yourself 1% on an annual basis. On a $1,000,000 portfolio that is $10,000 a year. Spread that over thirty years and that is a significant amount of money that is not in your pocket. Expenses compound just the same as interest.

My most extreme real world example: Over the last year the highest expense fund one of my clients had was 1.12%. By looking through their Retirement Plans (401k, 403b, and 457) we were able to drop their entire portfolio expense to 0.06%. Large retirement plans often have some very low expense options where small retirement plans tend not to have the greatest options. Look at what you have and compare to other options available to you.

Asset Allocation

The mistake: Being unaware of tilts that your portfolios are subject to. Your asset allocation will dictate the returns you’re receiving and is one component of an investment strategy.

The risk: Tilting your portfolio to any one asset class can give you concentration risk and will subject you to the ebb and flow of that asset class. If you aren’t invested in many asset classes you are also likely to pick and choose when to get in and out of them. This is not a good strategy.

The fix: Look at your portfolio to see where your assets are held. Do you have positions in US Stocks? Are they spread among Large, Mid, and Small Cap? Do you have International exposure? What types of Fixed Income are you holding? Next see how much you are holding in each asset class to compare. What is your percentage in Equities? What is your percentage in Fixed Income?

Sometimes US Large Cap stocks will perform well! This is 2016.

The cost: The likelihood of long term over/underperformance is more likely in a wonky asset allocation. It is very difficult to go through these swings without considering making a change to your portfolio. Making a change to your investment strategy based on emotion is a poor approach and can have an enormous impact on the future of your portfolio.

Sometimes International Stocks will perform well! This is 2017 year to date.

My most extreme real world example: It’s a common recommendation in many books to invest in “only” the S&P 500 or one index at a time. While that may be a good strategy for someone, it’s probably not for everyone. You need to have a high risk tolerance to go through long swings of over/under performance. To mitigate the long swings of over/under performance you should consider having Mid Cap, Small Cap, International, Emerging Markets, and Fixed Income positions. Or at least know the up/downside of not being in them and make that decision for yourself. After discussing this strategy with a client that was planning to invest their money outside their 401k into the S&P 500, we found that they had a very low cost S&P 500 index fund available in their 401k (0.01%) which allowed us to explore alternate investment options for their non-401k investments that ultimately made their portfolio cheaper and more efficient!

Diversification

The mistake: Similar to asset allocation, a lack of differing investments. Looking for uncorrelated asset classes is ideal but can be difficult for traditional investments.

The risk: Concentrated portfolios can hold a lot of risk. There is an adage that “you get rich by concentration and you stay rich by diversification.” The flipside is that taking a concentrated risk can blow up your entire portfolio.

The fix: While looking at your portfolio for asset allocation, you can look to see how many positions you’re holding in each asset class. With broad market funds you will likely be well diversified unless you stick to one industry. For example, holding Facebook, Google, and Apple is not diversified (all tech) but holding Facebook, Google, Apple, Wal-Mart, GE, and Pfizer would be much more appropriate if the size of the holdings are similar. The alternative is to invest in a fund that invests in an index where you will get hundreds of companies for a very low cost.

The cost: Concentrated portfolios can have a very positive effect on your portfolio or a very negative effect on your portfolio. The cost of underperformance will be lower than average returns which will put you behind. The cost of over performance can create a bias of higher expected returns that may or may not continue. I can’t stress knowing your risks and your tolerance for them enough. Assuming low expenses and a comfortable asset allocation, your investment strategy is a largely personal preference.

S&P 500 vs Procter and Gamble over the last 5 years.

My most extreme real world example: I often see entire portfolios filled with individual Large Cap US positions with little thought given to anything else. The worst I’ve seen was someone that had their entire personal net worth invested in one US Large cap company. For several years that one stock outperformed their spouse’s diversified portfolio until it didn’t. In a serious way. There is an entire world to invest in and many opportunities to take advantage of. The benefit of investing across the globe is that you will be in some assets that do well while others don’t. This reduces portfolio volatility which is a really good thing for most investors.

Managing Wealth is about Managing Risk

Learning about markets and investments will make you a more comfortable and confident investor. Even if you decide not to do it on your own, you will have an understanding of what your advisor is talking about and your conversations together will be much more constructive.

As you can see, focusing on expenses, asset allocation, and diversification can have a drastic and positive impact on your investments. When you focus on areas you can control, you will become comfortable with what you can’t. This will increase the likelihood your portfolio will perform how the markets are performing.

