15 Ways the Stock Market is like Online Dating

Back in my younger days, before I was lucky enough to start dating the man who is now my dear husband, I tried online dating for a short spell.  I went on a date with a guy who cried the entire time into his beer about his recent split from his (ex)girlfriend.  I went on another date with a guy who, after I told him I wasn’t interested, hid in the bushes outside of my apartment for a few days.  (Police said because he wasn’t threatening me and the bushes were on county property, they couldn’t do anything.  That’s a story for another day).  Here is a picture of Sean Spicer hiding in the bushes so you an experience how creeped out I was…

Image result for hiding in the bushes meme

I had a few other weird encounters as well.  So, suffice it to say, I know a little bit about the world of online dating (at least in the olden times circa 2009 pre-Tinder.  I’m old, I know).

Now, as an investment advisor, I am always vigilantly watching and analyzing the stock market.  Recently, it dawned one me:  the market, in a lot of ways, is like online dating.

So, today I’d like to share with you the 15 ways that the stock market is like online dating, and how investments are like potential suitors:

  1. History usually repeats itself.  Markets are cyclical.  Just like potential suitors, you can count on them to revert back to their (previous/true) selves for a stretch every once in a while, no matter what kind of upswing they’ve been on for a while.  How long is the stretch though?  If I had a crystal ball and could you tell you that, I’d be a very rich woman.  The great news is that the stock market usually bounces back.  Significant others, though?  That remains to be seen, depending on the individual in question.Image result for not who I used to be gifYes, you usually are.
  2. Figuring out what you don’t want and avoiding it is a great strategy for long-term success.  What do I mean?  In investing, research shows that figuring out what the worst sectors (like technology or utilities, for example) are for long-term outlook (performance) and avoiding investing in them is a better strategy for performance of your portfolio than than strictly looking for the best investments based on positive markers alone.  The same goes with weeding through online dating options.  If you can, first, sift out the ones that have traits that you really dislike (dishonesty, bad grammar, smoking, cheating, lazy, etc.), you’ll have a much easier time picking the best ones from the group you have left.Image result for bad online dating profile gif
  3. Marketing doesn’t always match the facts.  What a company (or potential suitor) says about himself/herself may not be true once you get to know them a little bit better.  For example, analysts have found that some of the self-reporting on finances from certain non-U.S. countries hasn’t turned out to be 100% fact-based.  Comparatively, many of us who have experienced online dating know from personal experience that what someone says about themselves in their profile is also not 100% fact-based.  So, doing further research is always a good idea.  In finance, we call this due diligence.  The word due diligence also works for dating, since nowadays we can look up different social media accounts and learn a great deal about someone we don’t know personally.Image result for false advertising gif
  4. You can do all of the due diligence you want, but you really don’t know the potential suitor or investment until you are “in bed with them.” Potential love interests are on their best behavior in the beginning.  So you can do all of the research you want on them, but until you spend time with them getting to know them, you don’t really know them.  This is also true with a potential investment.  You can have completed all of the due diligence in the world, but nothing is guaranteed.  You won’t know the outcome of the investment until you put it in your investment portfolio.
  5. Sometimes the performance is a disappointment.  All signs may have pointed to him or her being great, but when the rubber meets the road, he/she tanks.  Same could be said for an investment you chose, unfortunately.Image result for lax bro online dating gif
  6. Reliability of an investment (or a potential suitor) and excitement don’t usually go hand in hand.  If you are looking for reliability and stability, jumping on to the new and exciting investment isn’t usually the way to go.  Have you ever heard the saying of, “Don’t put all of your eggs in one basket?”  Well, I’m here to tell you not to “put all of your eggs in the bad boy basket.”  Bad boys may seem exciting, but they are a big risk because they could turn out to be a total crash-and-burn, and they definitely aren’t easy to predict.  In the stock market, take Bitcoin (crypto-currency) as an example.  Crypto currency was exciting and new and “bad-ass” but look where things are now.  With big highs also comes big lows.  Image result for bad boy gif
  7. The strong ones have a long way to fall.  Take General Electric’s (GE) stock as an example. It used to be seen as a safe, stable investment, however, it tanked big time recently.  GE is like the frat boy born into a good family whose profile picture shows him with his lax bros in college.  You thought he would always just be stable: go to work, drink beer and watch football.  But one day he gets a DUI and then he’s jobless and in jail with a long road ahead of him to get back to his former glory.Related image
  8. All it takes is one insensitive political statement or unsolicited inappropriate picture to take down the whole man/company.  This one pretty much speaks for itself.  Both in your personal life and professional life, be careful what you do.  All it takes is one misspoken word, tweet or text to go from “highly regarded” to “bottom-of-the-barrell.”Image result for unsolicited naked picture gif
  9. If an investment or a potential suitor looks to good to be true, they usually are. Don’t fall for the “too good to be true” ones.  You’ll just get your heart and/or wallet broken!Image result for too good to be true gif
  10. What their friends say about them in the beginning is usually never true. In investments, when someone who will benefit financially from your purchase tells you it’s great, it’s always important to take their advice with a grain of salt.  The same can be said for the friends of your potential suitor.  Even though they don’t benefit (tangibly) in some way as a result of you dating their friend, they likely won’t tell you the whole truth about the potential suitor due to their loyalty.Image result for not who I used to be gif
  11. Everyone has an opinion and they are all different.  Lots of people have opinions about the stock market, online dating, potential suitors, and individual investments.  However, even the ones who claim to be “love experts” or “market experts” aren’t right all of the time.Image result for i am an expert gif
  12. Sometimes the undervalued ones are the greatest dark horses in the race. In finance, we spend a lot of time trying to find “undervalued stocks” to invest in, so we can take advantage of when they reach their full potential.  The same can be said for potential suitors.  My friend’s grandma used to always tell her, “Find a man with great potential.”  Sometimes, finding a potential suitor as they are still working to be their best selves can payoff in the greatest way, as you grow and become your best selves together.Image result for great potential gif
  13. Finding one with the best potential (undervalued) is a great strategy if you are willing to put in the time and the work.  In investments, some people believe in what is called the “Buy and Hold Strategy.”  This means that they believe that if you buy a basket of investments and hold them over a long period of time, the net result will be positive.  However, this strategy isn’t suited for the impatient investor, who feels compelled to get rid of an investment impulsively depending on the day.  The same can be said in your love life.  If you are an impatient person, investing your time and emotions into someone who has yet to reach their potential may not be the right strategy for you.  However, if you are willing to put in the time, you could end up with an amazing outcome in your love life!  Don’t be like this guy:Image result for undervalued man gif
  14. Having expectations can be a dangerous thing.  This is true both for your investments and your potential suitor.  Try to enter in with an open mind, after having done all of your due diligence, knowing that it’s never fully possible to predict the future 100%.  For both your money and your heart I suggest two important things:  1. Make the best choice possible based on your goals and dreams.  And 2. engage the help of professionals when you need it!
  15. Just when you least expect it, the stock market or the online dating community can surprise you in the best way.  Some days, you will wake up and be pleasantly surprised by the performance of the stock market, and thus, your investments.  The same can be said for the online dating world.  Some days, you will wake up to pleasant messages and wonderful potential suitors, and have very positive experiences that might change your life.Image result for happy surprise gif

