Mutual Funds vs ETFs

On October 15, 2004, Jon Stewart made an infamous appearance on CNN’s Crossfire, a debate show that reduced political arguments to their biased extremes. Stewart was invited to promote his book but instead high jacked the live segment and embarrassed the hosts on their own show calling them “partisan hacks” engaged in “political theater.” The takedown has over 10 million views on YouTube.

Stewart began by innocently asking, “Why do we have to fight?” Of course, things escalated quickly from there, but the question still stands. As a country, we fight about everything—liberals versus conservatives, Yankees versus Red Sox, creamy versus crunchy, and most recently Lauren versus JoJo—so obviously we fight about money, which introduces the debate between mutual funds and ETFs. There is more nuance and detail than a blog post can contain, but here are the (hopefully) objective highlights.

The Quick and Dirty

Mutual funds became available in the 1970s, and their popularity increased over the next 30 years with the inception of IRAs in the 1970s, proliferation of 401(k)s in the 1980s, and the stock market boom of the 1990s. They provided diversification and professional management, both of which were previously unavailable to the average Joe.

Their structure is fairly straight forward:  Investors give money to the fund in exchange for shares, and the fund then buys and sells stock based on its investment strategy. Investors purchase and redeem shares from the fund itself based on the daily calculated net asset value (NAV), which is the market value of all the stocks held by the fund.

Exchange Traded Funds (ETFs) debuted in the early 1990s but have only gained popularity within the past 5-10 years. Most ETFs track a particular index, such as the S&P 500, so they provide diversified passive investment.

Their structure is quite different from mutual funds. Instead of beginning with cash to invest, financial institutions start by bundling stock into “creation units” that are then split into shares and sold on the market, just like stocks. You can buy or sell them at any point during the day.

So… Which is better?

It depends on your personal investment philosophy—Are you an active or passive investor? In other words, do you believe that professional investment managers can consistently deliver returns that beat the market, or do you believe that you will be better off paying lower fees and accepting market returns? Active investors should buy mutual funds with a proven investment manager and reasonable fees. Passive investors should buy ETFs from a reputable institution.

But there are some tax considerations as well. Because of their structure, mutual funds are more prone to capital gains distributions, which result from stock sales by the fund. The capital gains from such sales are passed on to the fund investor, but since mutual funds are not traded on an exchange like ETFs, any redemption of mutual fund shares requires the fund to have cash on hand to return invested capital. So if there is a significant exodus of investors, the fund will have to sell off its positions in order to pay for redemptions.

Bottom Line

Let’s not fight—mutual funds and ETFs can both provide diversification and have a place in your portfolio. Their utility largely revolves around your investment philosophy and objectives, but the individual fund you buy has more of an impact than which type.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Finding a Financial Hero

Since I was a kid, Tim Burton’s 1989 Batman has been one of my favorite movies. It’s dark, gritty, and has some of the best, villain one-liners of all-time. Most of all, Bruce Wayne is my kind of superhero—his only powers are wealth, intelligence, and non-superhuman strength. He’s a charitable billionaire by day and vigilante superhero by night. In other words, he is exactly what I wanted to be when I grew up.

But as adults, we still need heroes in our lives. Just like when we were kids, heroes encourage us to be a better version of ourselves. They are essentially mentors that we will probably never meet. So who is your financial hero? Who sets an example for your financial life? Warren Buffett is an obvious choice—he’s successful, frugal, and wise, but someone like Bethenny Frankel, a reality star turned entrepreneur, would probably be a more honest choice, although she carries more flash than substance.

Find someone that encapsulates both prudence and relevance. For example, my financial hero is Scott Leonard, financial advisor and author of The Liberated CEO, who decided to work remotely for a year and sail around the world with his family—not exactly practical, but he had a goal and made a plan.

What characteristics should your financial hero have? Did he overcome financial adversity to create enormous wealth (e.g. Jay-Z)? Does she live life to the frugal extreme (e.g. Shailene Woodley)? Or maybe he uses his wealth to pursue scientific achievements (e.g. Elon Musk)? This characteristic should speak to you personally and encourage good financial decisions.

When I read Leonard’s book, I learned that he built a successful firm with the right team so that he could work from a yacht without diminishing the quality of service to his clients. Now, I may never sail around the world—I don't even sail. But I would like to be in a position both financially and operationally to take extended time off. I love to travel, so his story resonated with me personally. It gives me a goal that I can consistently look toward.

Your financial hero should keep you focused and grounded in your financial plan. It is extremely difficult to achieve long term financial goals because they are not something you can just wake up one day and do. Instead, you have to make little, prudent decisions every day that gradually get you there one day at a time. So having a financial hero makes that process easier—they provide a template that helps you pave a way toward your financial goals.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Plain English, Part III: Amortization

Back in 1999, lodged between Braveheart and his permanent fall from grace, Mel Gibson starred in a gritty action film called Payback. It’s probably one of those movies you saw one Sunday afternoon while half asleep on the couch. But as you may have guessed from the title, some bad people owe Gibson’s character some money; needless to say, he gets his money back. With much less fanfare, banks get their money back through a process called amortization.

If you took Latin in high school, you may think it has something to do with love (amare), but if you’ve ever taken a finance course, you know it’s that thing with loans that no one can ever pronounce (ə-mor-tə-ˈzā-shən). Amortization is the process of slowly chipping away at your debt, one payment at a time. When you take out a mortgage, they will even give you a schedule that details every single payment you will make throughout the life of the loan. 

And that schedule is important because it shows you that not all payments are equal. At the beginning of your loan, the majority of each payment goes toward interest, which even if you understand conceptually, the numbers can still be shocking. For example, if you take out a 30 year $200,000 mortgage at 4% to buy a new home. In the first year, of the $11,500 in payments that you will make, only $3,500 goes toward principal. So even though you have lived in your new house for a year making monthly mortgage payments of close to $1,000 per month, you still owe the bank $196,500.

But here is the reason why: banks don’t give you money out of the goodness of their heart. Regardless of what the slogan in their mortgage department may be, they are not in the business of making your dream home a reality—they are in the business of making money. Don’t get me wrong, I am not faulting them at all; they provide a much needed service and should be compensated accordingly. 

But since they are willing to give you $200,000 for your dream home, they expect 4% of the current outstanding balance. So at the beginning of the loan, they charge 4% of the full $200,000. After the first year, you have chipped away $3,500 of the loan principal, so they charge 4% of $196,500. Finally, in the last year of the loan, there will be just over $11,000 left in principal, so only about $500 will go toward interest and the rest toward principal. That is how loan amortization works.

However, you can almost always make pre-payments, which can significantly reduce the time it takes to repay the loan and the amount of interest you ultimately end up paying. For example, if you make one extra payment per year on the $200,000 loan, you could pay it back about four years early and save $20,000 in interest. Some people make the extra payment with their annual bonus, but another strategy is to make half payments every two weeks. Since there are 52 weeks in the year, that would result in 26 half payments or 13 full payments, which would get you to the same result. 

People dream of owning a home, but they should also dream of owning a home outright with no outstanding mortgage. In order to do so, consider making accelerated mortgage payments a part of your overall financial plan.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Plain English, Part II: Backdoor Roth Contribution

Over four years ago, the sketch comedy duo, Tripp and Tyler, blessed the internet with a one minute video cataloging all the things that nobody ever says. There were lines I would have never thought of like “I just got the best deal on printer ink” and “Hey, can I burn a copy of your Nickelback CD?,” but they also threw in obvious choices like “I’ve got too much money,” which is something that not even Oprah would be guilty of saying. However, when dealing with the IRS that may very well be the case:  If you make too much money, you cannot contribute to a Roth IRA.