So there you have it! I hope this has been a helpful series.

Do you like seeing real world examples? Let me know what you would like to hear about from me in the future!

Do I need a Financial Plan? part three - What about taxes?

July 7, 2017

Do I need a financial plan?

What about Taxes?

I’m going to share several real world examples of mistakes I found and fixed for my clients that will save them an enormous amount of stress and money over time. This will be a 4 part series: Cash Flow/Budgeting, Insurance, Taxes, and Investments. For each section, I’ll go through The Mistake, The Risk, The Fix, The Savings and then provide a Real World Example. The first part was on Cash Flow/Budgeting here, last week was Insurance here, and this week is all about tax.

Hopefully, through these examples, you can learn a little bit more about what the financial planning process can accomplish and a few red flags you can look for when going through your own finances.

#3 Taxes

Reducing your tax liability is the result of years of appropriate planning. When you create a strategy and follow it your entire life, you will save a significant amount of money on taxes.

The mistake: Saving/Investing into only one tax advantaged account throughout your life.

The risk: This limits your ability when it comes to distributions, including into retirement. Every distribution from a Traditional IRA, 401k, or DB plan is considered income. The more you distribute in any year the larger your tax liability.

The fix: If you still have time to save you can start saving in a tax efficient manner. This can include Roth contributions and tax efficient investments within a taxable account. If you are nearing and into retirement you can consider Roth conversions in years with lower taxable income and increasing tax efficient investments into a taxable account.

The cost: There are pros and cons to every savings strategy. The benefit to Traditional IRA, 401k, and Defined Benefit contribution is that you are reducing current year income to pay tax in the future. When you are switching from Traditional to either Roth or Taxable contributions you will be increasing your current year tax liability.

My most extreme real-world example: The higher your income needs in retirement, the more important proper tax planning becomes. Every dollar you take out of a traditional IRA, 401k, or Defined Benefit plan is taxed as income, that means the more you take out of one of those accounts, the less money you will receive after tax on a percentage basis. The real world example I often see is not planning for large one-time expenditures in retirement when you only have one type of tax-qualified account available. If you buy a car with cash from a retirement account after age 59.5, that $30k car is subject to your tax rate. That could turn it into a $45k-$60k expense after income taxes are paid.

Second most extreme real-world example: Having multiple account types but only taking money out of a taxable account so that you don’t feel the burden of Traditional IRA/401k distributions come tax time. Having a “slow drip” on your Traditional IRA/401k is better in the long run than completely distributing a taxable or Roth in any one year and then taking full distributions from a Traditional IRA/401k the next. Be aware of the long-term impact of your decisions when it comes to making retirement distributions.

The mistake: Not realizing the taxable impact of exercising stock options (ISO, NQSO, Warrants) or selling restricted stock units (RSUs).

The risk: There are various risks to not having a strategy behind liquidating your options and RSUs. In relation to tax, the top two are:

Not leaving enough cash set aside for the taxable impact
Not realizing there are separate taxable events between exercising options and then selling them.

The fix:

At a minimum be aware that you will owe tax on your gains and will owe a balance around April 15th of the year after you exercise. On the more conservative side, set cash aside for the liability. If you know your tax bracket you can use that as a guide for a percentage to set aside.
If you are willing to hold exercised options for a year, your tax implication will go from short-term to long-term capital gains.

The cost:

Inability to pay taxes at tax time will result in monthly penalties until your balance is paid off.
Depending on your income tax bracket this can be a significant amount of money saved on tax. Upwards of 20-30% of your gain.

As you can see, proper tax planning is an extremely important part of your financial planning. We diversify your account types so that you have options when it comes time to start distributing all the dollars you’ve saved throughout your life. So there you have it! Next week I will cover common mistakes I regularly see on your investments and ways to fix. Tune in!

Do I need a Financial Plan? part two - Protect your Investment!!

June 30, 2017

Do I need a financial plan?

PROTECT YOUR INVESTMENT!!

I’m going to share several real world examples of mistakes I found and fixed for my clients that will save them an enormous amount of stress and money over time. This will be a 4 part series: Cash Flow/Budgeting, Insurance, Taxes, and Investments. For each section, I’ll go through The Mistake, The Risk, The Fix, The Savings and then provide a Real World Example. Last week we covered Cash Flow/Budgeting here, this week is Insurance.

