Your Money Matters More

Financial Rocket Science

 

 

Personal wealth management is not rocket science. However, it does require those of us who are professionals to use the same focus.  A rocket scientist sets the goal of reaching a destination and all of her efforts are aligned to make it happen. She doesn’t do it in a day, but overtime completes the mission.  When the unexpected occurs she doesn’t scrap the goal, she adjusts.

As a Certified Financial Planner it is my job to help you refine your goals. The market has created the opportunity for growth similar to the way a fire clears the forest for new growth.  If you continue investing for the long term you can’t lose sight of that goal.  Through the use of specific financial tools we can increase the efficiency of achieving those goals.

One specific tool is dollar cost averaging.  While prices are fluctuating we invest uniformly. Over time making the same investment, levels any crests or valleys that the long-term investor encounters. Whether it be periodically investing in an IRA or the payroll withholding in a 401k, dollar cost averaging provides a more consistent return as the market rebounds.

Even professionals have a difficulty timing the market.  Currently, we are in a situation that has no precedent; there is no foreshadowing.  Trying to guess what is about to happen will only derail the long term growth of your wealth. A CFP, with any experience, will keep you on track.

The role of a financial planner is to help you prioritize your goals for the optimal outcome.  Like any good rocket scientist knows, you must have a good return.

Charles T Shearman, CFP

Prospero Financial Planning

www.ProsperoFP.com

 

 

 

Financial Rules of Thumb

I have relied on general rules of thumb for the financial well being of clients.

Financial security results by adhering to basic principles:

Controlling Debt
    o Not exceeding 20% of your net worth (excluding the mortgage and net equity in the home)

Housing Costs
    o should not exceed 28% of your net income
    o includes all the expenses related to your house

Emergency Fund
    o Represents three to six months living expenses
    o Should be liquid and not volatile
This would include your money markets, short-term bond funds, and other cash equivalents.

Retirement Funding
    o Contribute 6% on a pretax basis to an IRA or a 401(k)
    o Or 8% funded on an after tax basis

Following these four steps should result in the accumulation of enough wealth to retire comfortably

If you would like more ideas contact.:

Charles T Shearman, CFP

Prospero Financial Planning
23 S 8th Street, Suite 3400
Noblesville, IN 46060
Work (317) 774-5136

www.prosperofp.com

 

Buy Smart

    I have always had medical professionals as clients. One thing this has taught me is that being smart enough to pass med school doesn’t necessarily translate into financial intelligence. Doctors, as well as any professionals who have a steadily increasing salary at the start of their careers, can often make purchases that hurt their cash flow down the road once their income plateaus. This makes it all the more important to develop an emergency or “slush” fund early in your career no matter what your occupation. Then later in life, once your rainy day money has grown, the finer things are less of a strain on your bank account. The two main purchases that can set an individual up for financial distress are expensive cars and big houses. Making the right buys can lead to a life of comfort, if done correctly.

 

Fancy Cars 

 

When individuals jump up into the six figure income bracket one of the first things they want to do is buy an expensive new car. What they fail to realize is that when they drive their so called “investment” off the lot, it loses thousands in value immediately. Their new car will then continue to lose value until the wheels fall off. But Chuck, “How am I supposed to show off my financial superiority while I’m on the go?” It’s  simple. Buy used. Say you think you would look nice in a Mercedes-Benz SLK350. You’ve worked hard to bring in the money and its time to reward yourself. A new SLK350 costs over $55,000. A used last year model costs $36,000. Paying an extra nineteen grand for that “new car” smell seems quite ridiculous. Any other investment that declined in value by 35% its first year would make you furious. Even for individuals with more modest tastes, a Honda Civic loses four thousand in its first year off the lot which is still a 20% decrease. Do yourself a favor and let someone else be the sucker who has to unload their bad investment in a year’s time.

 

Living Large 

 

The other mistake many make is purchasing a house that is too big early in their careers. If your job is putting fat stacks in your slacks the worst thing you can do is tie yourself down to a house that will pull cash out of your pocket for the next fifteen to thirty years. We at Prospero Financial always push to develop a solid emergency account before purchasing an expensive home. Buying a less expensive home allows you to build that emergency fund faster.  You will then be able to make a larger down payment on your next home. This will give you more equity to build on. You will need 20% equity in the property in order to avoid private mortgage insurance and decrease your mortgage payment.