Anyone with a cursory knowledge of personal finance knows that Roth IRAs are a fantastic way to save for retirement. They were created through the Taxpayer Relief Act of 1997 and named after Senator William Roth of Delaware, their primary sponsor. Roth IRAs allow you to make non-deductible contributions up to $5,500 per year that can grow tax-free and are available for tax-free distribution after you reach the age of 59 ½.

So why would you ever need a “backdoor” Roth IRA? Well, if you make too much money, then unfortunately you are ineligible to contribute directly to a Roth IRA. More specifically, in 2016 if you are married and make over $194,000, you cannot contribute to a Roth IRA. BUT you can still contribute to a non-deductible traditional IRA and convert it to a Roth IRA, and that is what we refer to as a backdoor Roth contribution.

Let me walk through that process. A non-deductible traditional IRA is seemingly the worst of both a Roth and traditional IRA—you cannot deduct contributions and you are taxed on distributions. However, after you contribute to a non-deductible traditional IRA, you can then make an election to convert the account to Roth. And since you did not take a tax deduction for the original contribution, your basis in the account would be the same as your contribution, so the conversion would not trigger any taxable income.

Keep in mind that this process is more complicated if you also have a traditional IRA because you cannot specify which accounts you are converting. IRS rules mandate that you treat conversion amounts pro-rata with all IRA account balances. For example, if you make a $5,500 non-deductible traditional IRA contribution to a new account, but you already have a traditional IRA worth $49,500, the conversion will trigger $4,950 in taxable income. Your aggregate IRA balance would be $55,000 ($5,500 + $49,500), and since 90% ($49,500 / $55,000) of that balance has been untaxed, 90% of the conversion ($4,950) must be taxed. So you can make the conversion, but it will not be tax free as in the case without an existing traditional IRA balance.

The point is that you may make too much money for a direct Roth IRA contribution, but you may also be eligible for this alternative funding method. It requires a little more work administratively, but your IRA custodian should be able to help you through the process.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Plain English, Part I: Dollar Cost Averaging

In the 1989 classic, Back to the Future Part II, Marty returns from the past only to find that his present has taken a dark turn. Seeking some explanation, he finds Doc Brown who says, “Obviously the time continuum has been disrupted, creating a new temporal event sequence resulting in this alternate reality.” To which Marty’s response was, “English, Doc!” The point is that terminology can get in the way of understanding, especially within the financial world. So here is a plain English explanation of a technical term that is very relevant for investors in the current market: dollar cost averaging.

It is a wonderful gift to those who are steady investors and a powerful mathematic principal as important to saving as compounding interest. And even though you have probably never heard of dollar cost averaging, you unknowingly use it in your everyday life:  You know when you’re at the grocery running down your list of normal purchases and discover that one of them is half off? Do you go home and complain about how the toilet paper market is down? Absolutely not—you buy an extra package. That is dollar cost averaging.

To illustrate, let’s assume there are two investors who each put $100 into the market every year:  one invests exclusively in Gizmo Inc. and the other in Widget Corp., which have both increased similarly in value over the last three years. But one key difference is that Gizmo stock has been much more volatile through its upward trajectory with prices zigzagging up and down along the way, whereas Widget has slowly increased over time.

As a result, Investor 1 purchased Gizmo at $6, $4, and $8 over the last three years, and Investor 2 purchased Widget consistently at $6 every year. But both stocks are currently trading at $10. So which investor performed better? You may be tempted to say that they ended up in the same position—each bought at the same average price ($6), and both companies are now worth $10 per share. And if they had purchased the same number of shares, you would be correct. But they didn’t—they purchased the same dollar cost of shares.

Therefore, the Gizmo investor was able to purchase more units in year two at $4 per share that then rose to $10, giving him an outsized gain compared to the other investor. As a result, the Gizmo investment saw an 81% return compared to 67% for Widget. So how does this principal correlate to the overall market?

Eric Nelson of Servo Wealth Management makes that exact comparison. In the 15-year period from 2000-2014, the Vanguard S&P 500 fund earned an average of 4.1% per year, which was about the same as the Vanguard Short-term Bond Index fund. But guess what the key difference was? Just like our Gizmo vs Widget battle before, volatility changed the game.

The S&P 500 experienced seven times more volatility than the bond fund. So if you had invested $1,000 every month for 15 years, then S&P 500 portfolio would have grown to $352,202, whereas the bond fund portfolio would have only grown to $228,294, despite the same $180,000 investment. So while it may have been painful to invest in 2001 and 2008 when the market experienced major declines, those investments lowered the dollar cost average of the S&P 500 portfolio, boosting its earnings over time.

In his 1949 book, The Intelligent Investor, Benjamin Graham uses the allegory of Mr. Market to explain the irrationality of market movements. Graham tells the reader that Mr. Market is your business partner, and every day he offers to sell his share in the business or buy yours. Graham further explains that Mr. Market has a major affective disorder, so his exuberant optimism and frantic pessimism are not based on meaningful changes in the business. Given these circumstances, you would never sell to Mr. Market when he has an unreasonably gloomy outlook for the business or buy from him when he has unreasonably high expectations. Either way, Mr. Market wouldn’t be offering a good price, and you know there will be another one tomorrow.

The point is that the market has no reasonable basis for its day-to-day movement. Over time, it corrects itself, but there is no reason to get caught up in short-term fluctuations. In fact, if you steadily invest in the market, through good times and bad, dollar cost averaging will accelerate your returns and propel wealth accumulation.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Can You Flip That House?

The night of September 28, 2004, brought confusion and curiosity into my life. Was it truth or fiction? Who were these people and why did I care? I’m talking about the premier of Laguna Beach on MTV. I’m not proud that I watched this show or its successor for their entire six-year run, and I’m furious that it completely eroded any moral high ground I would otherwise hold over the Andy Cohen faithful.

But I fully admit that I fell for the reality TV trap—it’s entertaining and really easy. You can insert yourself into a situation without any effort and feel like you are a part of the experience. That’s why after six years, I felt like I knew this random group of people in California. I didn’t. It’s also why people who watch any number of real estate-based shows on HGTV or TLC feel like they are professional house flippers. They’re not.

So who should invest in real estate? I'll answer by identifying who definitely shouldn't. With the notable exception of real estate professionals, you should not invest in real estate if:

You are depending on the monthly cash flow

If you are trying to fund monthly expenses with income from a rental property, don’t buy real estate. In an ideal world, you would collect a monthly rent check, pay a mortgage, and then pocket the rest. But we do not live in an ideal world. That one month when you really need the rental income to pay for an unexpected personal expense, your tenant will leave, the water heater will go out, and you’ll find a leak in the roof. In other words, at your most financially vulnerable state, you will be up a very certain creek without a paddle.

You already have high stress level

Rental properties are great, until they’re not. They have a way of waiting until the least convenient time for something to go wrong, and then all hell breaks loose. So if you have a stressful job or busy home life, don’t buy real estate. Even if you are not depending on the monthly cash flow and can afford to fix any issues that may arise, it can be stressful dealing with the tenant or property manager to make sure everything is handled appropriately. People are drawn to real estate as an investment because it is something they can see and understand, but ironically, real estate is more about managing people—tenants, property managers, contractors, etc.—and people are anything but easy to understand or manage.

You have no idea how to fix stuff

Even if you have a property manager, you should know how to fix basic problems. Otherwise, you will get nickel and dimed by plumbers and electricians on basic tasks. Regular repairs can add up quickly, eating into your profit margin. You should also have a fundamental knowledge about how much repairs outside your comfort zone should costs. I know it’s hard to believe, but most people do not have your best interests at heart and will take advantage of you. So if you get a quote on a project that’s double what it should be, you better be able to recognize it.