Hopefully, through these examples you can learn a little bit more about what the financial planning process can accomplish and a few red flags you can look for when going through your own finances.

#2 Insurance

The mistake: Auto/Home/Liability/Umbrella - having very low limits of liability

The risk: With automotive liability, if you’re found to be at fault in an accident which caused damage and/or injuries you may be liable for damages or costs associated with their injuries. With personal home/renters/umbrella liability coverage, it may cover bodily injury or property damage caused by your actions or negligence. Any dollar amounts owed beyond your liability policy limits will be coming out of your pocket.

The fix: Increase your limits of liability on your policies, I usually recommend the max your auto/renters/home insurer offers ($500k-$1m which can then be aligned with your additional liability/umbrella policy). You can add additional liability coverage beyond those policies with an Umbrella policy.

The cost: Increasing liability on Auto/Home/Liability is usually pretty inexpensive (recently a client went from $100k liability to $1m liability on their auto policy for an extra $180 a year).

My most extreme real-world example: Missing a rider on umbrella coverage for a rental property. As an owner renting your property, you are subjecting yourself to increased liability. As soon as you start to use personal property to earn income, the insurance company may look at this as a business and the risk may not be covered. Depending on your insurer, you can either add a rider on your existing homeowners/umbrella coverage or start a separate policy. Are your risks properly insured given your occupation and investments?

The mistake: Too much or too little life insurance

The risk: The only downside to having too much life insurance is that your monthly outlays could be saved elsewhere. The downside to having too little life insurance is that your family will be unable to continue their existing lifestyle if you pass away and this is a huge problem.

The fix: Decrease or increase coverage

The cost:

If you have too much life insurance you should consider reducing it. If you’re reducing whole life coverage your monthly cost savings could be enormous.
If you have too little coverage, you should consider increasing it. The cost of increasing coverage can be variable depending on the type of Life Insurance you would like to acquire (term, whole life, universal life, variable life, additional group coverage) and how much coverage you should add. Term can be inexpensive (healthy 35-year-old male could get $1,000,000 20-year level term for ~$1,000 a year). Whole and universal life are variable in cost but are usually more expensive than term for the same coverage. The upside to whole/universal life is that a portion of your deposits grow a cash value within the policy and the cash value is accessible at any point in time via various methods.

My most extreme real-world example: A year before a couple became my clients, they were sold whole life policies a few years before they wanted to retire. Most whole life policies need to be funded for seven years before you should stop paying on them (tax reasons), this wasn’t the best plan for them before retirement. We did an analysis that illustrated that they were over insured. Considering their savings and additional insurance, we could reduce their coverage and monthly life insurance outlays by over $1,000 a month. That extra thousand a month is now going to pay off debt, pad their retirement accounts, and is $1k less per month they will need to drain their retirement accounts in retirement. If you subscribe to the 4% retirement withdrawal rate, that is $300k of their portfolio that either doesn’t need to be spent down or doesn’t need to be saved ($12,000/4%=$300,000)

The mistake: No disability coverage. I see this most often with freelancers.

The risk: Inability to meet monthly financial obligations or drain emergency funds if you have a disability. A claim may be made for something as little as a medical procedure that has you out of work for a month (if your disability policy is past the elimination period).

The fix: Shop disability income and disability overhead expense policies.

The cost: This varies depending from the coverage. Several hundred to several thousand dollars a year.

My most extreme real-world example: At a prior firm, we had a client that was a high earner go on a disability claim in their 50’s. Their policy covered them for $15k/month until they turned age 65. Since the policy was paid by them and not an employer, their benefit was paid to them tax free. $15k per month for 10 years is $1,800,000 tax free! ($15,000 x 12months x 10 years). This is money they could use for living expenses, healthcare expenses, or to save for the future (many long-term disabilities will cause you to be separated from service from your employer, this means you can no longer contribute to your employer’s retirement plans or receive a match).

As you can see, risk management is an extremely important part of your financial planning. It is there to protect your nest egg in the event of an accident, death, or inability to work due to “disability” (long or short). Protect your investment!!

Next week I will cover common mistakes I regularly see on your tax planning and ways to fix. Tune in!

Do I need a Financial Plan? part one

June 23, 2017

Do I need a financial plan?