 

Wishing you all of the love and financial health in the world,

Margo

 

 

 

How to Calculate the Value of a Stay At Home Parent in YOUR household

It’s that time of year, friends!  No, I’m not talking about back to school.  (Even though this post is related to it tangentially).

I’m talking about the time of year when you are staring down the barrel of kid-related expenses like daycare, parties and events, and kid-related transportation thinking, how on earth am I going to manage this with all of my other responsibilities?

arnold schwarzenegger muh s GIF

It’s usually this time of year where parents start to evaluate the economy of their home and think to themselves, does it make sense if both of us work outside of the home?  Should one of us stay home?  How will that impact us financially?  What costs will we be saving vs. take home after the fact?  How will all of this affect my sanity?

tired GIF

I’ll give you an example from a friend of mind, who submitted this question:

Dear Margo: Johnny has soccer twice a week, and Sarah has voice lessons and tai kwon do.  Suzy is 2 and still in daycare.  School lets out at 2:45 pm but husband and I can’t get out of work until 5 pm.  After school care has a cost, too.  Then, I get home after picking them all up and am scrambling to cook dinner.  Husband arrives shortly thereafter to help with homework.  The house is a mess but we are too tired to address it until the weekend.  Same with laundry.  Then, the weekends don’t feel enjoyable because we are too busy catching up with household items and shuffling around to sports games.  What’s the best way for me to figure out how our household budget would change if I decided to stay home instead of continuing to work outside of the home?

As most of you already know, I work outside of the home.  I also have the UTMOST respect for my friends who work inside of the home because I strongly believe that their day is phenomenally harder than mine.  After all, I can actually take a break from working to use the ladies room without worrying that the building is going to be set on fire or… something like the below occurring…

kids GIF by Cheezburger

But, back to the topic at hand: Salary.com estimated that the value of a stay-at-home mom in 2018 is $162,581.  While I think we all agree that stay-at-home parents are invaluable, completely priceless in fact. However, there is also a functional pricetag of this kind of career decision. And on that note, you might be thinking that number is kind of high… You probably wouldn’t hire a private butler or groundskeeper, right?

They are basing the value of the stay-at-home salary on expensive assistance like this that may not be in the cards for you depending on your individual situation.  So how can you figure out how your household would be financially affected if one of (presumably) two parents were to stay home.

pay me bitch better have my money GIF

So, if you are wrestling with this, and considering having one of you stay home, allow me to share my financial methodology to calculate the straight monetary value of a stay-at-home parent in your household.  (Also, notice I said stay-at-home PARENT not MOM because Salary.com needs to realize that these days, women are becoming primary breadwinner more and more often and may not be the one who sacrifices a salary to take care of the kids… But I digress.)