If you enter “real estate” into a YouTube search, you will find dozens of videos about giving up the nine-to-five for an easy life in the real estate world, but it’s anything but easy. The people I know within the industry make good money but also work very hard. So be sure you know what you are getting into before you buy something.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

It's Not You. It's me.

On October 28, 1993, “The Lip Reader,” which was the 70th episode of Seinfeld, aired on NBC. Jerry attempted to date a deaf girl, which explains the title, and George confronted a new relationship-ending paradigm: the girl broke up with him. As a perennial bachelor, George was used to giving the line, not receiving it: “I invented it’s-not-you-it’s-me. Nobody tells me it’s them, not me. If it’s anybody, it’s me.”

Sorry, George. It was you, and you didn’t get to deliver the face-saving line either. I think a lot of investors feel like George. They are used to being in control of their lives, succeeding in their careers and personal lives, but when it comes to their finances, they feel a little used and very confused. But here’s the thing: it’s really not you. Managing your finances is tough, and I’ll tell you why.

Problem 1:  Jargon

The financial world loves to use complicated terminology. Advisors talk about seeking alpha, but most can barely deliver beta. Of course, now they market ‘smart’ beta to capitalize on market inefficiencies while remaining risk averse. Got it? We are not as bad as management consultants, the kings and queens of euphemism who prefer to say their analysis is ‘directionally correct’ when they really mean the numbers are wrong but they still like the conclusion.

But in both cases, jargon is a barrier for entry. Many in the financial services industry don’t want you to know what they’re saying because that might somehow diminish their perceived value. Obviously, that notion is ridiculous. One of our primary goals should be to educate clients, not confuse them. Regardless, if you generally consider yourself to be an intelligent person but find yourself confused when talking to your advisor, you need a new advisor. 

Problem 2:  Emotion

The two most powerful emotions that will affect your financial decisions are greed and fear. We all remember the Machiavellian advice of Gordon Gekko:  “Greed is good,” which is the best endorsement insider trading has ever received. But for those of us who prefer to obey the law and make decisions we can live with, greed is not so good. It encourages people to take on way more risk than they should and make investments they will soon regret. Easy money does not exist—just ask anyone who has ever helped a Nigerian prince wire money to the United States.

But fear can be just as dangerous; it’s the reason investors sell their entire portfolio when the market takes a big drop. Nassim Taleb, statistician and author of The Black Swan, said, “A stoic is someone who transforms fear into prudence, pain into transformation, mistakes into initiation, and desire into undertaking.” In other words, to be a successful investor, you have to be somewhat stoic toward your investments. Fear should not drive market reaction. Instead, it should illuminate excessive risk and create balance in your portfolio before a market selloff. Fear should make you proactive and not reactive.

Solution to Both

Simplify and ignore. You don’t have to talk like a broker and understand everything Larry Kudlow says to be proficient with your finances. You just need to know how much you’re saving each year, what accounts you own, and what your investments are within those accounts.

Start with a budget to track your savings and use low-cost ETFs to minimize expense and maximize wealth accumulation. Do not invest in anything with a complicated name (I’m looking at you Flexible Premium Variable Annuity III), products that are repeatedly touted as “guaranteed” (because they’re generally guaranteed to be a rip-off), or really anything you don’t completely understand. 

And unless you are close to retirement, do not worry about what the market is doing. In fact, if the market drops, think about the great discount you are receiving on the investments you are purchasing with current contributions. Otherwise, ignore the day-to-day movement and take solace in knowing you have a plan.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Be Boring, Make Money

In 2008, Paul Rudd introduced us to his character Kunu from the summer comedy, Forgetting Sarah Marshall. Throughout the film, Kunu, a carefree surf instructor, made us question some of life’s deeper truths like what you should really do when life hands you lemons or how ambiguous yet very much concrete one’s age can really be. But his best piece of advice came on the beach during one of his lessons:  “The less you do, the more you do.”

Now, that’s funny because it makes zero sense in almost every situation—almost. When it comes to investing, it actually holds true. People live in constant fear of missing out and as a result tend to do what everyone else (read: the market) is doing. Unfortunately, that process usually results in buying high and selling low, which makes it extremely difficult to accumulate wealth. So to break away from the pack follow these three guidelines:

Quit watching CNBC

It’s financial porn. Jim Cramer’s job is to get you all excited about the possibility of making big money, but you know it’s not the real deal. Actual investing is boring:  There are no flashy graphics, “buy, buy, buy” sound effects, or sweaty men yelling “booyah” to novice investors in Centerville, Ohio.

Actual investing is way less active. In his book The Behavior Gap, Carl Richards says, “Saving money, avoiding speculative investments, and repeating that process over and over may not be sexy, but it gets the job done.” People want to feel like they are doing something, so they watch CNBC and read Money magazine, adjusting their investment strategy based on the latest financial fad. Smart money sets an allocation, rebalances when necessary, but otherwise leaves it alone.

Quit thinking you’re Warren Buffett

In 2008, then Senator Barack Obama said to a group of kids, “Maybe you are the next Lil Wayne, but probably not, in which case you need to stay in school.” Well, I’m here to tell you that maybe you’re the next Warren Buffett, but probably not, in which case you need to stay in low-cost, index ETFs.

We can learn a lot from Mr. Buffett:  He is the consummate value investor, and he does not get distracted by the day-to-day movements of the stock market. You will not find a Bloomberg terminal in his office or a TV with CNBC muted in the lobby of his building. These are great qualities for an investor to have, but it would be a mistake to believe that you can match the performance of Berkshire Hathaway with your personal wealth simply because you agree with his philosophy.

Quit comparing yourself to your day trading co-worker

I know “Jim” supposedly doubled his money last year on that Netflix position, and now he’s thinking about buying put options against the yuan. But don’t listen to Jim. Jim has no idea what he’s doing, and he definitely isn’t telling you about all the times he lost money.

Do you know what the best performing stock has been over the past 30 years? It’s not Apple, Google, or Intel. It’s a company that produces flavor additives for animal feed called Balchem Corp. based out of Wawayanda, New York, and its stock is up over 100,000% since 1985. But guess what? You, Jim, and Warren Buffett all missed it because it would have been nearly impossible to predict. So quit trying; you’re just losing money and wasting time.

We live in the generation of now. We want to be active and engaged to see immediate results. But that’s not the way investing works. It’s slow and boring, but it’s also incredibly effective over the long run.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Financial Structure for Your Life

In 2005, Jake Gyllenhaal played a US Marine in the Gulf War drama, Jarhead. During the boot camp opening scene, Gyllenhaal’s character regrets his enlistment, and the drill instructor rather aggressively asks him why he’s even there. Gyllenhaal’s character unwisely responds, “Sir, I got lost on the way to college, sir!”

Sometimes, we just need a little structure in our lives. The military isn’t the answer for everyone, but we all infuse structure into our live somehow. You often hear people say, “I’ve got to get back into a routine,” because daily structure reduces anxiety and creates efficiency. The same is true for our finances, and we call that structure a budget.

I have written previously about the importance of budgeting but never offered any guidance on practical implementation, so today I will discuss the 50/20/30 Rule. I’m no fan of financial fads, but this concept can be very helpful when starting the budgeting process for the first time. The idea is that you spend 50% of your net paycheck on fixed monthly expenses, 20% on savings goals, and 30% on variable monthly expenses. Here is a quick breakdown of each category:

50% Fixed Expenses:  About fifty percent of your take home pay should go toward fixed monthly expenses. This category includes your mortgage payment, car note, utilities, daycare, memberships, tithing, etc. These amounts are predictable and recurring, so they should be easy to identify. If you need to reduce your overall budget, this category is a good place to start because you get hit with these expenses every single month.

