Nothing great in the world has ever been accomplished without passion.
- Georg W Hegel
I hope your weekend was as restful as ours!
But no matter what happens on the weekend, one of the highlights of my week is sitting down to write these blogs. I love the feeling of reaching out and virtually “sitting down over coffee” to offer encouragement and hope-as well as advice on how to be prepared for whatever comes.
And, we’ve seen some interesting public events come our way, haven’t we? It can sometimes seem that events are beyond our control, and we’re just along for the ride.
Well–here’s something you CAN control.
When we sit down with clients, and take a look at the asset picture, occasionally we run across some problems that could have been avoided with better planning. And I’m not referring to asset allocation.
Let’s talk about debt, shall we?
“Straight Talk” Personal Strategy
Don’t Let Your Family Be Bled Dry (Part 1)
The most heartbreaking emails we get from our correspondents are from those who have gotten themselves deep into debt, and don’t know where to turn.
In the next few weeks, I am going to make the effort to address the very real concerns of those who have debt problems. I will speak practically for everyone, but it is intended to help families get out of debt so that they can start saving–and build something even more substantial to pass to their loved ones. Everyone knows a family with financial debt. This series will help them. Feel free to pass it along to those who you know might benefit…
The average household credit card debt is $7,564 and the average credit card interest rate is 18.9%.
In the good old days, guys who charged that sort of interest had a sideline business of breaking legs. We called them loan sharks. With those statistics, the average monthly payment for *interest only* is $119.13. If you invested $119.13 in a stock mutual fund and it appreciated at the 11% annual average rate of the market, you would have more than $100,000 in less than 20 years. You would have over $1,000,000 in less than 40 years.
Here’s where I’m selfish: We are losing many potential estate planning clients because of credit card debt! But I know that families in debt feel it much more than we feel that particular pinch.
But here’s the very good news: The difference between those in debt and millionaires is as small as slight changes in financial lifestyle. I’ll address those more soon.
Additional statistics are not encouraging:
* Credit card companies solicit the average American 7 times a year through the mail.
* The average household has 10 credit cards.
* Americans paid out approximately $65 billion in interest last year alone.
* The typical “Minimum Monthly Payment” is 90% interest and 10% principal.
* Almost half the households in America report having difficulty paying their minimum monthly payments.
* Late fees are now $29.00, (if not received on the payment due date).
* Bankruptcy is becoming the only alternative for more and more Americans.
* Last year over 1.41 million Americans filed for bankruptcy, the highest in our nations’ history.
How are you doing? One measurement you can do is to compute your “debt to income ratio.”
To calculate your Debt To Income (DTI) Ratio, divide your debt payments by your income. For example, a person making $20,000 a year gross income with $10,000 of yearly debt payments has a 50% DTI Ratio.
For debt payments, add up all of your debt payments including: house payment, car payment, credit card bill, etc. Try adding up one month’s worth and multiplying by twelve. If your DTI Ratio is over 40%, you are in trouble. If you are under 15% you are doing well. Families who are over 40% will usually have to accept higher interest rates when applying for loans because lenders see them as “overextended”.
The first step to break out of the bad bracket, is to stop the bleeding. Simply stop using your credit cards. Pay cash or write a check on an account with sufficient funds for every purchase you make. Every day, one day at a time, pay cash.
This is tough love, and a hard pill to swallow. I’ll address how it can be made easier next week.
Let me know if this is useful to you! Leave me feedback…
“Nothing great in the world has ever been accomplished without passion.”
- Georg W. Hegel
I’m writing this on Monday morning, and last night the House of Representatives approved the Senate version of Health Care Reform…and it will soon be law. It’s been a drawn-out fight, and it hasn’t been very pretty–but all of us will now have to adjust to these laws. Keep it here (so to speak), and over the next few weeks and months, we’ll deliver insight as to what this means for YOU, your family, your job–and, of course, any estate planning implications.
There are so many different provisions in this bill, that my advice right now is to ‘wait and see’.
As the details become more clear, we’ll walk alongside you to ensure you’re informed…and that our clients take the most advantageous position possible in this new landscape. One thing *is* clear: the IRS will have even more power than before, as many of the proposed regulations are tied into the tax code. And that will have significant implications for setting up your assets properly.
Again…we’ll stay on top of this, so you don’t have to. It’s part of the service we provide our clients and our community through these weekly blogs.