  1. First, start by creating a monthly budget using excel if you haven’t already.  Start with your “Fixed Expenses.”  Think of your fixed expenses in the following way:  These are the expenses that do not change on a month-to-month basis, and that likely would stay the same no matter whether one of you or both of you were working (unless you downsized your home).  Below is a form for you to follow, if you’d like.
FIXED EXPENSES
Monthly Annual
Housing
    Mortgage P & I/ RENT 0 0
    Home Equity Loans 0 0
    Property Taxes (Front Ft) 0
    Real Estate Taxes 0 0
     HOA/Condo Dues 0
Total Housing 0 0
Insurance
    Life 0 0
    Disability 0 0
    Medical Premiums 0 0
    Long Term Care 0 0
    Homeowners 0 0
    Automobile 0 0
    Umbrella 0 0
    Other 0
Total Insurance 0 0
Consumer Debt
    Auto Loans 0 0
    Term Loans 0
    Credit Cards (Fixed Pmts) 0
    Education Loans 0 0
    Other 0
Total Consumer Debt 0 0
Savings
    Retirement Plans (A) 0 0
    Retirement Plans (B) 0 0
    Pension 0
    Other Tax-Deferred/Tax-Free 0 0
    Other Taxable Savings 0
Total Savings 0 0
Other Fixed Expenses
Other 0
Other 0
Other 0
Other 0
Other 0
Total Other Fixed 0 0
Total Fixed Expenses 0 0

2. Next comes estimating your Variable Expenses if both of you were to work outside of the home.  (I’ve included some sample costs for folks living in Maryland, since that is where I reside, as an example.  However, you’ll want to be realistic about how much you spend.)

It’s very important in this section that you estimate:

  1. Cost of before-care and/or after-care from school/daycare if necessary
  2. Cost of someone to pick your kids up from school and watch them at home OR cost of after-school-care for your kids until you can pick them up from work
  3. Cost of someone coming to clean your house at least once a month (because if both of you work, you deserve to spend on this service, believe me).
  4. Cost of someone handling yard work for you (because, see above)
  5. Higher cost of meals out because I’ve found in practice that when two parents work, they generally spend more on meals out due to schedules, prep and tiredness.
  6. Higher cost of cleaning/tailoring because you likely have double the professional clothes to keep clean.
  7. Higher cost of professional fees related to any assistance you would need other than those I have detailed here (like a plumber, gutter cleaner, etc.)
  8. Higher cost of gas because you would have to drive to and from your workplace in addition to transporting kids around
  9. And of course… the COST OF DAYCARE.  I put this in capital letters because if you have a child who is younger than school age, this can be the highest cost you experience when having both parents work outside of the home.
VARIABLE EXPENSES MONTHLY (Adults) MONTHLY (Dependents) *MD Averages
Age 25-40 41-60
Food 2 adults, 2 children
   Groceries  $  $ $250 $350
   Meals out  $  $ $250 $400
Clothing
    Purchases $ $ $125 $225
    Cleaning/Tailoring $ $ $10 $20
Household
    Maintenance/Repairs $ $ $50 $80
    Furnishings (Purchases) $ $ $200 $150
    Services (cleaning/ lawn) $ $ $30 $50
Utilities
    Oil, Gas, Electric $ $ $225 $250
    Phone/Internet/Cable $ $ $130 $180
    Water & Sewer $ $ $55 $70
    Home Security $ $ $50 $50
    Other- $ $
Recreation
    Vacations $ $
    Entertainment $ $ $200 $300
    Subscriptions $ $ $10 $20
    Sport/Hobbies/Activities $ $ $50 $100
    Membership Dues $ $
Personal Items
    Gifts to family $ $
    Charitable Donations $ $
    Tobacco/Alcohol $ $ $100 $150
    Pet Care $ $ $30 $30
    Personal Care $ $ $50 $75
    Professional Fees $ $
   Other $ $
Education
    Private Schools $ $
    College $ $
    Professional Education $ $
Health Care
   Prescriptions/Vitamins $ $ $20 $40
   Medical-Out of Pocket $ $ $80 $160
   Dental $ $
   Other $ $
Transportation
    Gas $ $
    Repairs/Maintenance $ $ $50 $75
    Commute/Parking $ $
    Other $ $
    Other $ $
SubTotal  $                              –  $                              –
Misc Expenses**
Variable Exp. Total $0 $0

3. Ok, once you have all of this in your spreadsheet, now comes the next step.  I want you to create a *separate* Variable Expense Sheet imagining if one of you were to stay home.  You’re going to reduce and/or eliminate many of the costs listed above, like eating out, daycare, etc.

4. So… What’s the monthly differential between your variable expenses if you stay home versus go to work outside of the home?  Now, take this number and increase it by the amount you’d pay in taxes on your income.

Hang in there, it’s about to get math-y

design desk display eyewear
Photo by energepic.com on Pexels.com

For example:

Let’s say the differential (how much more you spend working vs not working) is $2000/month.  This is $24,000/year.  However, if you live in Maryland and have both state income taxes (of about 5%) and federal income taxes (or about 28%), take home of $24,000 per year is the equivalent of a job that pays about $35,000 per year. You can make excel do this calculation with these numbers for you by typing:

= your differential yearly salary/(1-tax rate as a decimal) or with our numbers =24,000/(1-0.33) which gives you the 35,000

But… we’re not done yet.  Let’s say if you stop working, your family’s Federal tax bracket moves down – from 28% to 25%.  Let’s assume your spouse makes about $100,000 in income.  So, you are also saving about $3,000 per year in taxes from your spouse’s salary by not working (3% less on $100,000).  So, for argument’s sake, we’ll say it’s now $38,000 per year.  (You can find the federal tax brackets for 2018 here.)