20% Financial Goals:  The next twenty percent of your take home pay should go toward savings and other financial goals. This category includes retirement savings but also extends to creating an emergency fund, paying off student loans, saving for a trip or new vehicle, and setting aside money for your kids’ college. Anything you are putting money away for is included in this category.

30% Variable Spending:  The last thirty percent goes toward everything else you pay for on a monthly basis. Some of these items will be for essentials like food and transportation, but entertainment and travel are also included in this category. Variable spending is a bigger allocation than financial goals because it includes more items, but notice the order. Financial goals come before variable spending because you have to make your financial goals a priority.

It’s called the 50/20/30 Rule, but it should really be the 50/20/30 Suggestion. For example, if you make $1M a year, hopefully, your fixed expenses will be less than $500k for the year, and your savings will be greater than $200k. Conversely, if you make $20k a year, you will probably have to spend more than $10k on fixed expenses and may not be able to save $2k throughout the year. The breakdown just gives you some guidelines to think about when you are examining your monthly expenses.

Also, remember that these calculations are based on take home pay, so you may already be contributing toward retirement through a company sponsored plan. In which case, your total savings would be more than 20%, but that’s ok. Since financial goals encompasses much more than just retirement savings, going over 20% may be appropriate.

Finally, to make the most of this budgeting tool, automate as many of these items as possible. Your fixed expenses will be the same each month, so set them to auto draft. You will never miss a payment, and you can save yourself the mental energy of having to remember to write a check each month. Your financial goals can also be automated:  If you are contributing to an IRA, set it to auto deposit, and if you are saving for another short-term goal, open another account and have the money automatically transferred each month.

A personalized budget will not create itself. You still have to take time to analyze your expenses and see where your money is going. But hopefully the 50/20/30 Rule will give the process some structure and help you get started.

Disclosure:
 
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

What’s Important to You?

Out of all the wedding receptions I’ve been to, my favorite first-dance song is Hall & Oates “You Make My Dreams Come True” (you-hoo, hoo-hoo). It’s an awesome song and not overly used, so it is a great track to kick-off the night and celebrate the newlyweds. It’s also the feature track in (500) Days of Summer, a movie that proves if things don’t work out with Zooey Deschanel, they surely will with Minka Kelly.

Unfortunately, I’m going to use this 80’s hit to segue into the least romantic topic possible: money. People spend a lifetime mindlessly accumulating wealth and buying stuff but never take time figure out what is truly important to them. The sooner you figure that out, the sooner you can use the money you already have to make your dreams come true, hoo-hoo.

Identify

Show me your latest credit card statement, and I'll tell you what is important to you. Hint: it’s where you spend your money. For example, I spend $130 a month on my gym membership, which is probably a multiple of the average monthly membership fee. It's a CrossFit gym (queue eye-roll), so there's a coach in every class, which skews the fees higher. But it's important to me. Without that daily release, I would be a walking ball of stress. I sit all day, looking at numbers and meeting with clients, so I find it restorative. I listen to loud music and throw things for an hour then go home sweaty, tired, and relaxed.

Unfortunately, we also end up spending money on stuff that isn’t important to us. For example, you know that subscription to The Economist you renew every year and never read? Is it really worth the $160 you pay to have a new coffee coaster delivered to your house every week? Unless you actually read and enjoy it, cancel the subscription and put the money toward something truly important to you.

Prioritize

At a recent conference, I heard Greg McKeown, author of Essentialism, give a talk in which he recounted a brief history of the word "priority." He said that the word originated in the 1400s and remained singular for the next 500 years. By definition, there should only ever be one, single priority; however, that logic doesn't translate to our modern culture. We try to juggle multiple, competing priorities, which defeats the whole point of setting a priority in the first place.

So what is your true priority? Don't judge yourself by whatever first pops into your head, changing it to something more socially acceptable. It’s your priority, so be honest and figure out what’s most important to you. Is it making partner at your firm? Great. Is it the ability to pick your kid up from school every day? Awesome. Is it hiking the Appalachian Trail? Perfect. It doesn't have to be practical or prudent; it just has to be something you want, something important to you.

Execute

Now, for better or for worse, whatever that thing is you find most important, it has a strong financial implication. Making partner may require hiring domestic help or one spouse staying home. Flexibility to pick your kid up may mandate reduced hours and lower pay, or maybe it pushes you to toward self-employment. And taking a leave of absence for an extended trip will require a great deal of saving. But if that is what will make you happy, these are the considerations that should dictate your financial decisions.

All too often, we focus on some magic balance your investment account has to reach before retirement, and that ends up being the primary driver behind your financial decisions. And, yes, financial planners are the most egregious offenders. But doesn’t it make more sense to focus on creating a sustainable lifestyle that you can enjoy now and throughout the rest of your life, not just in retirement? The clarity that comes with setting a priority will allow you the opportunity to spend a lifetime making financial decisions that make you happy. When you eliminate distractions (read: unimportant expenses), you can focus your money on what is actually important to you.

This process should alter your perception of money: it will no longer be a goal in and of itself but a tool used to achieve your true goals. We all know the truism money doesn’t buy happiness, so start living it. Discover what’s important to you and start making financial decisions to achieve it.

Disclosure:
 
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

How Much House Can You Afford?

Owning a home is as American as apple pie or the Fourth of July. It’s the first step in obtaining what most people dream of:  a white picket fence, 2.5 kids, and black lab. Unfortunately, conspicuous consumption and debt are also just as American. Sometimes our ambition gets ahead of our wallet and we buy things we shouldn’t. With that being said, there’s nothing wrong with buying nice things; you just have to make sure you can afford them and they fit within the context of your overall financial plan.

So just exactly how much house can you afford? The answer is anything but straight forward. There are many variables to consider, and hiring a good real estate agent can help you clarify some of them. But to get you started, I have outlined three major financial considerations:

Create a Budget

You cannot purchase a house, or make any other financial decision for that matter, in a silo. You have to consider how that goal fits within the context of your greater financial plan, which is anchored by a budget. So if you have never created one before, buying a house is a good reason to give it a try.

Fortunately, most people who want to buy a house currently rent or pay a mortgage on their current home, so historical spending can give you a general baseline for what you can afford. But it’s a zero sum game; if you increase the amount you spend each month on a mortgage, you will have less to save or spend on other monthly expenses. So identify what will change: are there monthly expenses you will cut or can you save less and remain on track for retirement saving?

Estimate Monthly Mortgage Payment

It is easy to calculate how much your mortgage payment will be each month. There plenty of payment calculators on the internet that can compute principal and interest payments. However, there are other monthly payments to consider in addition to these two basic items.

Property taxes and insurance, which are generally escrowed and included with your monthly mortgage payment, can be a significant expense. You can look up current property taxes by street address using the county landroll query tool online. So if you are looking at a particular house or neighborhood, you can get a general idea of how much you can expect to pay each year. Insurance costs will be in the same range as property taxes but vary depending on a number of factors, but your insurance agent can quickly deliver a quote estimate to help guide you in the purchasing process.

In addition to these fixed monthly costs, you must also consider utilities, maintenance, repairs, and creating a reserve for the inevitable A/C and roof replacement. These costs are more difficult to estimate but can quickly add up. If you are purchasing a much bigger or older house, you must assume that the utilities will be higher.

Maintenance of a larger home can also add up, especially if the yard is no longer a manageable size and you end up hiring a professional. The same goes for cleaning. Owning a bigger house doesn’t create more hours in the day, so if you have more rooms to clean, you may also feel the need to hire a maid. These expenses also tend to create the greatest sense of guilt. But if they fall within your budget and allow you to spend more time with your family and keep your sanity, then there is no reason why you should feel guilty about them.