And, this week, I thought I’d deliver a few anecdotes and examples about why it really is so critical to ensure you’ve planned ahead for whatever kinds of curveballs which life might throw your way…
“Straight Talk” Personal Strategy
Good Estate Planning (and Bad)
I often take the time, in these blog posts, to pass along advice not directly-related to our primary area of expertise. But this week, I’d like to give you some examples of why it’s so important to be prepared–for the sake of your family’s future.
You see, when it comes to transferring real wealth to children, many otherwise-successful parents never get around to it. They’re just too busy running their businesses or performing their work duties to think about planning for the proper way to pass along their assets. This kind of thinking, unfortunately, can have devastating tax consequences if a well-conceived estate plan is not put in place.
Here’s a story passed to me from someone I know: a New York businessman in his late 40’s, who owned a thriving manufacturing business, was tragically taken from us because of a heart attack — leaving a wife and three young kids. At that point, the IRS valued the business at $6 million, far more than the $1.5 million the business owner had told his financial adviser he thought it was worth.
Further, because the manufacturer hadn’t gotten around to moving his life insurance policy into a trust for his kids, the policy was considered part of the couple’s taxable estate. By signing a single piece of paper, the manufacturer could have spared his kids from paying federal estate taxes of as much as 45 percent on $3 million in insurance proceeds.
Tragedy upon tragedy: with a little planning, he could have easily transferred that money to his heirs tax-free.
There are a variety of simple moves which could have been made. For example, by transferring a minority interest in your business to a trust for your children early on, you can take advantage of favorable tax treatment that lets you value that minority stake at a deep discount.
Make annual gifts. Under current IRS rules, you and your spouse can give each of your children as much as $13,000 a year tax-free ($26,000 total). Any gifts that you make to your kids while you’re alive count towards the “unified credit” that eliminates federal estate tax on the first $3.5 million of your assets. Make sure your assets are titled correctly: Holding assets in your own name can trigger unwanted tax consequences. Re-titling real estate and other assets so that they’re wholly or partially owned by a trust for your children is a fairly simple process that can be done without triggering capital gains taxes. Update your will. Again, horror stories abound of mistakes which could have been avoided with the right advice–and some simple paperwork. I know of a woman who had remarried and neglected to update her will. After she died, her second husband and her son from her first marriage ended up in a nasty fight over her $500,000 life insurance policy.
How can you avoid problems like these? Good estate planning will require an investment of time and money, but it may very well be the best investment you ever made. Your family will forever thank you.
“Old times never come back and I suppose it’s just as well. What comes back is a new morning every day in the year, and that’s better.”
- George Edward Woodberry
Well, the ides of March are upon us!
But, unlike Julius Caesar, we have nothing to fear from it! In fact, spring brings a sense of optimism and hope for so many–and with good reason. As the weather begins to shift, there’s a sense that whatever “winter” we may be facing…new life can emerge. It always wins.
So, I hope that you remember that…this economy has put so many families in a tough place, but you don’t have to let it steal your peace. That’s up to you.
And, actually, there have been *some* silver linings to the current mess. There has been a steady progression of certain pro-consumer changes to banking regulations, for one. A couple weeks ago, in fact, “The Card ACT” brought some new credit card rules in play, and I wanted to give you a “heads up” about the changes which affect YOU.
Read on, and leave feedback!
“Straight Talk” Personal Strategy
How To Use New Credit Card Laws To Your Advantage
You may not have heard, but a new credit card law (”The Card ACT”) went into effect recently. The provisions of this new law that will impact most of us are the ones around interest rates, over-limit fees, payment allocation, and monthly statements. Now, if you don’t use credit cards in your family life, this doesn’t apply to you…but most people do, and you should know about what’s now being done by credit card companies in response to this new law.
So, here is a quick summary of what you should know so that you can take full advantage of these pro-consumer changes:
Interest Rates
The new rules will make it harder for credit card companies to raise a customer’s rates across the board. Under the so-called “universal default practice”, a consumer who was late on a payment for one credit card might have seen the interest rate rise on that card and another, unrelated credit card.
But now… interest rate hikes are going away during the first year an account is open and on existing balances. However, banks and card companies will still be able to raise interest rates in *some* cases, such as when you are more than 60 days late paying your bill or an introductory rate expires after six months.
Another important exception: Issuers can raise your rate before the first 12 months is up if your rate is “variable” and tied to an index–and that index rises. These indices are at historic lows, but when rates begin to rise (to keep inflation at bay), so will payments.
