News Flash: Your Hero Might Let You Down

I find a lot of times when I write I am not only speaking to you the reader but also to myself – usually it is mostly to myself. A few months ago I wrote an article about finding satisfaction in your current situation. Boy, that message really resonates during the holiday season on so many levels.

I have been thinking a lot about finding satisfaction within your means both through the lens of personal finance but also as an individual. Being waist deep in the holiday hustle, I think it is important to think about your current satisfaction within your family’s situation. Are you happy with your resources? Are you happy with your giving over the last year? What would you change next year?

Like most finance professionals, one of my professional hero's is Warren Buffet. He lives here in Omaha, not far from the University of Nebraska. He is one of those guys that, when you grow up here, does not seem like he is that big of a deal. For the record, he is a big deal.

So just like I do with any hero, I watch his interviews on TV, I follow his company and their holdings and of course I read his biographies. In particular I read “The Snowball: Warren Buffet and the Business of Life”. The book was a volume in itself, outlining each of his major business deals as well as his personal family information. Like any human, Buffet has some particular quirks that make him unique as an individual. You know, weird food preferences like cheese sandwiches and interesting past times like model trains. But one quirk jumped out that really made me think. The book discusses Warren Buffet and his attitude toward giving away money. According to this biography, giving away cash makes Buffet physically ill – yes, to give even $1 makes Buffet’s stomach turn.

Now, I don’t generally like it when people speak poorly about my hero’s, it kind of makes me feel like someone is kicking my dog.

But I have to say it… he seems like a Scrooge.

Don’t get me wrong, I understand that Buffet has become the second richest person on earth by being cast iron, but becoming physically ill when you give money away? Come On!

So here is where the satisfaction piece comes into play. Don’t you say to yourself “If I had that much money I would give it to such ’n such” – I know I do. Well, Warren has that much money and he still doesn’t want to give it to “such ‘n such”.

There comes a point in life and in money where you have to say, “ok, it is time to starting living like I am satisfied”. I would argue that for every single one of you, including me, that day is today.

True Story:

I recently had an interaction with one of the most gracious people I have ever met. I started the conversation by complimenting him on some new construction he had recently finished. Rather than simply accepting the compliment and moving on, this man turned the conversation around and complimented me for mentioning it! I could not believe it, he was actually complimenting me for complimenting him – and now I felt really good about my compliment!

I walked away from that conversation saying, DANG! I want to be just like that guy! At some point in his life he made a choice to be so satisfied with his situation that the satisfaction oozes from his body.

I’m going to make the prediction right now: You will never have enough __________________ (enter whatever it is you would like more of) until you find satisfaction with your current situation. This holiday season I am going to choose to be satisfied, I challenge you to try it too.

There Is Something To Be Said For Peace Of Mind

When people start to take the journey of paying off debt they try to get all scientific about it. They say “Well I have a college degree, so I should synthesize these numbers and put together a debt payoff strategy that most completely displays my intelligence.” Then they go and spend all afternoon putting together an Excel spread sheet that best accomplishes the display. More often than not, that is where the excitement ends.

Keep it simple, there is something extremely psychological about debt.

Don’t let your mind keep you from winning! Pay off the smallest balances first – this way you can have a win right out of the gate. That win gives you an instant blast of peace of mind. You are going to beat debt! Next, pay off the second smallest balance with the payments you were making on the recently paid off loan, and so on until all the debt is gone.

The “Debt Snowball” approach works, plain and simple. There is no high finance involved – don’t even worry about the interest rates! Once you get the ball rolling you will find success like you would not believe. I always envision a Looney Toon's espisode where Wile E. Coyote is rolling down a hill to catch the Road Runner but is rolling so fast that he starts to pick up all kinds of dirt and debris. Do the same thing to your debt - START ROLLING!

Listen, if you still want a spread sheet, you can do that too. But make your first snowball payment before you open Excel.

The Fundamental Benefits of a Credit Union

A reader pointed out to me last week that I have never really spelled out what the big deal about credit unions is. I think I can break it down to three major points: Ownership, Mission and Service. I would like to say before diving into this topic that although all credit unions are charged with these same values, not all manage them with the same level of importance. When thinking about joining a credit union or when you evaluate your current credit union, understand that management has a significant impact on these values. You should get to know the manager of your local credit union, if they are aloof and inaccessible you may consider a different credit union. But I digress – on to the meat and potatoes!

Ownership

Ownership of a credit union is the first fundamental difference between credit unions and banks. A bank is owned by shareholders. Ownership of many banks is literally traded on a major exchange such as NYSE or NASDAQ. Some banks are family owned, this means that one family or a group of families own controlling interest of the bank and it is not publicly traded. Here’s the problem with this; I own stock and mutual funds, just like most of you, and I expect one thing from those investments - return. Rightfully so, I own it! I would have never invested in something that I wanted to break even. Why would an investor in a bank expect anything different? The problem is that the way a bank generates increasingly larger income each quarter (to avoid disappointing it’s owners), is by increasing fees or investing their own capital in higher risk investments – can you say mortgage backed securities?

Credit Unions are owned by the members. That is why we call them members and not customers! Every potential member has to meet the eligibility requirements to join, here at Gallup FCU that requirement is that our members must me Gallup employees or family members. There are many credit unions where the only qualification is that you live in a certain county or city. Either way you slice it, our members (customers) own the credit union. That means that there is no conflict of interest! Our owners expect return, so whatever we make in profit we fold back into the credit union in the form of new products, lower interest rates on loans and higher interest rates on deposits. We do not send out our profits to outside investors or other institutions. Big difference!

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Mission

“Not for profit, not for charity but for service.” All credit unions are charged with this mission. At a well run credit union these words are the core values behind every product and every employees actions. Credit unions are formed on the fundamental idea that banking should be based on community, in fact, that is how a credit union is run. A group of people pool their money together to be able to make loans to one another and benefit from the income generated from those loans.

I like to think of it in terms of the classic movie “It’s a Wonderful Life'”. George Bailey runs a Savings and Loan – which is different from a credit union but not too far of a stretch for this example. Do you remember the scene when there is a run on the savings and loan? I sure do, very distinctly – George yells above the noise (paraphrasing) “Now wait a minute! Your money is not here in the bank it’s in your house, it’s in Frank’s house and Ethel’s house…”

This is important because as times have changed, credit unions have not really gone away from that business model. Literally my deposit at the credit union could be used to fund an auto loan for my friend in accounting who is also a member. Now that is not to say that I don’t have access to my funds whenever I need them, the credit union is required to have enough money (called capitalization) on reserve to be able to handle all of your withdraws.