If you are currently a renter, you are unfamiliar with the stress of repairs. Even a quick trip from a plumber can set you back a couple of hundred dollars, and replacing the A/C will be several thousand. In order to be financially prepared for these “life costs,” you have to budget for small repairs and set aside a reserve for that unfortunate day in August when the unit goes out and you come home to a 90 degree wave of heat and humidity.

Calculate Down Payment and Emergency Savings

Finally, you need to decide how much of a down payment you can afford. This amount will greatly affect the monthly payments discussed earlier and determine whether or not you will also have the added cost of primary mortgage insurance (PMI). Obviously, a bigger down payment is better; ideally, you would have 20% of the purchase price. But many lenders will take much less, depending on your personal situation. So you have to decide if you want to stay in your current situation longer and save for a bigger down payment or pull the trigger on a new house and settle for a lower down payment.

You should also not underestimate the costs of moving and getting a house ready to move in. As compared to the overall purchase, these costs are relatively inconsequential, but they can add up. You may have to pay movers and rent a truck. Also, you may be thinking about repainting a few rooms and adding some new furniture to take advantage of all the space your new home may offer. You want it to feel like home, but all these things cost money.

As a part of your overall financial plan, you should build an emergency reserve, and buying a house doesn’t give you a legitimate excuse to cash it out. The emergency reserve has a purpose of its own, so do not re-characterize it as a house down payment fund because it’s convenience. Bad luck has a way of waiting for exposure, so if you deplete your emergency fund, don’t be surprised if life hits you with some unexpected expense that derails your plan.

Purchasing a home can be a scary process. For most individuals, it is the biggest purchase they will ever make. But if you give these areas proper consideration, you should be well prepared for making this decision.

Disclosure:
 
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

New Year, New Goals

It’s January, which means it’s time for you to sign that twelve month gym contract you’ll only use until March and lie to yourself about how many books you’ll read this year. Yes, I’m talking about your New Year’s resolutions. Unfortunately, the beginning of each year is besieged with such good intentions that rarely materialize into results.

Despite my aversion to New Year’s resolutions, I am a big believer in setting goals. I always have short and long-term goals for both my personal and professional life; they guide how I prioritize my time and focus my energy. So what’s the difference? People set goals because they want to make a positive change in their life; people make New Year’s resolutions because Twitter shames them into coming up with something. 

So what are your goals? Have you included something that will improve your financial life? Even those who are the most financially sound can make improvements. Consistently setting and reaching financial goals ensures that you are continually using your resources to most efficiently enrich your life. Money will not make you happy, but if you use it wisely, it can create opportunities for you and your family to enjoy. To that end, here are some suggested financial goals for the New Year.

Increase Savings

Participating in your company sponsored retirement plan is a minimum and does not guarantee you are socking enough money away for the future. In general, you should save 10-20% of your income for retirement, so depending on what your company plan allows, you may need to augment savings with an IRA, Roth IRA, or investment account.

Also, you should build up an emergency fund for unexpected expenses. You don’t want home repairs, medical bills, or other unpleasant “life costs” to set back your savings goals or catch you off guard with a low cash reserve. Three to six months’ worth of living expenses is usually sufficient.

Buy a House

Millennials especially are wary of the permanence that home-ownership implies. There is something to be said for renting, especially if you are new to a city and unsure where you want to live. But if you are ready to put down roots and buy a home, then there are a few things to consider.

How much house you can afford? This decision should be made within the constraints of your overall budget, keeping in mind not only mortgage payments but also property taxes, insurance, utilities, and maintenance.

How much of a down payment will you make? In an ideal world, you would put 20% down, but many mortgage companies will take less, depending on your financial situation. This amount may also play a major role in determining the timeline for when you plan to purchase if you need more time to save up.

What type of mortgage will you get? The gold standard is 30 year, fixed interest. The most conservative borrowers will get a 15 year note, but you can always prepay a 30 year mortgage. Generally, a variable interest mortgage is not advisable.

Start Your Own Business

You may consider starting your own business to be more of a personal development goal than a financial one, but the reality is that most all personal goals have some financial impact. Starting a business is no exception.

You may need to save in order to fund the initial idea, continuing to work while you get the business of the ground in your spare time. Or maybe you have passed that stage and have a viable side business that deserves your full attention. In that case, make sure you have enough cash saved to fund your “runway,” which is the time it takes for your business to take off and fully fund your living expenses.

Work Part-Time

Transitioning to part-time will mean making less money, but money is just a tool, not the ultimate goal. So if you have other priorities, maybe you should consider making the move. No one ever reaches their twilight years and wishes they had spent more time at the office.

Maybe you or your spouse wants to spend more time at home with the kids. Maybe you have strong convictions about community involvement and volunteering. Or maybe you and your spouse both just want to cut back so you can travel more. If you are willing to live on less, any of these options are a possibility.

Go Back to School

At twenty-two, you swore you would never go back, yet now you find yourself perusing degree offerings and course descriptions from different schools. So whether you think a higher degree will help your career or you just want to do it for yourself, going back to school will definitely affect your finances.

The most conservative option would be to keep your job, go to school at night, and pay tuition as you go. That plan keeps you in the workforce and gets you a degree with no debt. Obviously, this option is not available for everyone. You may need to leave your job and take out a loan, or if you are married, maybe you can reduce your monthly living expenses and live on one salary while you are in school.

Get Out of Debt

You should definitely pay off your credit cards, but maybe you want to tackle something bigger like your mortgage or student loans. Especially if you have seen a recent increase in income, you may consider paying down these debts. You will sleep better and enjoy seeing the balance drop on each statement.

But in order to be successful, you need to come up with a plan. Set a specific goal with how much you want to pay off over what timeline. That way you can track your progress and increase your chance of success. Monthly advances will encourage you to continue making payments, ultimately saving you a fortune in interest.

So as gym crowds swell and wane over the next couple of months, I hope you continue pursuing your personal goals. And if you need professional direction in setting your financial goals, please let me know. I would be more than happy to help.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Mail Call: Organizing Year-End Tax Forms

As a practicing CPA, when tax season rolls around, sometimes I feel like Bill Lumbergh helping people fill out their TPS reports. “Did you see the memo about this?” In January, taxpayers will receive an alphabet soup of tax forms in the mail that are all important, but the sheer volume becomes overwhelming. Their importance diminishes with each receipt as they are added to the pile for delivery to whoever is lucky enough to sort through it all and prepare the return.

Most firms send out organizers to help clients keep track of all this information. And while this package may seem too overwhelming to deal with, it usually highlights the information used to prepare the prior year return, so you can at least use that as a guide to begin sorting through this year’s tax forms. Regardless, I wanted to provide a high level guide of some forms you may receive and what they mean so that you feel less overwhelmed when your mailbox starts filling up in January.

W-2:  As the most common form, anyone with a normal job gets a W-2. It shows taxable income, retirement contributions, federal withholding, state withholding, cafeteria plan withholding, and other employer sponsored plans that may be needed to make sure your taxable income is correctly calculated, as well as applicable credits and deductions.

1099-MISC:  If you are self-employed or have a part-time gig, most of your clients will send you one of these. Although, clients who paid less than $600 for the year are not required to send a 1099, but the amount is still taxable. This type of contract wage generally triggers self-employment tax, so be prepared when you file your taxes.

1099-DIV / 1099-INT / 1099-B:  These forms typically come in one tax statement from wherever your investments are held. In many cases, it is included with your fourth quarter investment report and details dividends, interest, and stock sales for the year. However, you should be aware that it is extremely common for financial institutions to send out corrected 1099s a couple of months later. These companies must send out 1099s before the January 31st deadline, but all too often, these forms are prepared before all the relevant information has been received.