Now, let’s say you make $55,000 per year at your current job and you are considering staying home.  In our sample scenario, the difference between $55,000 and $38,000 is $17,000.  However, $5,440 is taxes (total of 32% combined federal and state), so let’s subtract that out, too.

So, in our case, $11,560 is how much more you take home working outside of the home compared to staying at home.  That translates to a little less than $1,000 per month.

This is less than you may have thought, right?

Image result for surprised gif

5. Now comes the hard part.  The part that is difficult, if not impossible, to quantify:  How do you FEEL about staying home?  Sit and close your eyes and truly imagine yourself working inside of the home.  This sounds cheesy, but it really does work.  Try to tune into the feeling in your gut.  Are you confident, happy and less stressed by staying home?

For some, staying home helps their mental health.  For others, staying home is bad for their mental health.  This is a very personal decision that only you can make.  For example, does staying home with your kids make you feel like this?:

mental health funny gif GIF

There is no shame in admitting that you aren’t cut out to handle working inside of the home.  It’s hard work, y’all.  Really, really hard work.

Finally, as yourself how you would feel if you had $1000 per month less to spend on vacations, gifts, personal care, professional fees, entertainment and the like.   (Don’t forget that there are LOADS of side hustles you can pick up if necessary, and I am not just talking about the ones you see all over social media.  Photography.  Consulting.  Tutoring.)  So this $1,000 may be able to be made up some other way that still allows you to be at home.

Most of all, remember that nothing is permanent.  Working outside of the home doesn’t have to be permanent.  Working inside of the home doesn’t have to be permanent either.

Image result for encourage mint

Trust yourself, and share the #financialfacts with your partner so you can make a decision together about the best set up for YOU.

Wishing you good fortune!

Margo

HEADSHOT

Margo is a financial planner and investment advisor, software developer, mother of 2, and wife.  She also is a nonprofit consultant, so if she can manage a side hustle, so can you.

Divorce and Money: Unpack One Box At a Time

A few years ago, when I was moving from Florida to Maryland with my husband, while pregnant, AND switching jobs, I had a friend give me some great advice.  “Take it one box at a time,” she told me.  “But there is so much to do!!”  I responded, exasperated at the growing To Do List I was attempting to keep in the Notes section of my phone.  She smiled and said, “Yes.  But not everything needs to be done at once.  So, spread it out.  Pack your home by committing to do one box at a time, one day at a time, leaving the necessities like toiletries and utensils for last.  Then, when you get to the new house, do the same thing.  Unpack the necessities first, and then commit to one box, one day at a time.”moving-boxes-e1528681689809.png

I must admit: I thought this was a strange and unrealistic suggestion, but I went against my judgement and did as she suggested.  I cannot tell you how glad I was that I did.  Moving is a huge disrupter in your life, and with life disruptions comes a multitude of emotions and stress, which can make you feel like your world is crashing down around you.

Your mind creates these false deadlines, expectations and worries, filling you with dread and piling a mountain of stress on you.  Unpacking one box at a time allowed me to prioritize my emotional hestress.jpgalth, and sidestep false deadlines I would have created for myself if I had an unrealistic expectation of my house being perfectly in order the moment I arrived.  There were things far more important and timely for me to stress about than being fully unpacked right away.

Now, as a financial professional, I have realized that this mantra of “One Box at a Time” is how I approach helping clients who are experiencing one of the largest life disrupters there is: Divorce.  It should surprise no one that divorce is an emotionally trying and stressful time.  The great news, however, is that there is one aspect of divorce that can be unpacked in a manageable way with the help of the right professional: Your finances.

You may be surprised to find out that your financial advisor is an important part of your team when considering/exploring/finalizing a divorce.  I would argue that, in my experience as a professional, they are.  Sometimes I see individuals even before they go to get an attorney.  The most common question I get is, “Can I even afford to be divorced?  Before I head down this road, I want to be sure I can financially afford the split, and then afford to be on my own.”  Finances are an important consideration in taking this step.

(Edited to add:  This isn’t to say that you shouldn’t go forward with it if financially it seems difficult.  I’ve taken on more than one pro-bono case where my client is a victim of domestic violence, so in cases like that, the important thing is to focus on moving on and to work THROUGH your finances to be in the best place possible as you start your new chapter.  Staying married to a spouse for monetary purposes is never a good idea.)

I help clients unpack the box that is their financial life.  In doing so, I help them prioritize financial activities, have realistic expectations, make important decisions, sidestep false deadlines they may otherwise create for themselves, and I provide expert testimony for their attorney should they need it.  Divorce isn’t an overnight transition, and it is very emotional.  The great news about the “Financial Box” is that it’s fact-based, and can be appropriately prioritized so you can focus on other items with your attorney and other advisors, like custody of minor children and your emotional health.