There is a certain level of ownership I feel being a member. At Gallup we call that engagement, I understand that my role as a member is important to the success of the credit union. I like the fact that when I put money in my savings account I am helping the credit union make a loan to another member. I also like the fact that when I need a loan, the interest I pay goes to all my fellow members in the form of interest paid on their savings accounts.

This is getting long but my favorite difference is coming up. Please keep reading!

Service

I have said it before, what a difference it would make if there was less selling and more teaching in the banking world? A credit union is about the closest place that you will find teaching when it comes to consumer banking. Speaking from my personal experience, I do not take much satisfaction in pumping out 10 auto loans a day. Clearly the fact that I spend several hours a week writing this blog demonstrates how strongly we feel about education. But service is more than education, it is the culmination of all the parts I have been writing about today. As a member you are an owner and a credit union will treat you as such. As a member you are part of a community where your deposit and your loan matter. I don’t know about you, but I like to matter. I like to feel like my bank is working for me and that my deposit is significant, that is where credit unions succeed above the rest. Come experience the credit union difference.

“Bailouts are for Boats”

If I have a good grasp on my readers, I think I can say with some certainty that majority of you fall into two categories: 1. You use a local credit union as your primary financial institution. Or 2. You use a “Mega Bank” for your banking needs.

I know, very insightful.

Community financial service providers are really trying to leverage the current insanity of the financial system to grow their businesses. What a better time to start advertising campaigns then when your competition is making a fool out of themselves, right? North Coast Credit Union in Bellingham, Washington is advertising using the slogan “Bailouts are for Boats” – very catchy.

You have heard me say it before, I believe all people have the same underlying desire. To have personal service from a professional who is more of a teacher and less of a sales person.

This desire didn’t come from a new found knowledge of phrases like credit default swap, collateralized debt obligation or subprime mortgage. The underlying urge to return to community  was there well before the economy took a tumble, the tumble was just the catalyst to start changing.

A lot of people are drawn to the “Mega Bank” because of a perception that it is just more convenient. “They have 50,000 ATM’s across the country, they have online banking on my phone, they let me print a picture of my pet iguana on my debit card and if that wasn’t enough, last time I was in their branch they offered me some rolling luggage for filling out a credit card application.”

True Story:

I have not had a need to physically go to a branch or an ATM in probably 3 years until last month. All I need is my debit card and online banking! Last month, my wife and I went to our annual Labor Day  family reunion in Minneapolis, Kansas. Yes you heard me right, not Minnesota, Kansas – population 1000.  In Minneapolis cash is still king and checks are still accepted, we haven’t carried checks since 1995.

We needed cash to pay for everything but like I said earlier, I haven’t been to an ATM in 3 years, so I never have cash. I desperately needed $50 to get through the weekend!

So you are probably saying to yourself, well Andrew, if I had been there I would have just whipped out my Wells Fargo debit card and gone to the local ATM (which is probably 1 of the 50,000 they own). Here’s the catch, there are no ATM’s in Minneapolis and the bank is not open on the weekends – a lot of good that 50,000 ATM network would have done! I was just out of luck, it didn’t matter if I banked with Gallup Federal Credit Union or Wells Fargo, neither could help me.

“It’s easier to get a divorce than to change your checking account” Texas banker Edward Speed said in an interview with The New York Times.

I get it, change is hard! But I like to think that in this case, change is worth it.

I really want to stimulate some discussion here (literally, please post your thoughts in the comments section below). Given all that has taken place over the last 2 years, what makes you believe in a local credit union? If you still bank with a “Mega Bank” why haven’t you switched? What would make it easier to switch?

Reflection: The Art of Future Triumph

How long has it been since you looked through one of those old photo books that your mom keeps on the shelf at home? If your like me it’s been a while! But just imagine flipping through the pages, looking back at your childhood. There are probably a few pictures of your first day at school and that trip you took to six flags on family vacation. Ah nostalgia… wait a minute, this is a personal finance blog. What does picture books and warm fuzzy feelings have to do with financial success? Everything.

Do you remember how good it felt the last time you paid off an auto loan? How about the last time you paid for all your Christmas gifts with cash you had been saving all year? It feels awesome! There is almost no better feeling than when you make some really great financial decisions. The problem comes when people forget that great feeling and quickly try to go out and rack up new debt. Rather than taking some time to bask in the glory of debt free living they immediately go out and  finance a new car!

I think the key to continual success comes from trying to constantly stay in that realm of debt free nostalgia. You have to reflect on the great decisions you have made in order to continue to make them in the future. Maybe it should be as literal as taking a picture with your paid off car, or snapping a print screen of your zero credit card balance at the end of the month – that way you can go back in a few months to find inspiration!

I am a huge fan of Dave Ramsey, his book “Total Money Makeover” single handedly inspires me to continue to blaze the trail to financial success. I literally try to re-read his book a least once a year and I reference his concepts every single day. The day I read Dave’s book marked a significant point in my life when understanding just clicked for me. I already had the head knowledge, but it took the personal stories and his no nonsense approach for me to find the application.

I use “Total Money Makeover’ as a reflection tool for my own life. I take that time to see where I have come from and where I am now. It’s just like an exercise routine, if you don’t know what you looked like before you started then it is going to be really hard to see results as you go so you can stay motivated all the way until the end.

Savings Success 101: Avoiding Bank Fees

There has been a lot in the news lately about the exuberant  fees that many of the large financial institutions are charging. Overdraft fees, statement fees, stop payment fees etc. etc.

Here is a little lesson in commercial bank management: Traditionally banks made money on the “spread.” That is, the difference between what they pay in interest on deposits and what they earn on interest from loans. Pretty straight forward right? Well not so much, investors began to demand higher and higher returns on their investment, so banks had to find another large revenue stream. Enter the ridiculous fee.

It probably started innocent enough, first a fee here to deter account abuse, then a fee there to cover costs associated with a specific product. But then they realized that there was some money to be made, after all consumers never look at their bank statement, right?  Boom – the account maintenance fee is born.