I'll admit, I have a bias on this topic and with good reason. Most people don’t know what financial planning is or what it accomplishes. To build yourself a financial plan, you first need to go through the financial planning process. Going through the process is where the real value is found!!

I’m going to share several real world examples of mistakes I found and fixed for my clients that will save them an enormous amount of stress and money over time. This will be a 4 part series: Cash Flow/Budgeting, Insurance, Taxes, and Investments. For each section, I’ll go through The Mistake, The Risk, The Fix, The Savings and then provide a Real World Example. Hopefully, through these examples you can learn a little bit more about what the financial planning process can accomplish and a few red flags you can look for when going through your own finances.

#1 Cash Flow/Budgeting

What am I talking about? You earn a certain amount of money every month… What’s your monthly take home pay? How much of it are you spending? How much are you saving? How much are you spending in various categories and how does that stack up against your peers?

There is a fine line between spending on current lifestyle and saving/investing for your future.

Being distinct on what you want to accomplish in your life makes this area more clear.

The mistake: Not having a budget or knowing where your money is going, spending too much on current lifestyle

The risk: Not having any money set aside for future large purchases, one off expenses, retirement, etc

The fix: Start a budget, Spend less (duh) ie. Save more to accomplish what you want.

The savings: This will add up to several hundred to thousands of dollars A MONTH! An extra thousand dollars a month not spent is $12k a year. Over 40 years that is $480,000. If that is invested in a standard portfolio (7%) that $1,000 a month can turn into $2.6 million dollars!

After saving $2.6m dollars you could use a 4% withdrawal rate to distribute $105k to yourself annually. Is that enough to live on?

An extreme real world example: In prepping a client for retirement we worked through their budget. I helped them realize that by reducing their monthly spending from $18,000 per month to $9,000 a month over the next 4-5 years. This will save them, their portfolio, and their estate $4,320,000 over a 40 year period. So that’s what they are doing.

As you can see, combing through your expenses, becoming aware of where your money is going, and creating a budget based off what you find gives you the power to accomplish great things! Next week I will cover common mistakes I regularly see on your insurances. Tune in!

Investing $1,000/month at a 7% interest rate over 40 years!

Green Money Journal - Investing isn’t Enough: 6 Things You Need to do to Grow Your Wealth

June 20, 2017

Hello everyone!

I wrote an article for the Green Money Journal that was published in their February 2017 issue. You can find it here: http://www.greenmoneyjournal.com/february-2017/investing-isnt-enough-6-things-you-need-to-do-to-grow-your-wealth/

In this article you will find advice on these 6 topics:

Define your Vision, Values and Goals
Savings vs Spending
How to Calculate your Net Worth
How to Build a Budget
How to Build an Emergency Fund
and Paying Down your Debts

If you don't feel like you have a handle on these topics, take a few minutes to read through these tips! Go kick some ass!

Getting Ahead Financially

August 30, 2016

Getting Ahead Financially

Hi All! Do you ever find yourself wondering, “Seriously, how do I get ahead financially?” or, “What do I even measure to see how I’m doing financially?”

The good news is, there IS one metric you can use to measure how you are doing, and track yourself to get ahead and it’s Net Worth! Boom. So, how do you grow your net worth?

Is it all about how much money you make?

Growing your net worth is not about how much money you ARE making. It’s about how much of your money you AREN’T spending. If you’re accumulating 50% of your paycheck in savings and investments every month, you can imagine where that will get you over time... It’s about flipping the usual view of money – I only make this amount - and focusing on what you can do to get ahead – I get to save this amount! Once this strategy becomes a habit and your way of life, growing your income will only accelerate the growth of your nest egg!

Most of us make a significant amount of money on an annual basis. Your 10-year-old self would probably have their mind blown by knowing how much money you now make. Being an adult has a lot of challenges and monetary demands, but take some time and think: how would your 10-year-old self feel about what you do with all of your income? Proud? Ashamed? Surprised?

Now, take some time and think: how do you, at your current age, view what you do with your paycheck? How would your life change if you looked at your paycheck and be able to marvel at how much you got to keep to yourself?

Growing your net worth will allow you many financial freedoms throughout your life. Having a nest egg set aside will help you throughout job changes, accomplishing financial goals, providing flexibility, becoming financially free, and even helping start your own business (if that’s what you desire).

So, work on flipping your views from negative ‘I only have this’ to positive ‘I get to keep all of this’. Then you’ll be able to watch your net worth grow and get yourself ahead financially!