If you are going through a divorce, or contemplating taking steps toward exploring it, here are the ways in which a financial advisor can help you, and your attorney, throughout your divorce process:

  1. Unpacking the box that is your financial life: Consider how hard it is to make decisions without having all the information or understanding all the information.  A financial advisor can ensure you have the information you need to make decisions with your attorney.  Every marriage is different.  For some, one spouse handles all the finances and the other doesn’t get very involved, which is perfectly normal and fine – until you decide to go separate ways, of course.  You may need a financial professional to help you understand what your investments look like, or your insurance and/or your debt.  There is a long list of things for you to look through before signing that final agreement.  For example, if your ex has a pension and they are asking you to waive your interest in it, you may want to have a financial professional evaluate just exactly what means.  You never want to look back and wonder: “If I had known X, maybe I would have made a different decision.”  The big message here is that you want to have as much information as possible so that you can make decisions from a foundation of knowledge and confidence. Knowing the facts takes the fear away that would otherwise be present if you left it unknown.
  2. How much does it cost to be you now? How much does it cost to be you in the new chapter?  It’s a very helpful exercise to do what is called Cash Flow Planning AKA budgeting.  It helps you understand how you spend money, how much you can save, and what it will look like once you are no longer married.  Sometimes people worry that they may not be able to afford their life as a single person, but how can you know this for sure until you evaluate it?  A lot of times, Cash Flow Planning helps you put your mind at ease to help you understand your budget moving forward.  It can also help you make decisions like housing and career choices.
  3. Asset review: All assets are not created equal, and it’s important to take a good look at things and know which assets you want and which you’re comfortable allowing your ex to have.  These include houses, investment accounts, retirement accounts, insurances, and even antiques and other personal property.
  4. Projections related to alimony: Monthly payments vs. lump sum:  If your divorce may involve alimony, it’s important to evaluate if it makes more sense to take payments over time or a lump sum payment.  Oftentimes, a lump sum payment is better for both parties, but analysis and projections by a professional are required to make this decision because it involves considering things like market return, inflation, and longevity, to name a few.
  5. What about the house? Can I afford to stay?  How much is my equity? If you own a house with your ex, these are common questions on the forefront of your mind.  It’s very helpful to have a financial professional help you think through this.  Part of the financial analysis revolves around the Cash Flow Planning/Budgeting mentioned previously.  The second part, equity in your home, isn’t as straightforward as many people would like because we often must subtract the various costs of sale before coming to a net equity to split between you and your ex.
  6. Insurance: What needs to change? Your insurance needs as a married person are usually very different than your insurance needs as a single person. Also, as your asset ownership changes, your insurance needs will change.  Having a financial professional who doesn’t sell insurance review this for you so you can start to investigate and secure appropriate insurance is important as you move forward in your new chapter.
  7. Financial Expertise related to in-court testimony: Occasionally, divorce proceedings end in a trial which can benefit from a financial expert providing testimony related to the advocacy of your attorney.  For example, if your attorney wants to advocate for a lump sum payment of alimony instead of monthly payments over time, a financial expert may be helpful in displaying why this is the case.  Be sure you find an advisor who can serve in this capacity.

At the end of the day, having a financial professional on your team of advisors through your divorce will ultimately reduce your stress, give you all the information you need to make decisions, give your attorney all the information he/she needs to adequately advocate for you, and potentially limit your expenses related to back and forth negotiations.

A divorce is stressful enough without having to worry about trying to be an expert.  You’ll be surprised to find out how much you may not know, and you’ll want to ditch any preconceived notions you may have had.  It’s important to have competent, compassionate and intelligent advisors in your corner – to get you set off on the best foot in this new important life chapter.  In addition to your attorney, these advisors may include a financial advisor, a therapist, a business advisor, and/or even a spiritual advisor, to name a few.  Be sure to surround yourself with the best when choosing this team.

peace of mind

And, when all else fails, remember to focus on one box at a time.  Your new home doesn’t have to be perfectly in order immediately for you to find peace and solace in the knowledge that you’re headed in the best direction for your future.  As sad as a divorce can be, the important thing is that it is pointing you on the best new path for you.

HEADSHOTMargo Cook is a fee-only financial advisor, and is honored to serve clients experiencing life-changing transitions like divorce.

Money Mondays: How Exactly are Financial Advisors Paid? And By Who?

Hi friends!

So, I’ve mentioned in the past that you should find a financial advisor that you trust to help you plan for retirement and invest your money.  I’ve had people say to me, “Margo, how come the person who sold me insurance is offering to do a retirement projection for free, but other advisors are charging money to do this?”  The answer lies in how different financial professionals are compensated.