1099-R: If you receive a distribution from any type of retirement account, this form will report the distribution and any taxes withheld. Even if you rolled a 401(k) into an IRA and received no actual distribution, you will still get a 1099-R that shows the amount rolled over. In this case, you should not owe taxes, but you must still report it on your return as a rollover to avoid receiving a notice from the IRS.

SSA-1099: This form reports social security payments for the year, as well as payments withheld for Medicare and federal income taxes. It may or may not be taxable depending on your other income for the year.

K-1:  If you own an interest in a partnership or subchapter S corporation, or if you are the beneficiary of a trust or estate, then you will receive this form to report your distributive share of the entity’s income for the year. That doesn’t necessarily mean that you received cash in this amount; they are either completely pass through (partnership or subchapter S corporation) or quasi-conduit (trust or estate), which means that you will pay taxes on income earned by the entity, credited to you, and not taxed at the entity level.

1098:  These forms come from your mortgage lender and report interest paid for the year, and if you utilize escrow payments, they may also list property taxes and mortgage insurance. All of these items are eligible for itemized deductions and may reduce your tax liability.

Giving Statements: If you report charitable contributions of over $250 to any one entity, they must send you a written acknowledgment of receipt before you file your return. Copies of cancelled checks and after-the-fact acknowledgment will not hold up under an IRS audit. This guideline is somewhat new and departs from prior year practices, so be sure to include these statements with your tax documents.

This list is by no means exhaustive, but hopefully it will help you get everything organized in the New Year. Also, since you already have to gather your financial statements, tax season is also a good time to revisit your current financial plan or contact a financial professional to discuss goals and create a new one.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com

Looking Out for #1: Your Retirement, Your Best Interest?

All too often, important topics are glossed over because their levity is clouded by industry terminology. For example, do you remember during the recession when it took a Harvard MBA to intelligently read the newspaper? Important things were happening, but the explanations were either too complicated or too boring for most individuals to follow.

So when I write that the Department of Labor has proposed a rule that will require financial professionals to act as fiduciaries when advising clients on retirement investing, you will probably not want to hear much more, unless I tell you that it involves Donald Trump, Angela Merkel, and an international sex scandal. It doesn’t, but it’s still important. And you should definitely find it interesting because it involves your hard-earned money.

Essentially, this rule would mandate that advisors make recommendations about retirement accounts that are always in their client’s best interest. Maybe this plain language explanation highlights a more fundamental issue that you find surprising: Not all financial advisors give advice that places your interests above their own.

In the world of financial advice, there are two tiers: fiduciary and suitability. The fiduciary standard requires advisors to put client interests above their own. In other words, a fiduciary cannot recommend one investment over another to earn a higher fee; they must always recommend the best investment for that client regardless of their compensation.

Conversely, the suitability standard only mandates that financial advisors recommend investments that make sense for the client’s situation. So there is still some degree of protection for consumers; a broker cannot recommend an investment that is completely unreasonable. But they certainly do not have to go to the trouble of finding the best or cheapest investments, just those that are suitable.

So what would this proposed fiduciary rule mean? That question is the current subject of bitter debate within the financial services community. Proponents site an estimated cost of $17 billion per year to retirement accounts that results from conflicts of interest allowed by the lower suitability standard. They believe this rule will protect retirement accounts from excessive fees and ensure that they can grow through the best investments available.

However, many representatives from the industry are against it. They say the rule would leave lower income investors without access to advice regarding their retirement accounts. Many of these clients are currently served through product commissions, which pose a conflict of interest. Unfortunately, that is one of the few ways to profitably serve that demographic, and enforcing a fiduciary standard would eliminate it as an option.

This debate is far from over, and we will hear much more in the coming months. Regardless, you should be aware of the difference between the fiduciary and suitability standard that this proposal has brought to light. Both types have their place, but if you think you are paying for someone to put your interests first, make sure that’s actually what you are getting.

Disclosure:
 
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Setting Rules after the Game: Congress on Tax Extenders

Congress has a lot in common with my four year old niece. She likes to play card games that she invents, and, of course, she gets to set the rules after each hand is dealt. So guess who usually wins? Likewise, Congress has a bad habit of playing political games with the federal budget and setting tax law retroactively. The so-called “tax extenders” are a group of temporary tax provisions that are typically reinstated every year, but they have yet to be extended for 2015.

Unfortunately, this delay comes as no surprise to most tax professionals. Last year, tax extenders were not reinstated until December 19, 2014, leaving taxpayers only twelve days to make decisions about over fifty different tax provisions. As a result, CPAs and tax attorneys were left in limbo for most of the year and forced to make recommendations based on professional predictions about which extenders would be reinstated. This year has been no different.

The ten year cost estimate for this year’s batch of extenders is estimated to be between $85-97 billion, which is only a fraction of our annual budget but it’s still a considerable amount of money. Congressional budgeting rules mandate that legislators consider this ten year cost when making permanent changes to the tax law, so instead of carrying the political shame of such a high price tag, lawmakers prefer to renew these provisions on a year-by-year basis to make the costs seem much less. So there are many extenders that we assume throughout the year will be renewed, but we don’t actually know until Congress decides to act.

These tax provisions vary in size and benefit a range of taxpayers, so if you have never heard of tax extenders, you are probably thinking that theses tax rules only affect the extremely wealthy or multi-national corporations. But that is not the case. You probably do not care about the “Subpart F Exemption for Active Financing Income,” a tax break even more complicated that its title indicates: it’s an exception to an exception to an exception for multinational banks. But here are several extenders that very well could affect your 2015 tax return.

Educator Expense Deduction:  If you are a teacher and spend up to $250 on supplies for your classroom, you can use this deduction. It’s a “Page 1” deduction, meaning that you don’t have to itemize in order to claim it, so it is generally a direct reduction in your taxable income.

Sales Tax Deduction:  One of the biggest itemized deductions is state income taxes. However, if you are retired or live in a state with no income tax, then you are fortunate enough to be somewhat limited in the amount of that deduction. But this extender allows you to use state sales tax in lieu of state income tax, which increases your overall itemized deductions. And you do not have to keep track every sales receipt; the IRS allows you to use an estimate of your annual sales tax expense based on your adjusted gross income.

Private Mortgage Insurance (PMI) Deduction:  PMI is a policy paid for by the borrower that reimburses the lender in the event of a mortgage default. It is required when borrowers do not make a significant down payment (generally 20%) on their home; however, it can be cancelled when the loan-to-value ratio drops to 80%. But while you are paying PMI premiums, this tax provision allow you to use them as an itemized deduction, much like mortgage interest payments. In fact, PMI payments generally appear on the annual Form 1098 from your lender, along with mortgage interest and property taxes.

IRA Charitable Rollover:  When you turn 70 ½, you must take required minimum distributions from your IRA, although Roth IRAs are exempt from this rule. So even if you don’t currently need the money, you are still required to make a withdrawal, which creates taxable income. However, under this provision, those who are 70 ½ or older can choose instead to make a direct charitable contribution from their IRA up to $100k. The rollover amount is not counted toward charitable contributions eligible for itemized deductions, but the amount is also excluded from gross income. And since many tax calculations are based on adjusted gross income, excluding an IRA charitable rollover could increase deductions, decrease taxable income, and lower your overall tax liability.

Bonus Depreciation & Section 179 Expense:  If you are a small business owner in a capital intensive industry, then you are well aware of these provisions. Generally, equipment and other assets are depreciated over a number of years, spreading out the expense over an extended period of time. However, bonus depreciation allows for a 50% current year deduction for the purchase of new assets, and Section 179 can allow current year expensing of the entire asset cost. These provisions were initiated to spur capital investment during the Great Recession, but small business owners have come to rely on them heavily to reduce their current year taxable income.