You know how the fee story progresses, after all you are the one paying these fees. But let me share the most ridiculous of all ridiculous with you. In a recent USA Today article Sandra Block writes about the latest bank fee. A $29 to $99 fee will be charged to some credit card holders who have never carried a balance and have never paid a late fee. WHAT!!!

Yes, you read that correctly. It will now cost you, in real dollars, to be a responsible borrower. 

Listen, I have never been one of those advisors who wants clients to swear off credit cards. I have been of the notion that there is a time and place for credit cards, given a certain level of responsibility. But there comes a point where enough is enough…

Here comes my shameless plug for Gallup FCU and other credit unions all across the country. The credit union mission is “Not for profit, not for charity.” A responsibly run credit union should be abiding by this mission in all they do, including fees. Gallup FCU publicly posts all of our fees on our web site. Our goal is to have as few fees as possible while maintaining an appropriate level of accountability with the member. I am not saying that we don’t have any fees, we do. But the fees we carry are typically fees that are designed to deter members from abusing their account or for new products that are cost prohibitive without subsidy from a fee. We want to be as open about or fees as possible, if you ever wonder why we charge a fee for specific things or how we price those fees, please do not hesitate to ask.

The bottom line is that fees eat away at the progress you are making on your savings pilgrimage. You have to be aware what you are paying for in each of your accounts. This doesn’t only apply to your bank account, you have to evaluate all of the places you have money. What does you credit card charge, how about your 401(k), those mutual funds you own, the life insurance policy you have or the advisor you use? If you aren’t sure, go find out! 

“The Blame Shifter”

One of my favorite financial bloggers, Carl Richards at Behaviorgap.com, recently wrote an article called “The Assumer”. His whole premise is that the financial planning community needs to change their process for financial planning because they assume too much, I agree. Financial planning is a process, it is not a one and done document – hence the family CFO approach to financial planning that I am so fond of.

While I was thinking about “The Assumer” this week , I started to think of a different disease I like to call “The Blame Shifter.”

A Blame Shifter is someone who always attributes  financial  success  to their personal great decisions and financial failures are someone else’s fault. I am sure you are picturing someone who fits the description.

They have large credit card balances because their spouse spends out of control – No, it’s because they don’t have a budget.

They paid their bills late because their employer doesn’t pay enough – No, it’s because they live outside of their means.

They made a bad financial investment because their banker/advisor told them to do it – No, it’s because they didn’t surround themselves with the right resources.

They “just found out” that they have past due bills – No, they just decided to wake up and get involved.

and my favorite, most common Blame Shifting excuse:

I am just unlucky, that’s why I don’t have any retirement savings – No, they don’t have any discipline, they didn’t create artificial discipline and they didn’t bother to ask for help.

Are you still reading? Did I get your blood pumping – me too!

Here’s the deal, we are all Blame Shifters at one time or another during our pilgrimage. The place where you will determine success or failure is at these moments. Let’s face it, each and every one of us can think of a financial setback; that’s because sometimes it rains and sometimes it pours!  It is pretty darn easy to blame those setbacks on other people or the circumstances but that doesn’t help you learn. The only way to climb the tall mountains is to arm yourself with knowledge and understanding. When you make a mistake try to understand where you went wrong and how to avoid it next time. Sometimes you might need help, ask for it!

Your strengths and your finances

Ronny and I have been spending some time over the last year thinking about the Clifton Strengths Finder assessment and its applicability to personal financial success. We had the opportunity to take part in a 3 day Strengths Performance Coaching seminar here at Gallup and we were really immersed in the psychology of strengths and how they interact together. Typically, strengths coaching centers around helping an individual understand their talents and how they can leverage those talents to be successful with goal setting and in team interactions. But what if we took it a few steps further, what if the coaching went from personal goal setting to financial goal setting to full blown financial coaching?

Let’s face it guys, the traditional format of banking is broken. A bank is the only business on earth where the customer is truly intimidated by the service provider – well maybe the auto mechanic is another. What would happen if the loan officer at the bank was a coach? What if rather than trying to hide the requirements for approval with smoke and mirrors like the Wizard of Oz, loan officers coached members on the underwriting process and helped them make good decisions with their borrowing?

Those of you who have had the opportunity to take part in the Strengths Finder assessment know about the power of understanding your talents. Here at Gallup we get to think about talent every day and really get to put our knowledge of strengths and team interaction to work – that’s part of what makes this such a great place to work! What I have been meditating on for the last several months is what would a financial institution based on strengths and a coaching spirit look like? How could it impact the way people feel about personal finance? How engaged would those members be?

How much more successful would your savings pilgrimage be if you really understood your talents and realized the power of your strengths with your finances?

Living life through the lens of your strengths and talents will change your perspective – ask one of the 3 million people that are armed with the knowledge. For most people, thinking about their bank account is a struggle, saving is a tall mountain and planning for the future is as uncertain as the lottery. Finding out what your talents are and then working with a coach to kick butt on the things you struggle with will change your life. Take that thought and put it in the realm of your finances… I am already getting excited.

We are going to run with this idea, we believe that relationships matter and that by helping you succeed we are helping our business succeed. There is a certain intangible piece to this business, people still value community and integrity. People want more than a secure spot to park a few dollars and you know what, they deserve more! Think about your talents this week – I would love some feedback on how you think you could apply your strengths to your savings pilgrimage.

The Debt Consolidation Loan

Debt is like quicksand, once you fall in things start sinking pretty quick. The more you struggle, the more you thrash around, the quicker you fall. People start grasping for anything they can to pull themselves out, sometimes even bringing family members down with them. Inevitably they hear about the solution that will “clear up all their problems” – A debt consolidation loan.

“Oh yeah” they say, “If I can just make one monthly payment, I can get back on solid ground in no time.”

Here’s the deal guys, it’s just like your mom used to tell you: If it sounds too good to be true, it is. There are a few problems with the typical debt consolidation loan and one MAJOR problem with all of these types of loans.