This is where it gets a little tricky.  It’s not as easy as it would seem to figure out exactly how financial professionals are paid.  And, most people would agree that it’s kind of confusing to figure out how to find a financial advisor you trust if you can’t figure out how the advisor is paid!   Some people have told me that this prevents them from even trying to find one at all – because when you don’t know how they are paid it’s pretty hard to figure out what it will cost you.  To compound the issue, many professionals call themselves “financial advisors,” but they all aren’t created equal.  They each may have varying expertise and very different “end games” when it comes to their relationship with you.  I’m here to tell you:  It’s confusing, and I’ll explain it to you.  I’m also going to give you a list of questions you can ask the advisor when you are interviewing them to figure it out, too.

To simplify, we can basically put financial advisors into one of three categories:  Commission-only, Fee-only, or Fee-based.  Fee-only and Fee-based sound the same, but they are actually quite different!  Here are the details:

compensation of financial advisors

Fee-only:  Fee-only advisors are only paid directly by their clients for the services they provide.  This fee is usually represented as a percentage of your account value or an hourly rate.  They do not sell any products like insurance or annuities, they don’t represent a bank or any financial institution, they don’t have proprietary funds like mutual funds to place into your investment accounts, and they don’t receive referral fees for sending you to other advisors, like an attorney or insurance rep.  In this scenario, the financial advisor only represents the best interests of their client – they aren’t there to sell a product or represent the interests of a bank or other financial institution.  Every decision they make is in the best interest of their client because they don’t have any conflicts or receive compensation from any other party or institution.  Fee-only advisors are true fiduciaries for their clients.

Commission only:  These are your insurance sales-folks and annuity sales-folks.  What’s good about them?  You need to have certain kinds of insurance: home, auto, health & life, for example.  These people have expertise, execution and only indirect cost to you out of pocket.  Some of these individuals will offer free financial planning meetings, but beware.  Their planning usually revolves around insurance products and getting you to buy one.  The reason that they offer financial projections for free is that they use the time to convince you to buy a product that they sell.

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Sometimes, in these financial planning meetings, they might encourage you to buy insurance or an annuity that may not appropriate for you because it makes them money.    I carefully vet the insurance representatives that I refer my clients to, so I know they aren’t going to inappropriately suggest a product to them, but there are unfortunately people like this out there.  I also review all insurance before my clients sign on that dotted line.  Having a neutral party who only works for you, and not a bank or an insurance company, review these sorts of things is a very smart move to make so you know it’s actually best for you.  And even though you aren’t paying the commission-only advisors directly (out of pocket) for the product they are selling you, you are paying them indirectly because of the fees you are paying upon purchase and/or the life of that product.  These products are not inexpensive, and the advisor receives payment from the company offering the product as a result of the money you spend to purchase it.

Fee-based: This is where it starts to get a little more complicated.  Fee-based advisors are a mix between fee-only and commission-only advisors. They receive a fee from you directly for managing your investments, usually a percentage of the total dollar amount of your account AND they sell products like insurance, propriety mutual funds, and/or receive referral fees for other professionals they send you to.  I know a lot of fee-based advisors who are wonderful – very smart and very ethical.  However, if the fee-based advisor isn’t as ethical, you can see where they might get into difficulty.  Are the investments they are choosing in your portfolio always the best ones for you?  Or are they choosing them because they receive a commission?  Are they selling you a product like insurance or an annuity because it makes them a commission?  Or are they recommending it to you because it’s actually the best product for you, and it’s the right choice for your goals and risk tolerance?  When it comes to fee-based advisors, you are potentially paying them both directly and indirectly for their advice and the choices they make for you/recommend to you.  Again, I know a lot of really great advisors who are fee-based, and one of the positives of this model is that they can sell you directly the products you might need to ensure you are comprehensively planning for your future.  However, it’s imperative that you find an ethical advisor if you are shopping in the fee-based arena.

If this sounds confusing, you aren’t alone.  I’ve been asked the following question by clients pretty often:  “How do I figure out which bucket my financial advisor falls into?”

So, I created the following list of questions to help figure it out:

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If your advisor is fee-only, the answers to all of these questions are NO.

If your advisor is fee-based, the answer to any ONE of the following questions will be YES: 1, 2, 3, or 7.  A YES to any one of those questions means they are not fee-only.

If your advisor is commission-only, they will always answer YES to #1.  Another hint:  They won’t be charging you an investment management fee, which is how you know they are commission-only instead of fee-based.

Finally, if the answers to #4, 5 or 6 are YES, it’s time to find a new advisor regardless of the way they are compensated.

If you are looking for potential advisors, the initial meeting should always be complimentary.  This is an intro meeting so they can figure out your needs and how they might serve you.  So, cost shouldn’t prevent you from reaching out to a potential financial advisor and “interviewing” them to see if they are right for you.

In that meeting, use the list of questions I give you here to figure out how they are paid, culminating with the final one:  “How much will this cost me, and will you quote me ahead of time, or as we go?”

There are great financial advisors out there, and armed with this information, I am confident you will find the best one for you!

Happy Advisor Shopping!!

Margo

HEADSHOTMargo is a fee-only financial advisor and mom of two.

Money Mondays: 3 Types of Accounts You Should Open Now to Save for Retirement

Happy Monday, Friends!

Today, I’d like to talk about retirement.  Every time I think about having this conversation with my clients, I think about this one young man I spoke with not too long ago.  We were talking about managing his debt, and he said, “When the bills come in the mail, I swerve them.”