Principal Residence Debt Forgiveness Exclusion:  Generally, cancellation of debt produces taxable income. But at the onset of the housing market crash, when millions of Americans were defaulting on their mortgages, Congress passed the Mortgage Debt Relief Act of 2007, which excluded from taxable income cancellation of debt on a primary residence. This act lives on as a tax extender that excludes up to $2 million on married filing jointly returns of cancellation of debt income for qualified principal residence indebtedness.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Life Charade: We fake it, but do we ever make it?

If you are inclined to identify with international superstars, as I often am, then you may enjoy this humble quote from the much-adored Taylor Swift:  “My confidence is easy to shake. I am very well aware of all of my flaws.” That’s coming from someone with 7 Grammys, 66 million Twitter followers, and an estimated net worth of $200 million. Clearly her insecurity is misguided.

However, it may not be all that surprising. Tomas Chamorro-Premuzic, professor of business psychology at University College London, writes in his book Confidence, “Although society places a great deal of importance on being confident, there are no genuine benefits except feeling good. In fact, lower confidence is key to gaining competence…” The theory is that insecurity motivates us to constantly deepen our knowledge and hone our skills. So those who are successful are also likely motivated by their insecurity, which pushes them to strive for perfection.

In fact, this seemingly ridiculous combination of success and insecurity has a name. It’s called imposter syndrome, which is defined as a collection of feelings experienced by people who are unable to internalize their accomplishments. And it doesn’t take Taylor Swift-level success to create anxiety about being discovered as a fraud. We all mentally discount our own qualifications and inflate the accomplishments of others.

Personally, I find myself in meetings and sometimes feel like I’m there by mistake. It’s usually because I’m the youngest in the room by twenty years, so I immediately feel insecure sitting next to colleagues with years of experience and the grey hair to prove it. In that moment, I forget the professional expertise, business experience, and youthful creativity that I bring to the table. But I am invited for a reason; I bring value whether I can admit that to myself or not.

So if you have these feelings, then congratulations, you’re normal—or even better you enjoy some degree of success. If not, then you are probably too narcissistic to read an article titled Life Charade and have no idea what I’m talking about. But for the rest of us, what to do about the nagging annoyance of insecurity?

Honestly, I find it empowering to know that the term imposter syndrome exists and that it is extremely common among successful people. When you feel like part of a club, then it makes carrying the weight that much easier. Insecurity also probably indicates that you are operating outside your comfort zone. That’s a scary place to be, but it means you are pushing yourself; you are stretching your skillset and gaining new experience. So you should take solace in the fact that you are making yourself better.

Finally, we need to give ourselves permission to acknowledge some level of success. I am not endorsing arrogance or suggesting that you take all the credit for everything good in your life. No one can create or achieve anything alone. We all have a team of family, friends, and colleagues that encourage, guide, and support us. But it is healthy to look back, feel good about our accomplishments, and then push on toward the next goal.

Fees, Fees, Fees

Warren Buffett has famously said that the number one rule of investing is ‘never lose money.’ Rule number two is ‘never forget rule number one.’ Now before you roll your eyes at the advice of arguably the most influential investor of our time, let's think about the application of this simple yet overlooked principle. Obviously, it applies to investment choices; don't pick losing positions. But it also applies to the fees and ancillary costs associated with otherwise smart investments.

There are transaction, advisory, and product costs with virtually every type of investment. At the very least, you have to pay a broker to execute a trade on your behalf. But people rarely take time to analyze the collective effects of these fees on their portfolio performance. Many times the same service, product, or investment can carry a different cost depending on where you get it. And over the span of your working years, the effects on your portfolio can be dramatic.

See if this gets your attention

It is easy to dismiss investment costs at first glance. ETF fees range from about 0.1% to 1.25% per year, and mutual funds range from 0.1%-3%. So when comparing them to say a plaintiff attorney taking 33% of a client's settlement, they seem relatively modest. However, do not fall for this deception.

The fees appear to fall within a constrained range, but if you do the math 1.25% is several multiples of 0.1%, meaning the effects on you investments can be staggering over an extended period. For example, if you invest $5,500 per year (the 2015 individual maximum IRA contribution) in an ETF with a 1.25% expense ratio and an assumed 6% growth rate over 30 years, you will have about $350,000. But if you had just invested that same money in a similar ETF with an industry average expense ratio of only 0.5%, you would have just under $400,000. That’s a $50,000 difference from simply choosing a more cost effective investment.

But what’s worse is that the effects are even more dramatic when applied to greater annual contributions. Individuals who are fortunate enough to work for a company that offers a 401(k) plan can contribute up to $18,000 (maximum for 2015). The cumulative difference between an account using low-fee investments versus high-fee investments for this level of annual contributions would be over a $150,000. That is incredible.

Where to look

Unfortunately, these fees are not always easy to find. You won't see them on monthly statements, and, unsurprisingly, they are not heavily advertised. However, every ETF and mutual fund has to issue a prospectus, which no one ever reads. But this information is summarized online through services like Moringstar and other fund research websites. There are several different terms used to describe these fees but most commonly they are listed as a percentage called the expense ratio or load. The expense ratio just divides the current or projected administrative expenses by the total fund assets, and the load is generally specific to mutual funds that may charge an additional fee upon their purchase or sale (front-end load or back-end load). There can also be transaction fees and commissions depending on the fund and broker.

Suggested alternatives

The biggest names in low-cost investments are Vanguard and Fidelity. Both companies offer solid, passive investment products with low fees. Many other funds justify their high cost by active management that try to beat overall market trends. But the long-term investor is best served by finding low-cost funds that track market indexes.

If your custodian does not offer many low-cost investment options, IRAs are easy to rollover so that you can take advantage of better products. However, it can be more challenging with a company sponsored 401(k) since you are limited to the funds offered within the plan. But make sure you are at least invested in the most low-cost options available. Consult your financial advisor on specific investments.

Summary

I hope this information was at least illuminating, if not downright upsetting. Contemplating fees is not nearly as exciting as think about growth rates, but they are both important. Maximize your investment dollars by minimizing investment costs. That’s the best way to never lose money.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Work-Life Balance: Myth or Reality?

Work-life balance is a lot like world peace. People talk about it, but you can’t really imagine what it would look like if we ever achieved it. In fact, such equilibrium seems so elusive that it has almost taken on the myth-like character of Big Foot or the Loch Ness Monster. However, impossible as it may seem, we should all strive toward achieving a balance between our work and personal lives.

We work hard to earn money that supports our lifestyle, but if we never actually take time to enjoy it, what’s the point? Millennials, especially, appreciate this concept, and as a millennial, I have tried to make decisions that will allow me to maintain a work-life balance throughout my career. During that process, I have observed these three key concepts:

Segregate

Our work and personal lives are increasingly intertwined because technology allows us to work from anywhere. We like to romanticize this notion and picture ourselves taking a quick business call from Turks and Caicos, but more commonly it means responding to a work email only a few short hours after leaving the office.

As a result, we need to mentally segregate our lives between work and personal, setting goals within each. And from that list of goals, we should clearly articulate what our priorities are. For example, you may set a personal goal of having one date night a week with your spouse and a work goal of finishing a long-term project a month ahead of schedule to impress your boss. If these are your two goals, then you have to decide which takes priority. This decision helps you decide whether you stay late at the office to work on your project or leave on time for date night?

Without a priority framework, we drown in these day-to-day decisions, lose focus on our priorities, and fall out of line with our work-life balance. We need priorities to give us permission to focus on one thing at a time.