1. The “Debt Consolidation” companies that typically offer these types of loan programs as their only source of business are usually scum bags. These type of companies prey on desperate people, they hide hidden fees in their loan program and do next to nothing to help solve the problem. I new a guy who owned a local debt consolidation firm, let me put it to you this way, he owned more sports cars and mansions than some celebrities. Do you think he was making a few bucks off of people who were turning to him for help? Absolutely!

2. When you are in debt you are often making decisions under extreme pressure. Many of the sales people at these debt consolidation firms are so pushy that they put additional pressure on you to make a hasty decision. More often than not these decisions produce outcomes that are detrimental to your future as a savings pilgrim.

3. Debt does a funny thing to logic. All you can seem to understand when you are in debt is that the noose is slowly tightening and you are just trying to survive. Add in a few debt collectors calling your house at all hours and normal logic goes out the door. Many times people have options out side of a debt consolidation loan that they can’t seem to see clearly. Selling some assets, picking up more hours at work, a second job or looking for help from family are all options that often people don’t see.

The major problem with a debt consolidation loan:

The major problem here is not the debt, it is the psychology of spending that pushed the consumer into this problem in the first place. By moving the debt to a consolidation loan all you have done is freed up the credit cards to potentially re-spend on! Many, many times people will double up their debt load in a matter of months by moving their old debt to a consolidation loan and then they go rack up new debt again on the available credit card. Talk about Quicksand!

If you want to get out of debt, there is only really one solution - a lifestyle change.

It is not the easy answer that most people are looking for. There is nothing easy about it, in fact it is down right hard. There are steps you can take to tackle credit card debt and be successful, that’s another post.

A CFO For Your Family

A Chief Financial Officer is the quarterback for the finances of a corporation, they oversee all aspects of the cash flow and reporting for the company. A great CFO pulls together a team of experts that each bring valuable assets to the group and then directs them to perform like the Boston Symphony. All the while this executive casts vision for the future and tweaks the financial approach for maximum performance.

I talk about it all the time, make savings automatic. If you make your savings automatic, you will be successful on your pilgrimage to financial freedom. So you do it, you are systematically investing and building wealth in the process. But as your wealth grows, things become more and more complex. It actually happens quicker than you might think. All of a sudden you are dealing with a CPA, a lawyer, an insurance agent and various other advisors and things are very complicated.

For most people thinking about juggling the advisors and monitoring investments simply takes time away from being able to enjoy life and have a few hobbies. After all, being able to enjoy life is the reason you started your savings pilgrimage in the first place. Right? A family CFO is the link that pulls all these complicated pieces together to make the symphony perform.

Carl Richards of BehaviorGap.com writes about a family CFO:

Note that a Family CFO doesn’t face the same conflict of interest as most financial planners or brokers. This person isn’t focused on making a short-term sell, which may be driven in part by commissions on products and services you don’t really need. The best Family CFOs are paid a predetermined rate and receive compensation from only one source—you. There are no strings attached, no lurking fees. You control your financial relationship.

For your family CFO to truly be able to put together the best team, cast vision for your financial future and tweak your plan, you must have a relationship. It might be a little awkward at first but in the long run a solid relationship with your CFO will give you the ability to relax and let them take the reigns.

We started Guide Rock Capital Management because of a desire to continue to serve families with more than just banking products. We found that people came to us looking for recommendations and direction for their financial future. Often times we sent people to other advisors to help them with the needs we could not serve. How could we know what kind of service and the quality of the advise that our friends were getting? We focus our new business on providing the best service we know how and by building relationships. We put the same philosophy that we use in the credit union to work at Guide Rock, “relationships matter”. You do not have to be a credit union member to start a relationship with Guide Rock. In fact, if you would like to learn more about Guide Rock and our family CFO approach to financial planning please contact me. We would love to have the opportunity to sit down with you and start a relationship.Contact us at: 402-938-6800

Chasing Return = Certain Failure

There are few things more frustrating than when your fund or stock pick is under performing or lagging the average industry return. This frustration often leads to the largest set back a pilgrim could have on their savings journey - chasing returns.A return chaser buys one hot fund and then once it turns cold jumps to the next hot fund – the catch is, that by the time they identify a hot category and make the decision to switch the new fund may have already begun to turn cold. All the while the old fund may now be poised to take off.

There are no clear signs when to switch or where to switch and when information becomes evident to aid you in your decision it is probably already too late. Meir Statman said it beautifully in a recent Wall Street Journal piece, here is an excerpt from the article:

Goldman Sachs is faster than you.

There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I'm faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?

It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn't seem so hard. But we are much too slow in our race with the Goldman Sachses.

So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).

Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way

From: The Mistakes We Make – and Why We Make Them by Meir Statman

If you really want to delay your summit of the mountain we call financial freedom, all you have to do is start chasing return. I recommend a well diversified portfolio of varied funds so that no matter what the market is doing, at least a portion of your money is doing well.

It isn’t very sexy and it doesn’t have the excitement of a hot tip, but there is no better way to improve your odds for financial freedom.

Listen, everyone says they are a long-term investor until things start to get tough – then they want out. Do not let your emotions or fears drive you to make bad decisions. If you are questioning the diversification of your current portfolio please give me a call. I would be happy to review your current allocation structure and tweak it to the right mix for you.

Change the Way You Contribute

Step One: Open a retirement account to start your savings pilgrimage.

Step Two: Fund your retirement account systematically every month with an automatic contribution.

You’ve heard me say this over and over again, make contributions automatic every month. But why? Why is it so smart to contribute systematically? 

The long and short of it is Dollar Cost Averaging. I don’t want to scare any of you off with high finance lingo but trust me, dollar cost averaging is neither complicated nor high finance so bear with me.

Let’s say that your rich uncle died and gave you $100,000 - nice! The very next day you take the whole lump sum of money and dump it into the stock market and the day after that, the market falls 40%. Your $100k is now only worth $60k, so you freak out and pull all of your money out of the market because you don't want to suffer any more losses.

Then lets say, one week later the market is up 60% and you missed the up-swing because you were out of the game.

How would you feel? Horrible, You missed your chance!

Guys, this is exactly what could have happened to you last spring if you did not take advantage of dollar cost averaging with your contributions.

Here’s how it works: 

Let’s say you get the same $100,000 from your dead rich uncle. Only this time you divide it into 20 pieces of $5,000 each and invest each piece on the first Monday of the week for the next 20 weeks. If the stock market declines as soon as you invest the first $5k you can take comfort in the other $95k you still have in cash. When the market increases you will be poised to take advantage of the swing because you are systematically investing, no matter what the market is doing.