How has Crafted Wealth been getting ahead?

Summer is always busy, so besides spending a lot of time with our clients, we’ve been working on some fun, new, interactive content to help you out. Over the next few weeks, our Building Blocks pieces will have interactive checklists so that you can track your progress throughout each of the four blocks. You’ll be able to mark things done, push off for the future, and set reminders for yourself to revisit the list at a later date. All of which can be sent to your email and doesn’t require you to sign up for yet another service (unless you want to!). This has been made possible by our friends at Tribe.do. We’ve never been more excited to help you get ahead with your finances!

How do you make the most of working with a Certified Financial Planner while in your 30’s

June 24, 2016

How do you make the most of working with a Certified Financial Planner while in your 30’s

Hi all! I’ve helped many people in their 30’s get their finances in order. Today I want to walk through a real world situation so you can see what is possible with our help. Our lives get more complicated as we age and we’ve seen the weight lifted by the clarity and organization we’ve brought to our clients.

Compared to your 20's, your 30's can mean a lot of change. You may have been through multiple jobs, moved states, gotten married, had kids, gone through a divorce, etc. You’ve had life happen and you’ve been going through it as an adult. It can be difficult to keep your financial ducks in a row throughout this period. This is especially true when two people are making joint financial decisions. You are starting to wonder if it’s possible to stay on track, organized, and on the same page with your spouse/significant other. You feel like you want the help of a financial planner, but aren’t sure you can afford it, where to start, or if you need all the bells and whistles that come with a full financial plan. Well, don’t worry because this is what we do and we have options for you! 

For ideas on a number of ways to engage a Certified Financial Planner, see our post here. 

Case Study time!!!

This is a real client that came to me with investment questions. They had just received a reasonable windfall, didn't consider themselves to be “good” with money, and wanted some advice.

What do we do first?

Ask some questions of course!

Why have you reached out to a financial planner at this point in your life? What do you hope to gain by working with a financial planner? What does clarity look like to you?

It’s important to reflect on your financial history and the story you tell your self about money. What is your understanding of the financial markets and investing in general? What’s your earliest memory surrounding investing? Asking these questions helps me learn a lot about you and may actually remind yourself of something you’ve long forgotten. Through discussion, we learn why you feel you may not be “good” with money. In this case, none of their friends were “good” with money. There was no one there to give constructive criticism when going through financial decisions and no good example to model themselves after. The default in their life was to spend what you made.

What’s next?

So what else did we cover in this session?

I knew we had plenty of time to chat so we started calculating their Net Worth, they were surprised to see what it was.

We also went through their budget and current outlook of cash flow. They had a few expenses that were pushing them above their current monthly income. Three of those expenses were going away over the next couple months which would soon give them a net monthly positive income! They were excited about that, now they can decide what to do with it. Save, spend, invest, or give? Lots of options.

We also covered investments. Taking their current understanding, we walked through how to take advantage of financial markets for long-term gain. We learned their tolerance for risk which helped us determine their asset allocation (split between stocks and bonds). We did an audit of their 401k to see if their current allocation was in line with their risk tolerance. We also made sure that they were invested in the least expensive, most efficient mutual funds that their 401k offered. 

All of this was done in a two-hour Ask-Me-Anything session. They left the meeting with a spreadsheet that held their net worth, current budget, and hopeful future budget (their goal budget!). They also got their risk tolerance report and an analysis of the fund choices in their 401k via Morningstar software. The Morningstar reports have a breakdown of asset allocation and mutual fund expenses as well as many other in-depth data. Lots of value and questions answered in a short amount of time. 

If this relationship were to officially continue in the Hand-Crafted variety we would have replaced the spreadsheets with ongoing tracking through Advizr, transferred investment accounts to TD Ameritrade, invested according to their risk tolerance and asset allocation, and proactively worked through their personal financial story via hopes, goals, and values conversations to start reframing their focus. Working through this is pivotal to your future success. When you approach your finances with your goals in mind it’s easy to decide where to put income, bonuses, and unexpected windfalls as they come into your life.

Takeaways

When you’re working through your own finances, it’s helpful to have someone to provide expertise and act as a sounding board. Especially, like the client in this case study, if you have no good role models or others to turn to.

When you’re working through your finances with a partner, it can be helpful to have a third party to work with. Instead of conversations breaking down to “you vs me” you’ll have someone to help you work through joint goals. This will give you mutual understanding and clarity. You’ll be able to work together to get what you want out of life.

As financial planners a lot of the time we’re here for accountability and proactive planning. It’s important to live a proactive, financially healthy lifestyle. That’s what an ongoing relationship with a financial planner is all about!

What other financial or life planning questions would you like answered? Let me know and I can answer them in a future blog post. 

How do you find a REAL financial advisor?

June 17, 2016

What is a Fiduciary and what’s all the hype about? 

Have you watched John Oliver’s June 12th episode? Episode here. It was about retirement plans, their fees, and how to best avoid them. He kept repeating that if you want to work with a financial advisor, make sure they are a fiduciary. That’s because a fiduciary is legally obligated to work in your best interests. 

I get it, this is a weird industry. We have huge companies who’s “Financial Advisors” operate as broker dealers, insurance salesman, and get paid commissions on sales. Getting paid commission isn’t inherently bad but it muddies the waters when it comes to advice. When working with a professional you want to know that the advice you're receiving is best for you and the person you're working with isn’t a salesman selling their company’s products. 

While looking for a fiduciary, set your sights on a Certified Financial Planner.

Financial Advisor versus Certified Financial Planner (CFP)

What’s the difference in working with a Certified Financial Planner over someone labeled as a Financial Advisor, Financial Coach, Wealth Advisor, Financial Consultant, etc? Certified Financial Planners provide all aspects of the wealth building process and not just investment management. The wealth building process includes financial planning, cash flow/budgeting, debt management, retirement, insurance, education, income tax, estate planning, and investment management. These are all critical aspects to keeping you and your family financially healthy. You will be less likely to make critical mistakes or have chronic issues. You will use the services that a CFP provides at the same or lower cost than working with an investment-only financial advisor.

Why is a CFP held in high regards? A Financial Advisor with the CFP designation has a bachelor’s degree, gone through the CFP educational curriculum (9 principal topics), studied a massive breadth of material (78 detailed areas), has passed the grueling CFP exam, has a minimum of three years of experience, and has signed the CFP boards ethical standards. That’s why when looking for a financial advisor, I find it important to not only look for a fiduciary but someone who also has their CFP designation.

To further improve your odds of finding a "REAL" financial advisor, use NAPFA.org and XYplanningnework.com. You can use both sites to search for a Fee-Only CFP near you. Good advice doesn’t need to be expensive and working with a CFP and fiduciary means it will be in your best interests and tailored to you. 

Thank you John Oliver and team for using your platform to inform all your followers about the financial advice industry! You have a broad reach and are helping us “REAL” financial advisors spread the word.

How do you make the most of working with a Certified Financial Planner while in your 20’s?

June 10, 2016

How do you make the most of working with a Certified Financial Planner while in your 20’s?

Hi all! Today I want to talk about the options Crafted Wealth has for those just beginning to take control of their own financial lives.

Let’s say you’re out of school, making a decent income, feel like you are living a frugal lifestyle, working on paying off your student loans. You're starting to wonder if you’re on the right track, wondering what’s next, or if there is anything you’re missing. You feel like you want the help of a financial planner, but aren’t sure you can afford it, or if you need all the bells and whistles that come with a full financial plan. Well, don’t worry because Crafted Wealth has options for you!

Brief Industry History

Before we talk about what we do have, let’s talk about how this all started. Not too long ago your options to get financial advice were pretty limited. They were:

Investment managers - who weren’t likely to talk to you unless you had over $250k+ and even if they did talk with you, it only involved investments and not comprehensive financial planning. At a younger age, having investment only conversations without financial planning isn’t valuable.

Brokers – who make a living through commissions on the products they sell, things like front-load mutual funds and insurance products. Brokers aren’t required to act in your best interests unlike Registered Investment Advisors (RIA). So how do you know, since brokers aren’t fiduciaries, meaning they aren’t legally required to act in your best interest like Crafted Wealth is, if the advice they give is what's best for you?

So, you either had to figure out how to get from $0 to $250k in investments on your own or you’re subject to working with a broker, neither being a very good option.

The good news is, over the last few years there has been a huge shift in the financial world. There are many of us that have been pioneering a new part of the industry. Fee-only firms with Certified Financial Planners on tap! You can get advice from a fiduciary for an affordable upfront, hourly, or annual fee. That is what we are offering at Crafted Wealth.