Automate

If you still write a check each month for your mortgage payment. Stop. Just please stop. In 2015, there is no reason for this process to take up fifteen precious minutes every single month for thirty years. If you do the math, that’s ninety hours spent writing checks to your bank, not to mention the mental energy it takes to make sure you actually remember to do it.

Bill payment is an easy area to automate, but there are other processes that we can put in place that save time and lower anxiety. For example, Amazon has a subscription service that allows you to set a recurring order for a bundle of products. So if there are ten things you buy every month at the grocery store or pharmacy, you can add it to your Amazon subscription service, and all ten items will arrive at your doorstep each month, leaving one less thing for you to worry about.

Even with tasks that you or your spouse must complete yourself, it is much easier to assign permanent responsibility as opposed to trading out week-to-week. Automation takes away the anxiety of remembering whose turn it is. Whether it’s picking up dinner or dropping kids at school, knowing who is responsible for each task makes life much easier.

Delegate

With only twenty-four hours in a day, we cannot do everything. Moreover, if we are truly seeking a work-life balance, we should not do everything. Instead, we should only do what we excel at and delegate the rest. Many people feel guilty when they hire a weekly yard and housekeeping services because these are things that we can do for ourselves. But if these expenses fall within our budget and allow us to focus on our priorities, then we should absolutely delegate these duties to someone else.

Guilt comes from the added bonus that many of us do not like these tasks anyway, but in order to build true efficiency and inch closer to finding work-life balance, we need to delegate tasks that do not require our personal attention. Anyone can mow our yard; but no one can replace us at home or in the office.

Delegation applies to your financial life as well. Many professionals and small business owners are very good at making money but often struggle with managing it. Financial management is not their focus, so they should delegate these tasks to a financial planner that has expertise in budgeting, saving, and investing. A professional can help you maximize the money you make and ease the anxiety associated with making financial decisions.

Summary

My life is far from the epitome of a work-life balance. It is a continuous process with daily wins and losses. But it has helped me to segregate priorities, automate what I can, and delegate the rest. So I hope these ideas help you too.

How to Ask for a Raise

The first time I asked for a raise, I was twelve and asked my parents to increase my allowance. Of course, I didn’t actually deserve a raise; I just really wanted to buy a new stereo. So I used the politician tactic of making empty promises like taking on more responsibilities around the house. But mom and dad weren’t buying it. They knew there wasn’t much of a track record to justify a raise based on anything but parental sympathy.

Needless to say, my negotiations did not go favorably. I felt like I deserved a raise just like many employees “feel” like they deserve one too. Unfortunately, I have learned from being an employer that your feelings have little to do with it, but that doesn’t mean you don’t actually deserve more money. So when you ask for a raise, keep your employer’s perspective in mind and remember these three things: 

Get Specific

You are expected to do your job, so any justification for a raise has to be an example of exceeding expectations and going above and beyond your normal duties. It is easy to assume that because you do your job well, you deserve a raise. But this generality will be completely lost on your boss. Identify three key examples of things you have done that go beyond what is normally expected of you. Be specific with each example and describe exactly what contribution you made. Be sure to give yourself proper credit through each example, but do not embellish or exaggerate. Obviously, that is dishonest, but your boss will also know. 

Reframe Your Perspective

When you give your three specific examples, make sure each one illustrates one of the following:  how you made the company more money, how you made your boss’s life easier, or how you made your boss look good. This concept may seem obvious, but many times your ‘hard work’ may not seem so raise-worthy from your boss’s perspective.

For example, I had a recent discussion with a lawyer who works in a satellite office and has to deal with frequent walk-ins who seldom convert to paying clients. She felt underappreciated for this constant annoyance, which her boss never sees and never has to deal with, so she asked for a raise. From her perspective, she is doing more work than she gets credit for, and that may be true, but from her boss’s perspective, she has essentially admitted to wasting time and giving free legal advice.

However, if she could explain to her boss how she has streamlined a process for screening prospective clients, allowing her to spend more time working on paying clients and bring in new business, that would paint a completely different picture. Now she is a hero trying to make the firm more money. It’s the same situation; she just needs to reframe her argument to make it more persuasive.

Know an Amount

If you want your employer to go to the trouble of quantifying your efforts, you should have already done so yourself. Come up with an amount that you think is fair. Don’t name an outlandish figure, but if you really believe that you have made valuable contributions to the company, don’t be afraid to express that value in reference to your compensation.

They may completely disagree with you, but that is ok. It’s a negotiation. At the very least, they know what you have in mind. It will also be a reference point for future raise discussions. For instance, if you ask for a $10k raise this year, but they only give you $5k because of budget constraints, the next year they will know that you probably still want the additional $5k.

Summary

Be specific about what you have done and how it has helped the company or your boss. Know beforehand how much you want and clearly articulate how that amount corresponds to your efforts. You shouldn’t be afraid to ask for more money if you are providing true value to your organization. But you should also be realistic and self-aware enough to understand that you may not get as much as you want.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Amazing HSA

In the world of financial advice, you often hear conflicting opinions. One expert disagrees with another, and the everyday consumer has no idea who to trust. But in the midst of all that disagreement, there is one financial tool that everyone universally agrees is amazing – the Health Savings Account.

Health Savings Accounts (HSAs) allow you to make tax deductible contributions to an account that you can use to pay qualified medical expenses or let grow tax free. The only major requirement you must satisfy in order to qualify for an HSA is obtaining coverage under a high deductible health plan. For 2015, a high deductible would be a minimum of $1,300 for self-only coverage or $2,600 for family coverage. Maximum contributions for 2015 are $3,350 for individuals and $6,650 for families.

So why are these accounts so great? HSAs allow you to deduct medical expenses are often below the threshold for itemized deductions or provide supplemental contributions to a tax-advantaged retirement account. Let me explain a little further:

Deduct More Medical Expenses

Every year in my tax practice, I see people who go to great lengths to gather information about their medical expenses from the previous year. And many times, even if it is a significant amount, it’s not enough to help them tax wise. In order to take an itemized deduction for medical expenses, the total amount from the year must be more than 10% of your adjusted gross income.

For example, a couple has a new baby and as a result faces abnormally high medical expenses for the year of $10,000. But their adjusted gross income is $200,000. So even though their medical costs were substantial ($10,000), they cannot take a deduction because the expenses were not over 10% of their adjusted gross income ($20,000). Alternatively, if the couple contributed to an HSA, they could take a $6,650 deduction for the maximum HSA contribution that could then be used to partially reimburse them for the $10,000 paid out of pocket. So they essentially get to deduct $6,650 that would be disallowed as an itemized deduction.

Save More for Retirement

This feature is my favorite. Since I am generally healthy and have few medical expenses throughout the year, I keep my contributions invested within my HSA and let them grow tax-free year after year. The funds are there if I need them in the future, and every year I get to take a deduction for my contributions. But I do not plan on touching the money until I am 65 when you can take distributions for any purpose penalty free, which essentially makes the account exactly like a Traditional IRA. Contributions are currently deductible against taxable income, and distributions are taxed as ordinary income.

Medical distributions are always tax free, and I’m sure that once I’m over 65 my annual medical expenses will be much greater than they are now. So distributions to cover medical expenses will always be the best use of HSA funds, but it is also nice to know that you can use the account as a supplemental retirement account if you are generally healthy and have few medical expenses.

If you already have a high deductible health plan, you really should consider opening an HSA. Check with your insurance provider to see if you are eligible. If not, it may be worth reevaluating your plan to see if a high deductible makes sense for your overall health and financial situation. Also, see if your employer sponsors an HSA plan as a part your employee benefits package. They may even make tax free contributions on your behalf.