The other benefit to systematically contributing  to the market is lowering your average costs of shares purchased. For example, your first week you might buy shares of a specific investment at $5 per share, then next week you might buy at $4 per share and the week after you may buy at $4.50 per share. So the average cost of the shares is $4.50. Now you are really taking advantage of fluctuations in  market because you are buying at lower cost than you would have had you put all your money in on the first day.

Buy Low, Sell High

Everyone knows that the ultimate goal of investing is to buy low and sell high but because of emotion and human nature many people do just the opposite. Use dollar cost averaging to help you avoid falling into the trap. Make it automatic and you can create the discipline that you need.

Who would have guessed that after the miserable winter of 2008 to 2009 in the stock market, March was the month to have your money in! I certainly would not have made that prediction, but I took advantage of it because while the market was falling I was buying every month at lower and lower prices. It’s not rocket science but there is an element of discipline that is required. The good news is that you can create the discipline for yourself.

Your Children Want You to Save for Yourself

You want to give your children a hand up in life, absolutely. You want to provide them with all the opportunities and luxuries that you never had, sure. What if you do all these things but never save for your own retirement? Will that help your children in the long term? Probably not.

Sometimes parents get so caught up in “providing” for their children that they never take the time or resources to ensure that they are providing for themselves in the future. I want this article to ask the question: if you stretch yourself financially to give to your children without saving for your own future are you really helping them?

This is a difficult topic, no one wants to hear that they should hold back on college savings to contribute more for their own retirement. There is a basic human element that floods our emotions with a desire to provide for children. I am sure there are many underlying reasons why giving everything to your children is detrimental to their development of character and work ethic but I am not a psychologist, so let’s leave those arguments out of it.

Let’s just focus on the dollars and cents of it.

I have to argue that your kids have a longer time horizon to save and more opportunities for low cost student loan debt than you do. Saving for college in a 529 plan or through some other savings method is a great goal to have – but you have to remember when you start saving for a college goal you are embarking on a savings pilgrimage for someone else!

Why would you start a new pilgrimage if you have not yet made it even half way up the mountain of financial freedom? Let me put it to you this way, if you focus all your efforts on saving for your children’s future then your future will involve living with your children. Maybe your family culture is different than where I come from but when I close my eyes and dream about retirement it does not involve asking my kids for a few bucks to pay my greens fees for the day.

Friends, if you do not save for your retirement thinking that you are doing your kids a favor, your wrong. The only thing you are doing is ensuring that you will be a financial burden to them in the future.

Your kids will have the opportunity for scholarships, low cost student loans and part time jobs to get through college. And guess what, speaking from experience, they will value the education that they earned and paid for far more than if it were free. The other good news is that your children are quite a bit younger than you are. They have a good twenty years to create their own financial freedom.

If you can afford to put some money away for your children’s education it might be a good idea. I would strongly encourage you to talk with a professional to determine if you can truly afford it.

How about this idea, instead of giving your kids a free education and housemates in their 50’s. Why not give them the opportunity to earn their education and a big fat inheritance when you no longer need it.

Why Worry About Return?

Usually the answer I get when I ask the question above is, “so I can grow my retirement account”. Although this is a good answer, it’s not the real reason why it is so important is to make sure that you are achieving adequate return. The true answer is one word:

Inflation

There truly is no better time than now to talk about inflation and the impact it can have on your goals. With all the “stimulus” and government spending we can only assume that in the future our economy will experience significant inflation. 

So what is Inflation? Well the simple answer is this: The standard assumed average annual inflation rate is 3%, so if I were to go out and buy a box of pencils for $1.00 today, in one year that same box of pencils will cost $1.03. As you can see, the purchasing power of my dollar has been reduced! I can no longer go out and buy a box of pencils for just a buck.

Inflation is caused by many things but the looming cause for our future inflation is monetary policy. When the government passes out “stimulus” essentially they are adding additional dollars to the market which eventually dilutes the value of the dollars already out there.

Let’s use an example, say you are washing your white clothes at home. Every once in a while you will probably use bleach to help restore the whiteness to your clothes, but to keep from burning holes through the fabric you add water to the bleach to dilute it, the more water you add to the bleach the less potent the bleach is.

If bleach is like buying power then adding water is  like adding dollars to the market.

The more dollars you add the less buying power there is! Eventually retailers will have to raise their prices to compensate for the fact that each dollar is now worth less, or the bleach is not as strong as it use to be. And that my friends is inflation.

So why do you have to worry about return… because if you only generate a return that is equal to inflation, your money will only be able to buy you the same amount of stuff that it did last year! If you want to be successful on your savings pilgrimage you have to earn a return that beats inflation.

Let me insert a little disclaimer here, chasing return is a very dangerous thing. This topic is an entire blog post in of itself, but suffice to say that I am a proponent of buy and hold strategy unless you are a professional investor. I’ll write more on this topic at a later date.  As a savings pilgrim I want to always be conscious of the return I am earning on my path to financial freedom. I want to be sure that the investments I am using are falling in line with my risk tolerance and my mountain top goals. The only way to tell if the investments are working the way I want them to is through careful measurement and giving adequate time to let them work. Occasionally, I might have to adjust my path to success.

Inflation is a bear and no one knows when it will kick in from the great recession, but it will. Be aware and prepare yourself for the need to generate increased returns.

Two Things You Have To Do

Several months ago, back when the Dow Jones Industrial Average was at a decade low 6500, a friend of mine who is not a professional stock analyst or broker predicted the bottom of this recession in front of a group of 25 or so clients (bold move!). Turns out he might have been right, although I think it is still too soon to confirm or deny his prediction. But if you had dumped $10,000 into the Dow Jones Index that same day it would now be worth roughly $14250 or about a 42% increase in just 4 months. That’s something you can’t ignore.

Sure, I have been burned just as much as the rest of you in my retirement accounts over the last year and a half, so I understand the sick feeling that comes over you when you have to open your quarterly earnings/loss statement every 3 months.

I also completely understand bulking up the old emergency fund and paying down your unsecured debt – do it! But if you are young (younger than 45 or so) you have got to be taking advantage of the giant rebound in the market that we will inevitably experience over the next several months.  You cannot afford not to!

Friends, the current economic situation we are in is once in a lifetime.

Fortunes are made, missed and lost in environments just like this. If you are disciplined, use the right products and understand your personal risk tolerance, the choices and investments you make could be game changers for your financial future. Your savings pilgrimage will be a lot easier with the initial boost of a 50% return right out of the gate. Talk about a motivation energizer!

There are 2 things you must be doing no matter what your situation is.

First things first, if your company offers a 401(k) with any sort of match, you have to do whatever it takes to get the full match. Scrape every penny together and tighten your belt to take advantage of the guaranteed return. You will not find a guarantee like this anywhere in the market!

Second, the Roth IRA is the greatest gift the government has ever given to savers! There are some income limitations to take advantage of this program. A single individual with an adjusted gross income (AGI) of more than $95,000 is prohibited to contribute funds into a Roth IRA account. For a couple, the AGI is $150,000, and these limitations change on a annual basis.

If you qualify for a Roth IRA you have to have one! No Excuses!

When you reach retirement the distributions from a Roth IRA are tax free because you contribute with after tax dollars. I don’t know about you, but I am pretty sure than in 30 years taxes are going to be higher than they are today. If you do not understand why this is an amazing deal PLEASE CALL ME RIGHT NOW!

The reason I am so adamant and enthusiastic about these two things is because of this…

In a recent survey, 40%…. 40% of respondents said that their best chance to gain $500,000 in their lifetime is via a sweepstakes or lottery win.

WHAT!!

Apparently 40% of people have never heard the good news about the power of compound interest. I have got a lot of work to do.

Please do not be one of these people. $500,000 is easily attainable if you simply do two things, get the match in your 401(k) and contribute systematically to a Roth IRA.

What is in a Credit Report?

There is a lot of mystery surrounding credit reports and the scores that are generated from the report. I think that bankers and other financial providers try to keep the truth a mystery to aid in their power trip when people come to apply for a loan. Why is it that most people find themselves feeling like they are headed to see wizard of Oz when they go to see the banker for a loan? The truth is that most loan officers are blowing smoke and using your misconceptions to leverage their salesmanship. Let’s pull the curtain back and give you some insight to what really makes up a credit report.

The REAL free credit report link www.annualcreditreport.com

First things first, if you want to see your report the only real free web site that is sponsored by the government is listed above. You are entitled to view your report annually for free – SO GO DO IT!

There are three credit bureau’s that gather data and generate reports. They are:

Trans Union, Equifax and Experian

Essentially these agencies are gathering the same data but to maintain accuracy and to avoid potential conflicts that could arrise from one entity, there are three companies. You can pull your report from each one of the agencies annually for free. So if you are considering paying a third party entity to monitor your credit and send you reports every month, don’t do it any more. You can pull a report once every 4 months for free your self! Pull the Trans Union report in January, the Equifax report in April and the Experian report in August. Boom! You just saved a bundle of money and achieved the same thing that those “experts” are providing.

What makes up the report?

A credit report is made up of data that lenders report. If you have an open line of credit, installment loan, charge card (those in-store cards you can only use at that store), credit card, mortgage or student loan it is on your report. It also might include negative information such as judgments from the court, items sent to collections and accounts that are charged off by the lender.

What is not included on the report?

Accounts at your daily service providers are not included on your credit report unless they extend you credit or they have to send your account to a collection agency. Often people think that their insurance company, cell phone provider and utility services are listed on their report. They are not.

What is the difference between a credit score and a credit report?

Your credit score is an artifact of the information listed in the credit report. The credit score is calculated using a secret algorithm that is proprietary to a company called Fair Isaac, also known as FICO. We do know some basics of what goes into the calculation. By and large the most important thing to do is pay all credit obligations on time over many years. Different credit providers are given more weighting in the calculation depending on their importance in repayment. For example, a long on-time payment history on a mortgage is given more weight than good history with a charge card. Likewise, a late payment on a mortgage will hurt your score more than a late payment on a charge card. The amount of credit out standing relative to the limit of the account is also a factor. A rule of thumb is: Never use more than 30% of the max amount of an account to maintain the best score.

In the past, it did hurt your score to have multiple inquires for credit in a short amount of time. This really put a damper on folks being able to shop around for the best loan. Legislation several years ago changed this rule and now allows for consumers to apply to multiple lenders in a two week period when shopping for a mortgage or an auto loan and it only counts as one inquiry. Always compare lenders just like you would any other product!

There are many nuances to credit reports, too many to cover in one article! If you have specific questions or want more information, please feel free to contact me. A good understanding or credit reports will liberate you and help you maintain a better score. A good credit score is essential to succeed in your savings pilgrimage.

Consumer Driven Health Care

Suppose I told you that you could go out and buy something very  valuable that cost $20,000 for $75 a month and a one-time cost of $10. Would you go buy the new item? Absolutely. Would you go buy a new one of these items every year? Sure, it’s only a one-time cost of $10 and you are already paying the required $75 a month.

But let’s assume that sellers of these items are in business to make money (like most businesses are). Wouldn’t you suppose that these business people would try to find ways to make more money as time goes on? Maybe they will raise the monthly cost, or maybe the one-time fee. Or maybe they will do something even more sinister – raise the value of the item.

What is the significance of raising the value of the underlying product? Well, if you can’t or wont pay the $75 per month then you are not eligible for the deal. So now, if you want the item you will have to pay the full $20,000 cost. Suddenly the item seems far more unattainable.

The valuable  item I am referring to is health care. Millions of Americans pay their monthly insurance premium ($75 per month) and when they go to the doctor, simply pay their $10 co-pay. Most health care users never even stop to look at the dollar value of the service they received, if they did they might stop for a second to catch their breath and thank God that they have health insurance.

Insurance companies are in business to make money, a lot of it. In order to do this, they raise the premium cost every year, increase co-pay cost and yes even more sinister – they inauspiciously contribute to the rising value of health care.

As consumers we should be leery of any product that we purchase where the actual value is hidden in the fine print of a statement we receive 6 months after the fact. Think about those paycheck advance shops on every street corner. The mere fact that they are everywhere tells me that they are in business to make lots and lots of money. The truth of the matter is that they do. Why? Because the consumers that use them do not clearly see the actual cost of the service.