 As unpredictable as the housing market is, you want to make sure that your house and property are sellable when the time comes. Choosing your neighborhood wisely can make a huge difference in the future. Picking the right house in that neighborhood can be just as important. The most expensive house in a neighborhood will be the hardest to sell. When prices in housing go up your palace might increase in value, but a home is worth nothing if there’s no one to buy it. The cheapest house in the neighborhood can be just as tough. Look for a home that is in the upper middle price range for the neighborhood you are moving into and you will have made a safe choice if you ever need to liquidate the property. Lastly, when  it comes time to sell a house, you need to leave yourself at least six months time to keep from leaving money on the table. Selling a home can be profitable, as long as you make smart decisions along the way.

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Not Ready To Retire Yet?

 I was looking around my networking group and it seemed to be made up of a large group of people on their second or third careers due to company downsizing. They probably had a retirement plan, 403(b) for not-for-profit entities or 401(k) for any other entities, after leaving a previous employer.  They may be spending this to maintain their lifestyle and that's probably alright as long as that doesn't go on for very long. It is better to reduce your lifestyle then drain your retirement plans.  You not only don’t have the money for the retirement years you also don’t get the growth on that money that you withdraw from these accounts.   

Not only do you pay tax on the withdrawls but this can be doubly bad if you're paying tax penalties on an IRA or 401(k).  The IRS may charge a 10% premium to withdraw funds.  This is if you haven't reached the age of 59½.  There are several exceptions to the age 59½ rule. Even if individuals receive a distribution before they are age 59½, they may not have to pay the 10% additional tax if they receive a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55 (age 50 for qualified public safety employees).  Or they are receiving a series of distributions in equal payments based on your life expectancy.  These are not the only exceptions but those most likely to apply.    

Another way to avoid the 10% penalty is to prove hardship. A retirement plan may (but is not required to) allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need.  

You should consult your tax Advisor before you undertake this.

Black Monday Revisited

Volatility

With the volatility of this market I'm reminded of the October 19, 1987 decline of the market referred to as “Black Monday”. This one was not as severe from a points standpoint it was from a percentage standpoint. The market plummeted 500 plus points which in itself doesn't seem like much but it represented over 22% of the market. Two hundred points up or down seems like an average day. Imagine getting up and your portfolio is worth three quarters of what it was the day before. Some important safeguards came into play after this debacle. For example computerized trading, was supposed to protect the big pension traders from losses, but had the opposite effect. When this type of thing happened it contributed to this kind of downfall. Today computer trading is suspended after the market moved fifty points.

Federal Reserve

The new chairman of the Fed Alan Greenspan in his first year wisely thought to loosen the money supply as opposed to what happened in the 1929 Depression in which case they thought that was wise to tighten the money supply thus causing the Depression. So the resulting rollercoaster ride we have been through in this year does not compare to the large downturn that was experienced in the past. The volatility of the market although big in points is minimal in percentage. The market should be positive for the year in results and no-harm-no-foul in percentage and volatility.

So as Christmas approaches we should be thankful for the little things that are available to us and Ben Bernanke should be thankful that he's not facing the same thing as Greenspan faced in his first year.

Is The Downturn Finally Over?

My research shows that from September to October manufacturing activities have expanded in all the main areas, with the exception of Russia.  I think this is one of the early indicators of a financial recovery.  And the United States and the United Kingdom showed the biggest percentage gains.  These indicators are a positive sign, thus I believe that the economy is healing. 

 

These things give support to the recent uptrend in the market.  And this is in contrast to earlier up-trends that weren’t necessarily a result of improvement in the underlying economy.  It was based on mere speculation.  Now we have hard facts to support the uptrend.  In fact, the construction sector is also up thanks to new housing starts for the second straight month.  Are we finally bottoming out and starting up the other side?  I think these are clear indications that we’re finally coming out of the woods.

 

The last component of the economy to improve will be employment.  With figures in the double digits, this will take some time for it to fall into place.  The economy has to establish a certain momentum for employment to improve.  In other words, there’s got be an increase in demand for manufacturing industries and businesses for owners to feel the need to hire additional employees.

 

I’d like to hear your comments whether you are in favor or against this being the end of the market downturn and if it is time to invest.  Or do you think the economy has more down time?  Do you see areas of the economy that you believe have not recovered yet?