“Swerve them?” I asked, clearly feeling older and older by the second since I wasn’t up to date on the lingo.  “Yeah, I swerve them.  You know, I don’t open them and just put them in the trash.”  We laughed and laughed and laughed.  (And then of course we talked about how avoiding you debt doesn’t make it go away – it actually makes worse, and then we came up with a plan.  But I digress.)

The reason I think about this young man and this conversation in particular is that a lot of people I meet also avoid thinking about/saving for retirement.  It could be for a myriad of reasons – lack of understanding or fear being two main ones.  (Example: “I don’t have time to figure this out so I’ve just been avoiding it!”)  But the point, my friends, is that “swerving” your retirement, by not saving enough & in the right way, is just as damaging in the long-term as avoiding your bills.

I’m sure you’ve all seen/heard these commercials from big banks where they tell you that people who start to save really early magically have millions in their retirement accounts. Well, it’s not that easy, but those ads did get something very important right:  The earlier you start, even with small amounts of money, the quicker it builds and the easier it is to get to your retirement goal.  It’s a little more complicated than that, though.  Because it’s not just about timing of the saving or how much you save – it’s about HOW you save it.

In that spirit, today we are going to address the 3 Accounts You Should Open and Contribute To NOW to Be Retirement-Ready Later.

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1. Pre-tax Retirement Account:  This is a 401k or 403b (Depending on the type of company you work for).  If you don’t work for a company that offers a retirement account, you should open an IRA.  Contributions to any of these three accounts are with your income BEFORE it is taxed.  This means, you get paid, you (automatically) put money in this account and you don’t get taxed on it this calendar year.  When do you get taxed?  Later when you take it out.  You should put in at least the amount that is matched by your employer if you have an employer that offers a match.  Your employer’s match is a contribution they make to YOUR retirement account that’s free money to you that you otherwise wouldn’t get.

Here’s when people make a big mistake – Some people don’t contribute enough to get the full match.  Here’s when some people make another big mistake – they ONLY contribute to this type of account and think it’s enough for retirement.  However, that’s not ideal.  Why?  Remember when I said that it’s pre-tax money, so when you take it out you get taxed?  This is important.  In retirement, if all you have is a pre-tax retirement savings account, every time you use that money, you pay income taxes on it.  That’s why you also want to have the next two kinds of accounts.

2. Post-tax Retirement Account:  This is called a Roth account.  It comes in many forms – Roth 401k, Roth 403b, Roth IRA. The important thing to know about this account that it is a retirement savings account that grows tax-free, but you are taxed before you put the money in.  So, if you are in a high tax-bracket, it’s not an ideal time to make a contribution to a Roth account.  However, if you are in a moderate to low tax-bracket, you should be contributing to this account.  When you take the money out once you are in retirement, you are able to remove it tax-free.  (This is because you already paid taxes on it when you made your contribution!)  You did hear that right  – You pay taxes on it, put it in the retirement account, it grows tax free, and then you take it out tax free.  So, when you are in retirement and you need to access cash, you can access this cash without paying taxes on it.  This is one way to help mitigate taxes in retirement.  If you can, try to put a chunk of money into your Roth automatically every month just like you do for your Pre-tax Retirement Account.

3. Taxable Account:  This is a regular non-retirement savings account, but unlike your savings account at your bank, this is a brokerage account that allows you to invest the money you deposit.  You can usually set this up at your bank or at another place like Charles Schwab, TD Ameritrade, or Fidelity.  Every month, you should be saving what you can into this account, and depending on your age and timeframe for need of the money, investing it appropriately.  There are lots of professionals out there that can help you with this at a very affordable rate.  Similar to the Roth, you can access this money in retirement without paying income taxes on it.  The only drawback to this account?  It is subject to capital gains taxes every year based on trading in the account.  So, if you sell a bunch of highly appreciated stock in the account one year and realize that gain, you’ll need to pay taxes on it that year.

However, that’s great news, because it means you made cash!!

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Do you see a theme here?  You WILL pay taxes – Uncle Sam will get his chunk of flesh from you whether it’s now or later.  For the post-tax retirement account and taxable account, you are paying taxes now but not later.  For the pre-tax retirement account you are paying taxes later but not now.  So, it’s a game of tax brackets and hedging your bets. You want to have access to various types of accounts in retirement so you can minimize the amount of taxes you will need to pay in retirement and keep yourself in the lowest tax bracket possible in retirement.

I know what you are thinking: “But, Margo, I live paycheck to paycheck.  I can’t save for retirement!” Let’s unpack that a bit together.

Everyone can look at their spending habits and identify the difference between things that are “need-to-have,” “want-to-have,” and “nice-to-have.”  Need-to-haves are things you can’t live without.  Want-to-have’s are things that you want but aren’t too extravagant – like a cup of expensive coffee every now and then.  Nice-to-have’s are like motorcycles and $500 purses.  You should not be spending money on Nice-to-have’s until you already are saving a chunk every month into the three accounts I mention herein.  You shouldn’t deprive yourself of the Want-to-have’s, within reason, but I can guarantee you can look through your spending habits and eliminate a few small things and use that money, no matter how much it is, to save for retirement.  Whatever you can put in each account is great – AND don’t forget, I want you to be putting in at least the match of your employer, if they offer one, if you have a 401k or 403b.