Our society has labeled paycheck advance shops as “Predatory” to consumers. How is the health care insurance industry any different?

The only way for us to put an end to the rising cost of health care is to clearly state the actual cost of the services being offered. Would you pay 50% interest for a 3 day advance on a check? NO WAY! You would say “I can wait!” Would you go to the clinic for the sniffles if you knew that it cost $500 just for the 15 minute exam? I wouldn’t! I would only go to the clinic when I absolutely needed to, I would go when the value of the service matched the value I was willing to pay.

Forbes Article on Consumer Driven Health Care

Purchasing health care should be no different than purchasing a new TV at the local electronics store. The value of the item matches the value I am willing to pay. If the TV is more expense than I want to spend then I forgo purchase of the item.

The good news is that there are products out there that promote this logic and will help you on your savings pilgrimage. High deductable health insurance policies offer low monthly premiums and the ability to contribute to a health savings account. This puts the power back in your hands. Health savings accounts offer significant tax advantages and will help you to be a conscious consumer. If you want more information on these types of accounts please contact me! 

Choosing Your Retirement Lifestyle

You might not believe me, but one of the most difficult decisions you will make after completing your savings pilgrimage is how to live in retirement. You will have spent the majority of your life on the path to a goal, financial independence - the ability to do what you want, when you want, for as long as you want. Ah, what a great feeling this will be… but what is it you want to do?

Right now if I were to retire I would want to play golf, drive fast cars, exercise for 3 hours a day and grill out for every meal. Will I want to do these same things in 40 years? Not likely. But I can make some basic decisions: Will I want to work part time in retirement or what about volunteering? Will I travel more or stay around town? Do I want to follow my fellow retiree’s to live in Florida or Arizona?

The answers to these questions will be vastly different for everyone and there will be unique questions for each person’s situation. Your answers might even change after 10 or 15 years. I strongly recommend sitting down with your significant other and think about your ideal retirement lifestyle at least once every 5 years. This is a great way to stay on the same page with your goals and you might even re-energize your savings pilgrimage.

Remember, any financial plan is a living, breathing document. As your financial situation changes so should your plan. As you reduce debt you should look for places where you can put that extra money to work. If you earn a raise at work, make new plans for the extra money.

Retirement is not the same for everyone, you may not want to fully retire or you may choose to spend more in retirement then you did while you were working. The idea behind retirement planning is that you will have accumulated the resources to be able to choose either option. If you don’t have a financial plan or would like a second opinion on your current plan, feel free to contact me!

Harnessing your Mental Spending

I am as guilty of it as anyone. I think to myself: “When I get my tax return I am going to spend it on a brand new (insert favorite item here).”

For some reason I find myself doing this time and time again. Fortunately, I typically don’t go spend that money before I have it, call it discipline or just the fact that I know better. For millions of people this is where their savings pilgrimage fails and in some cases where their debt habits take off.

It is so easy to spend the extra money you might have coming in before you actually receive it.  Our culture is truly based on instant gratification, after all that’s why the credit card was invented, have something now – pay for it later. Don’t become a victim to self rationalizing credit card spending. If you find yourself justifying credit card spending because '”I will pay it off as soon as I get that bonus”, put the item down and walk away. 

This is a great place to put in a plug for a tool that is near and dear to my heart: The Emergency Fund. If you are saying: “Andrew, the things I am using my credit card for are essential items that I cannot live without.” You need an emergency fund. I will not go so far as to say that credit cards are evil or that you should never have a credit card but if you do not have an emergency fund, you have no business using a credit card. 

If you do not have an Emergency Fund, drop what you are doing and call me to set up a time to put together a plan to get one. 402-938-6800

If you are embarking on a savings pilgrimage, the quickest way to failure is to start mentally spending the money you are saving. One of my secrets to saving success is to “spend” my savings by investing it in an account that is very difficult for me to reach. If I send my savings to a Roth IRA, 401(k), investment club or credit union CD; I spent it. At first it might seem like this tactic would not work but once the savings has left my easily accessible checking or savings account – it’s gone. It works because I can’t spend it again. 

What are some ways that you have harnessed your mental spending to succeed in your savings pilgrimage? I would love to hear your tactics!

When is it right to work with a financial advisor?

Finding the right financial advisor is one of the most important decisions you can make for both you and your money. Identifying a true professional who is honest and loyal is easier said than done. The best way to start your search is by asking 5 to 10 people you trust and respect who they use for financial advise.

Once you identify a few potential candidates you should set up a time to interview them. Ask these advisors questions like:

How are you compensated?

How do you handle conflicts of interest?

What is your investment philosophy?

These 3 questions cover the major issues that set advisors apart from each other. You want to build a relationship with an advisor where you can stay for the rest of your investing career. One of the worst things you can do is jump from advisor to advisor every couple of years.

A great advisor should be compensated directly from the client to ensure that the clients interests are always put first. This type of compensation structure enables the advisor to implement investment plans that can focus on buy and hold strategy for the long term.

Many “fee only” advisors require minimum account balances but many also offer consulting on an hourly basis. This is a way to get the professional advise you need while building your account to the level required for complete management.

Gallup Federal Credit Union now offers financial planning and investment advisory services. Please feel free to contact me to learn more about the services we have to offer!

Reduce Debt or Save

By Ronny Miller

One of the most common questions we receive from credit union members sounds something like this,

“Should I pay off my credit card (car loan/mortgage/personal loan/etc) or should I save the money instead?”

A simple mathematician would tell you to pay off the debt. You are paying an average of 4% more on the debt than you are earning on your savings. It’s simple! Right? Maybe…maybe not.

Simple Math

You have a $100 mortgage charging 7%. That costs you $7 per year. So if you paid off the mortgage you would have an extra $7 to spend.

Your other option is to invest the money instead and earn a rate of return of 3%. This provides income of $3 per year. Now you would have to pay taxes on that. (Let’s assume marginal tax rate of 30%). That means, after taxes, you have an extra $2.10 to spend.

A difference of $4.90. So, mathematically it almost always makes sense to pay off the debt first.

In a perfect world we would all pay off higher interest debt first, but that fails to take into account many important factors.