Case Studies

So let’s get back to you. What can Crafted Wealth do for you?

There are a ton of pointers and advice I can give to set you on the right track from the start. It's my job to help figure out what those pointers need to be based on what you want to accomplish and where you are currently standing. Some typical cases are:

#1- I’ve just got some questions

You don’t think you’re ready for a full planning relationship but want someone to go to for questions.

You feel that you could get your questions answered in around a two-hour period. Easy, a lot of advisors have a “Ask-Me-Anything” or a “Quick Start” program that is exactly that. $500 up front for two hours of their time and you can ask any question under the sun. If you need more time or have extra questions, you may be able to engage on an hourly basis after that.

This is a great way to ease into a relationship with a professional with a low cost barrier. Plus side is that you now have experience with a CFP that you can go back to for any other future questions. Crafted Wealth has that, schedule a “Ask-Me-Anything” here.

#2 – I have more than questions, I want some help with the basics.

You want a deep dive into your financial foundations: Net Worth, Budgeting, Emergency Funds, and Cash-Flow/Student Loan Planning. You’re also looking for access to an online tool to use to help track your progress. You are considering paying for an ongoing relationship with your CFP.

Cash flow planning is one of the core financial foundations to flexibility within your life. It’s the starting point for most conversations I have. Cash-flow planning starts with an audit of your existing monthly expenses that we can start to use for your personal budget. With an audit we will learn what percentage of your income you are spending every month on both fixed and variable expenses. As an example, if you’ve chosen to rent an expensive apartment and an expensive car that takes up a significant amount of your monthly cash flow (fixed expenses) it will give you less flexibility to take advantage of non-monthly opportunities like traveling, saving/investing, or other hobby expenditures (optional expenses). Neither is right or wrong but it’s good to be aware of these things to make sure you’re spending your money in areas that you actually value.

Working through your financial foundations is $1,000 for two initial conversations and $1,200 a year to continue an ongoing relationship with reviews and advice. The $1,200 can be broken out into monthly or quarterly payments. You could also get setup for $1k, opt out of the ongoing guidance and reengage with us on an hourly basis if/when you have more questions. This may be a more economical solution for you.

Crafted Wealth has the Get-Started program – schedule a meeting here.

#3 – I want help with Investments

What do you do if you’re looking for someone to help with investments too? Have no fear, we are here!

There are a handful of us that offer our traditional investment management services with no investment minimum as long as you are also engaging us for financial planning (Hourly, Ask-Me-Anything, or Get-Started).

I’m in that boat because investments are one of the power tools in your financial tool belt. It’s good to build an investment philosophy for yourself at a young age. Starting to understand investing early will give you a lot of flexibility as you grow older.

This service starts at 1% of AUM and falls as your assets grow.

#4 – I want help with everything.

You already know you want a full ongoing relationship with a Certified Financial Planner.

In this case you are a perfect fit for our Hand-Crafted Financial Planning process. This is where most of our client relationships fit. We have conversations around what you want out of life, discuss your values, goals, and big dreams, use the wealth building process to help you get there, and act as a guide throughout your life. The full wealth building process entails knowing your financial foundations, and engaging in retirement, income tax, insurance, education planning, and investment management.

You get access to the full Advizr suite which is a cloud based financial planning software to track your finances and goals. You warehouse your life planning on your own mindmap through MindMeister and receive your own “One (or more) Page Financial Plan”. If you have us managing your investments through TD Ameritrade, you will have access to their online platform.

When you start working with us, our goal is to get you to the hand-crafted planning process as quickly as you’re able. It’s where the full power of working with a financial planner is unleashed!

Starting fresh with a Hand-Crafted plan means there is a $2,400 upfront planning fee and a $2,400 minimum annual ongoing fee (broken out monthly/quarterly). Annual fees are based on your Net Worth and Income. This structure aligns our goals and reduces likelihood for conflicts of interest. As Hand-Crafted planning clients our only incentive is to help you grow yourself and your net worth!

Schedule a Hand-Crafted Planning meeting here.

Crafted Wealth has a variety of options that can be used by those in all different stages of your financial life. We want to provide services for you starting from your first job all the way through retirement so we’ve built ourselves to be able to do just that because there should not be a high barrier in order to get professional advice. We provide fee-only fiduciary services to those that want a “REAL” Financial Advisor. If you have any questions about any of our services, please don’t hesitate to ask!

WTF is a Roth IRA?

June 3, 2016

You have probably heard that you should put your money into a Roth IRA, but why? Today I’m here to tell you why I love the Roth IRA and why you should consider it in your planning.

When you are building a savings plan for yourself you have a ton of options where to put your money. Most of you have your savings and checking and if you work with a larger company you may have access to a 401k. But what if you want to save more and do so in a tax-efficient manner?

Taxes...

The United States government has given you some powerful incentives to save for retirement. They incentivize retirement savings by allowing certain accounts to grow tax-deferred or tax-free. For many people, the default account type is a taxable account that is taxed on an annual basis. That means that your investment gets a haircut every year which is inefficient in the long run. When you earn interest in your savings account, you will receive a 1099 at the end of the year. You must add the income from your 1099 to your taxable income and pay tax on that. Gross, but reality. Fortunately, there are a few government incentives while saving through Roth IRAs, Traditional 401ks, and others.

In a Roth IRA, you earn a dollar, pay taxes on that dollar, contribute the difference, and then let your Roth IRA balance grow tax free. You are paying your taxes up front to get tax-free growth throughout your life.

In your Traditional 401k, you earn a dollar and can contribute that whole dollar into your 401k. Each dollar that you contribute (up to $18,000 for those under 50 and $24,000 for those over 50) will reduce your current year taxable income dollar for dollar. You skip upfront taxes, allow your full dollar to grow tax-deferred, and then your dollar is taxed when distributed in retirement. Your retirement distributions are taxed as ordinary income. The US government also REQUIRES you to take minimum distributions from your 401k starting at age 70.5. Currently, the Roth IRA doesn’t have that requirement.

Advantages to Roth IRA, pay tax now and get tax-free growth.

Advantages to 401k, lower your AGI, tax-deferred growth, pay tax in future.

Why this matters early on in your career...

While you are in your twenties you might be in the lowest tax bracket of your career. This means that your annual tax bill may be lower now than it will ever be! This gives you a STRONG incentive to start contributing to a Roth IRA before your earnings eclipse the limits. In 2016 you’re allowed full contributions of $5,500 or $6,500 after age 50 to a Roth IRA if your Modified Adjusted Gross Income (MAGI) is under $117k and you file Single or under $184k and you file Married Filing Jointly. For those with slightly higher incomes, they allow partial contributions with incomes up to $132k filing Single and $194k Married Filing Jointly. Since your Roth dollars are going into your account after tax, it’s best to do so when you aren’t paying much in tax in the first place.

Downsides...

Any money put into your Roth IRA is for retirement and investment gains/earnings can’t be accessed until age 59.5 without incurring a 10% penalty. That means that any short term spending goals you have shouldn’t come out of these accounts. However, you are allowed to take your contributions out tax and penalty free at any time and Uncle Sam allows you to take a distribution of earnings before age 59.5 for the following exceptions:

Exceptions. You may not have to pay the 10% additional tax in the following situations.

You have reached age 59½.
You are totally and permanently disabled.
You are the beneficiary of a deceased IRA owner.
You use the distribution to buy, build, or rebuild a first home which is limited to a max of $10k.
The distributions are part of a series of substantially equal payments.
You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1951) of your adjusted gross income (defined earlier) for the year.
You are paying medical insurance premiums during a period of unemployment.
The distributions are not more than your qualified higher education expenses.
The distribution is due to an IRS levy of the qualified plan.
The distribution is a qualified reservist distribution.

Where does it fit into your plan?

I always like to help clients diversify. This means taxation diversification just as much as owning a well-diversified portfolio. Truth is that we don’t know what the income tax rates will look like in the future. I still haven’t met anyone that is expecting to spend less money at age 65 than age 25. Knowing that, we can expect that someone with a larger lifestyle will pay more in taxes. This holds true even if rates stay the same! This means that for diversification purposes we will often want to see you spread your contributions among a 401k (especially if there is a match!), a Roth IRA, and a taxable account. You never know what sort of things life will throw at you and your job is to be prepared when that happens.

So why do I love the Roth IRA? Put simply, you pay taxes now while your tax rates are low and your money has a long time to grow tax-free! Definitely a win-win in my book.

PS: This is a really simple explanation and everyone’s own situations are unique. Please do your research before making contributions or reach out to me or a fellow fee-only CFP for tailored advice!

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