When I am at cocktail parties, I am often asked, “So, Margo, how much does the average person need to save to be ready for retirement?”  I always say the same thing: It’s impossible for me to tell you how much you need to save for retirement because I have no idea what it costs to be you.   The point of retiring is to have a chance to enjoy your life.  So how can I tell you how much you need in order to enjoy your life if I don’t know what a month in your life looks like and/or what it costs?  There is no “average person” when it comes to spending.  Do you spend the same way as your next door neighbor?  Do you have a boat?  Do you want to travel?  Do you have an expensive hobby?  Do you want to sell everything and move to an island?  Would I want my financial advisor to assume I am the same as the “average person” in my geographic area/age group and then base my savings off of those assumptions?  The answer to that is NO.

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So, go see a financial advisor to figure out how much you need to save.  If you can’t make that happen, in the very least, save based on the capability of your budget until you can see a financial advisor.

Follow us and Tune in next Monday for the follow up to this discussion: How are financial advisors paid?  And how do you find one you can trust within your budget?

me and kidsMargo is a married mom of 2 and financial adviser in the Annapolis area.

Margo’s Money Management: Why I Won’t Tell You ‘How Women Behave With Money’

Since we’re getting all personal here, I want to start by revealing a huge pet peeve of mine.  Let me set the stage with a few examples:

While studying for a finance exam recently, the instructor in my course said, “Women have unique challenges when it comes to saving for retirement.  However, one positive thing to note is that they take advice from financial advisors better than men!”

While driving in the car, a commercial came on for a bank.  “Women are more risk averse than men. Their investments generally are too conservative to earn the rate of investment return they need to save for retirement.”

While listening to a podcast, I came across this gem: “If you are an advisor that works with women, keep in mind that they want you to treat them differently than you might treat a man.  Speak to them instead of their husbands. Explain it in a way they understand. Don’t use too much jargon. Look them in the eye, focus on behaviors, and show empathy.”

An article recently came across my desk from a finance writer titled, “What Women Want.” Enough already! I immediately put it in the trash.

UMMMMMMM. HELLLOOOOOOOOOO.  Am I losing my mind??!?!!? When is the last time we heard commercials, read articles, or listened to instructors talk about men like this?  If men get to be individuals, with individual goals, needs and behaviors, why can’t women be unique individuals too? Dang. And who is writing this crazy offensive content?!  Boo hiss!!! 

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My managing partner asked me not too long ago if I’d be interested in writing an article to send out to clients.  I thought, “Maybe I should speak to our women clients?” However, when I sat down to write it I started to get frustrated.  I kept thinking about all of these experiences I’ve shared with you here and finally just wrote one sentence: “Women are individuals who each desire unique things from their financial advisor/investment manager based on their own situation, goals and feelings.”  I couldn’t get past this sentence so I gave up.

So, here is my PSA:  If you are working with an advisor, find one that helps you because you. are. you.  Not because you are a woman and he/she thinks she already knows what you want. Not because you “take direction well” or need to be coddled.  Ask them questions about the ways in which they are compensated (I will share some guidance on this in a later post). Figure out if they know how to incorporate your personal needs into a plan of action rather than just telling you what they think you should do (AKA, a canned plan) without getting to know you.  Find someone who respects you, regardless of your sex or whether you are the primary breadwinner in your household or not. Women have been running the show for quite some time now. (Actually, I heard recently that women control finances in 51% of households now so HELL YEA TO THAT!) It’s just that now women are starting to stand up and admit they run the show instead of allowing others to feel like they are all-powerful and the women can just “leave the money management to the men.” 

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To that point, I have one more story I’d like to share.  While at a finance conference, I sat down for the keynote session at a table near the front (Yes, I am one of those people who always sits in the front. It’s a survival habit from my elementary school days before I admitted I needed glasses).  The man sitting next to me turned to me and said, “Oh hi! You must be one of the TD girls!” Uhmmm, excuse me? “No sir, I am an advisor, like you.” Cue the mortified silence from him. And I have to say, I am glad he was mortified.  At least he showed some remorse for A) calling me a girl when I’m clearly a grown woman and B) assuming I must work for the bank as a conference hospitality rep instead of possibly being a financial advisor like him. Maybe that embarrassment is progress? Since I am trying this new thing where I assume positive intent from everyone I encounter, I have chosen to take the potential complement – he thought I looked young enough to be considered a “girl”.  However, this sheds a light on a major problem in the world of finance that still exists to this day – the fact that the majority of people think “it’s a man’s world and we are all living in it”.

Well, I hate to break it to you world, but this woman (and many advisors like me) won’t let that stand for too much longer.  And, let it be known, I treat all of my clients with respect and as individuals, whether they are man, woman, in the green, in the red, rich, older, younger or brand spanking new to starting this whole “saving” thing.

Don’t let anyone tell you what you (should) want or how you behave. 

 

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