1) Building an emergency fund which may save you from acquiring more debt later on.

2) Piece of mind in knowing you have a nest egg on which to rely.

3) Waiting too long to start saving may be the worst mistake of all.

The Psychological Factor

How would you answer this question?

“I want a debt reduction plan to pay off my credit cards. How should I go about paying these off?”

Most people would recommend listing the balances from highest rate to lowest rate and start paying extra on the highest rate card. This is excellent advice, but not what we would recommend.

First we say “Save!” If you are truly putting together a debt reduction plan, the best thing you could do to set yourself up for success is to have an emergency fund. Without question you will have an emergency at some point during your effort to pay off debt. A lot of people depend on credit cards to fix these emergencies.

Imagine just starting a debt reduction plan and then having to go into more debt due to a medical problem, car repair, or other emergency. How frustrated would you be? For most people this is all the reason they need to give up on the plan and go back to their old ways.

This is a great example of when you should save first to pay off debt second.

The time value of money

You can’t afford to wait. The power of compounding interest is a miracle of personal finance and the sooner you start the more benefits you can reap. Actually, the benefits are exponential. This is the reason Albert Einstein referred to compounding interest as “the 8^th wonder of the world”.

So, how does this apply to debt reduction? If you are choosing not to save in order to pay off a mortgage in 20 years instead of 30, you are losing 20 years of compounding interest. You cannot afford to lose that time.

Compound Interest Equation

P = C (1 + r) ^t

where
    P = future value
    C = initial deposit
    r = interest rate (expressed as a fraction: eg. 0.06)

    t = number of years invested

The “t” is the exponential part of this equation and it makes all the difference. Let’s look at two examples:

Let’s say you are 20 years old with 45 years to retirement. Saving $1200/year (100/month) and you average a 10% rate of return. You’ll retire with $948,954.38. Who knew $100 a month could almost make you a millionaire.

Now, let’s say you are 50 years old with 15 years to retirement. Saving $_________/year and you average a 10% rate of return. How much would you need to save to get your million dollar retirement? Go ahead, take a guess.

The answer: $28,000 a year. ($2,333/month). Ouch.

By the way, if you just saved $100/month for 15 years you would need to earn a rate of return of 45% to hit the millionaire zone. Not very likely.

The Bottom Line

Paying off debt is never a bad idea, but sacrificing long term saving to pay off debt is. Look at your personal situation and ask for help if you need it.

Conquering the Tall Mountains

Many Americans are finding themselves embarking into new, strange territory.

Saving

Maybe you have traveled this road before but somewhere along the way took a detour for a decade or so. Don’t feel too bad – the national savings average from 2001 to 2007 moved from 1.8% to 0.5%. That’s right – negative savings!

Over the last 18 months or so Americans have been re-energized to get back on the path to financial freedom by saving more than they have in the last several years. Blame it on looming job loss, potential pay cuts or the new rebirth of the required down payment but everyone is looking for ways to save a few more dollars each month.

As I talk to people every day, I find that it is really easy to start getting jazzed up to embark on the savings journey. It is easy to think of a goal that you want to save for, maybe it’s that new car, a down payment  for a house, college or even just retirement. But when that first tall mountain in the path comes, it is really hard to push through.

I like to think I am a savings pilgrim.

Imagine starting your journey as a pilgrim at the Missouri river and trekking through Nebraska or Kansas where the path is incredibly flat – you started your savings plan putting away a few bucks per month building a nice balance. But then your journey eventually takes you to Colorado and the Rocky Mountains.

I like to think I am a savings pilgrim that will brave the rocky mountains.

  On the other side of those mountains is freedom, an ocean of endless future. Over the past several years only a brave  few have set out on the journey to reach financial freedom. Today is a great day to start your journey, team up with other savings pilgrims and push each other through the tallest mountains.

I would like to hear about your mountain top savings victory and what your financial freedom looks like. Contact me or leave a comment about your success!

A Survivors Guide to Weathering a Financial Storm

Work force reductions and layoffs are a lagging indicator of the tough economic environment that businesses are operating in these days. With more and more companies forced to reduce their payroll expense to meet budget this year, many families are finding a family member back in the job market. Here is a list of some pointers that will help your family weather the storm.
1. Don’t do it alone
Many people find themselves attempting to manage the stresses of job loss and the ensuing job search on their own due to our cultural norm of individualism. We tend to hold to the idea that people succeed and fail due to their individual efforts; the reality is that success depends on relationships as much as it depends on the individual.
Look to family, friends and peers for coaching through the struggles and victories. Find opportunities to network with other professionals, you may even consider seeking out a professional job coach or counselor to help you identify your future career path. Listen to people when they tell you you’re good at something.
2. Find out about benefits available after you lose your job
One of the first phone calls you should make after the job loss is to the benefits department at your former employer. For health insurance, coverage usually expires the last day of the month in which your employment ends. Ask about continuation of medical coverage through a program such as COBRA, you will be responsible for the full cost of the coverage but it may be an expense worth taking depending on your specific situation. Also ask about your flexible spending account or health savings account. In most cases long term disability and life insurance coverage ends on the last day of the month in which your employment ends as well. For more specific information regarding your plan options please contact your benefits department.
You should automatically be sent a distribution/rollover packet from the 401(k) department that outlines all of your options. Typically 60 days are allowed before you must rollover the balance to an IRA or other qualified plan. Please contact me with rollover questions and options offered through the credit union.
  3. Get Organized
Getting organized and staying organized are essential to success in a new job search. Brush up that resume and put together solid references that can be called upon to give rave reviews. Determine and write down how far you are willing to go to find work, will you do part time or temp work? Research and keep files on the companies where you are applying, be sure to have a polished presentation of yourself specifically tailored to each position.
Getting your financial house in order is also essential to be able to focus the necessary attention on your job search. Sit down as a family to determine your new household budget; you may want to consider seeking the help of a professional to act as a sounding board for changes or to help you identify other areas where you could save. Please contact me if you would like help in this area!
4. Remember where your satisfaction comes from
Resist the temptation to cut out the gym membership and social events with friends, unless of course you cannot put food on the table for your family, but it should not be the first thing you cut. Look at this time as an opportunity to re-invent your career path and dive into opportunities that appeal to you. Stay positive and remember where you find your personal satisfaction.