Over-Limit Fees Rising
Another major change involves the fee charged when a consumer charges more than his or her credit limit. Until now, many card companies have allowed consumers to continue charging beyond set limits–tacking on sometimes hefty over-the-limit fees in the process. Cardholders will now have to “opt-in” for over-the-limit spending.
How Payments Are Applied To Balances
With the new rules, card issuers have to apply payments to the part of a bill with the higher interest rate. For example, if an account has a $5,000 balance with a regular rate of 15 percent, and a $5,000 balance at a promotional rate of 5 percent, the monthly payment must be applied first to the balance with the 15 percent rate. This is good news for the consumer.
Monthly Statements
Credit card statements will have to show how long it will take to pay off a credit card if only minimum payments are made. The statements will also have to show how a consumer may pay off the entire bill in 36 months if payments are increased.
Lastly, you should be aware that, because of these new rules, credit card issuers will be forced to find other sources of revenue. Already, we’re seeing card companies take an “airlines” approach–identifying ticky-tack fees which can be justified as a “normal” course of business. Rewards transactions & international charging are two very-common places which card issuers are already applying fees. So watch your statements carefully.
I hope this helps.
“The past does not define you, the present does.”
- Jillian Michaels
As we work with families, we spend a good amount of time sorting through beneficiary decisions and attitudes about life, money and the values which parents seek to pass on.
But one of the more difficult tasks for me is when I meet with a family who doesn’t have the confidence they wish they would have about how their children would handle finances, down the line.
At the point of making these decisions, we can put into place a whole range of mechanisms which will ensure that financial assets are properly distributed, when the time does come.
But wouldn’t it be great if our children had the experience and self-control to handle money, starting at an early age?
That’s why I’ve put together some pointers for you (10 of them) which will help your family raise children who “get it” when it comes to money. This is a great article to forward along to your friends and family, I think–it’s an issue which too often goes neglected within families.
And, of course, I’d love your thoughts (as usual!)…
“Straight Talk” Personal Strategy
Teach Your Children Well About Money
As Americans try to spend less and go on a budget this provides an opportunity to teach the next generation financial principles they may never have seen in the prosperous years they have been alive. Here are ten principles for teaching children about money:
1. Talk about money. Every time money is involved, parents have a chance to teach their children the values and analysis behind their actions. Money should never be the primarily topic of discussion, but it is one of the most important topics through which we communicate our wisdom and values to our children. Every purchase, investment, or donation can be a time to teach your children something about your values.
2. Talk openly about money. Parent makes a mistake when they keep information from their children. The only way children learn what is a good deal and what is too expensive is by the experience of what their family earns and what items cost. Hiding this information robs children of the financial education they need.
3. Talk factually about money. Many parents have strong emotions about money based on their childhood experiences. These emotions are always transmitted to children. Instead of helping children, they can cripple children from growing to make sound financial decisions.
4. Require chores; pay for optional work. Everyone in the family has to help complete the work that needs to be done. If you want to pay your children, only pay them for optional work they can choose to do or not to do.
5. Provide children an allowance they can make real choices with. Talk about money is important, but children need real-world lab experience to understand the consequences of their decisions. Consider giving them an allowance large enough so that they can purchase some of their own needs. Then continue to give them honest advice, and help them ask the right questions to make wise decisions based on their values.
6. Help children prioritize purchases. Ask them if this purchase is better than other purchases they are considering making.
7. Help children comparison shop. Help them consider issues such as cost, quality, and convenience.
8. Require children to wait before making large purchases. Adults should wait at least a month whenever they are making a large purchase. Children shouldn’t be expected to wait that long. Here is a good rule of thumb: Children should be required to wait as many days as they are old in years before being allowed to make a large purchase (over a week’s allowance). There is always tomorrow and over half the time they won’t remember what attracted them to it in the first place. Developing this habit will help make them resistant to impulse buying.
9. Don’t use money as a punishment. Your priority should be helping to give your values to your children, not buy their outward behavior.
10. Don’t loan your children money! If their desired purchase is something they should be saving for, let them save for it. If you want to buy it for them for the value of the experience, buy it for them. The principles are “If they want it, they have to save for it. If you want them to have it, you will buy it for them.” Loaning your children money for items they want teaches them they aren’t responsible and they don’t have to prioritize.
Some may disagree with all of these admonitions–I don’t intend to become a “parenting guru” in my spare time–but I do hope that, at minimum, this will help you be thinking about how your wishes get passed down.
IMPORTANT NOTE: