Getting debt under control

I recently had the good fortune of being featured in this article which appeared on the front page of the Seattle Times Business section, and I want to share it with you.

A.J. and Amy are a young couple burdened by debt who did not have the resources to pay for a financial planner. The Seattle Times reached out to me through my affiliation with the Puget Sound Financial Planning Association and asked if I would build them a plan. After several meetings we were able to identify and build a plan around their short and long term goals. I am thrilled to report that they feel like they are finally in control of their debt and retirement savings. Most importantly, they have developed peace of mind around their finances.

Please keep in mind no two investors are alike, this article referenced above is a specific recommendation based on A.J. and Amy’s personal finances. If you would like to give the gift of financial peace of mind, I am always more than happy to help your friends and family develop their own personal plan.

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An alternative to the financial news treadmill

Every day, financial news sites and channels provide a steady stream of conflicting opinions and predictions that often leave investors feeling confused, frustrated, and paralyzed. Don’t believe me? Please allow me to elaborate.

In addition to reading a wide range of investing and personal finance pieces each day, in the evening I often browse a site called RealClearMarkets.com to make sure I take a look at some of the interesting and/or important articles I might have missed during the day. RealClearMarkets.com is basically a consolidator of articles from a number of other sources. You might want to take a look at it just so you can see what I mean.

When I review the list of approximately 50 headlines, I always find it interesting to see how many compelling yet contradictory articles and videos are in one spot, one right after another. It’s common to see one claiming one view, with another of the exact opposite view right below it. China is imploding/China is still a sleeping giant, Gold is headed much lower/Gold will touch new highs by the end of the year, The stock market is about to re-visit the lows of 2008/The stock market is pausing before reaching new highs by year end, Stick with large cap U.S. stocks/America’s best days are behind us and one should look abroad for better investing opportunities, A bond catastrophe is upon us/Don’t believe the bond bust hype, Inflation is about to run rampant/Deflation is the new worry, Emerging market stocks and bonds are to be avoided at all costs/The long term secular growth story of the emerging markets is still very much intact. Good grief! What’s an investor to do?

We’ll continue to see these contradictions, but one does not need to feel paralyzed by them or compelled to decide which one is the better path to follow. The truth is that they all have elements of truth and quite often are written by some very bright people. This month marks my 27th year in this business, and I have seen investors get caught up wrestling with these contradictions in each and every one of those years. Please let me offer an alternative.

Rather than struggling to decide if this is the right or wrong time to hold stocks or bonds in your portfolio, or which types of each to hold, how about always holding a portion in stocks and a portion in bonds, along with an adequate cash reserve for emergencies or opportunities that may arise? Of the portion devoted to stocks, hold U.S. and foreign (including emerging markets), small  and large cap, growth and value, and also some REITs (both foreign and domestic). Of the portion destined for bonds, hold those of the highest credit quality (which tend to hold up relatively well when the stock market severely declines), and those with short- to intermediate-term maturities (which have lower interest rate risk in a rising rate environment).

With regard to cash reserves, the rule of thumb in the financial planning community is to maintain enough to cover 6 to 12 months of living expenses, depending on your situation, but often these targets tend to be on the low side. My experience has been that during periods of severe market or personal financial stress, nothing provides peace of mind like cash. Nobody ever complains about having too much cash on hand during these times. And when opportunity knocks, it’s nice to have plenty of cash on hand to take full advantage. Even when yields are as low as they are now, cash is king. The purpose of your investment portfolio is to deliver returns in excess of inflation over time. Cash is for liquidity, flexibility, and peace of mind.

The appropriate mix of these various asset classes, of course, depends on your individual circumstances and objectives. A big part of my job as an investment advisor is to help clients establish and maintain this mix in the face of unrelenting alarmist news headlines.

If all this advice sounds like nothing more than common sense and things we’ve all heard before, you’re right. But interestingly enough, many people tend to get caught up in all the predictions and hype out there, and they tend to ignore or forget these time-tested principles. As Paul Merriman once said, “There is a Grand Canyon of difference between what people know they should do and what they do.”

If you are tired of feeling confused, paralyzed, and frustrated and would like to jump off the financial news treadmill, I invite you to contact us. If you are not quite there yet, I wish you luck and a quiet mind as you continue down your path. We’ll be here when you need us.

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I’m finally making some money…now what?

I recently had the pleasure of sitting down with a client’s daughter. She’s in her twenties, just finished up her nursing degree six months ago and is working the night shift at a local hospital. She is living with a couple of roommates and is finally in a position to save some money after being a very broke college student. She now faces the question posed by many young people who are starting their first “real” jobs.

Now what?

Michelle (as we will call her) wanted to know what to do with the money she’s now able to save. She had no idea where to start getting her finances in order. To get her started on the right track, I suggested she focus on a few key areas.

Live within your means

She’s already years ahead of many twenty-somethings in that she is living on less money than she earns. She wasn’t sure how much money she would be able to save on a monthly basis so I suggested she set up a rough budget. I didn’t encourage her to be terribly rigid with the budget but to use it to get a sense of where she is spending her money so she’s aware of her spending habits. This will help her decide what she wants to spend money on and what is less important to her.

Create an emergency fund

While she enjoys her job and has no plans to quit anytime soon, you never know what life will throw your way. So I recommended she save three to six months of income and have it very liquid (money market, for example), which will enable her to have a safety net in place.

Understand your insurance policies

Michelle wasn’t sure exactly what her benefits were at work. She knew she had medical but wasn’t sure of the deductible. She also didn’t know if she had dental or vision coverage. As a young woman in her twenties, the likelihood of an expensive surgery or illness is very low, but injuries can still happen.

She also had no idea whether her employer provided disability insurance. I recommended she read through her employee materials again as things are typically a blur when starting a new job. I also encouraged her to ask the HR department about any questions she may still have after reading the policy information.

I checked to make sure she has car and renter’s insurance and that the policies are up to date. When you’re just getting started financially, you don’t want to find out after an accident that your $10,000 car is only covered up to $5,000, or regret not having renter’s insurance after your upstairs neighbors leaves a faucet on, flooding your apartment and ruining your new laptop, couch and clothing.

Pay off your debt

This is typically the ball and chain around many people’s ankles when they first start their careers. I recommended that Michelle pay off the money she owes by attacking the debt with the highest interest rates first. She has about $10,000 in student loans and another $1,500 in credit card debt. The credit card debt has a much higher interest rate than the student loans, so she’ll pay the minimum on the student loans until she pays off the credit cards. Then she’ll pay down the student loans. A good way for her to keep debt in check moving forward is to use primarily cash for all purchases or to use a credit card and pay it off monthly.

I also recommended she compare her local credit union fees and programs to that of her bank. She’ll likely save money on ATM transactions, credit card interest and loans in the future by using a credit union.

Identify short-term and long-term goals

Michelle’s short-term goals include a trip with college friends to Hawaii later in the year. Her longer-term goals include retirement and buying a house. It was important to identify these goals so she can budget for the trip and start down the road to home ownership and retirement. While retirement is probably 40 to 50 years off for Michelle, she will not have to save nearly as much towards her future as friends who start saving in their thirties. She’s fortunate to have a 401k plan and the hospital provides her with some matching as well. The matching is basically free money to her so she would be wise to take advantage of it. By contributing to her 401k plan, she’ll pay less in taxes and benefit from the employer match, which is a win-win. She may not be able to add as much as she’d like to her retirement plan right now, but she can always increase that after building up her emergency fund and paying off debt.

Get organized

Michelle is well on her way to a successful future just by addressing her finances at such a young age. She’ll have a good handle on her spending habits, her debt level and goals.

My final piece of advice, which Michelle has already followed, is to talk to your parents’ financial advisor. The advisor may not be in a position to take you on as a client, but they should be happy to meet with you and get you headed in the right direction.

 

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Spring cleaning: 10 ways to freshen up your financial situation

After cleaning the garage, packing away your winter clothes and cleaning the windows, turn your spring cleaning efforts to your finances. Here are ten ideas to freshen up your financial situation:

1.      Reduce paper: Most banks, brokerages, credit cards, and utilities offer online delivery and storage of statements and bills. Sit down with your paper statements and see how many you can move to online. You will save the time spent opening mail, remove clutter and help the environment.

2.      Pay your bills online: Sign up for an online bill payment service if you don’t already. Set up automatic payments for recurring bills.

3.      Purge: Get a good shredder and use it aggressively. You really don’t need the water bill from two years ago. Purge! This can also help reduce your risk of identity theft.

4.      Eliminate redundancies: Eliminating clutter is not only about getting rid of paper; Identify what accounts are redundant and can be combined and/or closed.

5.      Organize: Get a label maker and create a small, efficient filing system.

6.      Reduce costs: Review bills you get from cable and phone companies, because when contracts expire they may revert to higher charges. Give them a call and you’ll be surprised how easy it is to have your rates reduced.

7.      Check your coverage: Review your insurance coverage to make sure that it is appropriate for you.

8.      Compare interest rates: Make sure your banks and credit cards are competitive for their fees and interest rates.

9.      Track your goals: Create easy-to-use systems for tracking your big picture goals, including a simple budget, college savings, and retirement.

10.  Think about getting help: Identify what areas you may need professional help, and create a plan to interview candidates.

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2013 update to the ultimate buy-and-hold strategy

Every year, we update some of our core articles.

The 2013 update of The ultimate buy-and-hold strategy, which includes performance information through 2012, is now available in our Best of Merriman library.

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5 ways to simplify your finances

For many Merriman clients, getting investments right is only part of achieving their financial goals. I am often asked what else people can do to help improve their financial outlook, and I always answer that being financially disciplined is just as important as investing wisely.

Here are five things I think everyone should do to simplify their financial situation and become more disciplined with their finances:

  1. Consolidate your accounts. If you have an inactive 401(k) with an old employer, transfer it into an IRA. Often, 401(k)s have limited investment options, and you can take advantage of diversification and management benefits by moving your old 401(k) into an IRA account held elsewhere.  Likewise, if you have several IRAs in your name, consider consolidating them into one. There is no real benefit to maintaining multiple accounts, and it can be a headache to manage them all.
  2. Get a handle on what you are spending. There are dozens of apps and websites that can simplify the process of tracking expenses. Mint.com is a great example – it is free and anyone can use it. If you own an Apple device, go the App Store and search for “budget.” Find the app with the highest ratings and download it. Knowing how much money you spend and what you are spending it on is important, both before and after retirement.  You cannot, for instance, know how much you are going to need in retirement unless you know how much you typically spend.
  3. Put your savings on auto-pilot. If your employer matches contributions to your 401(k), you should contribute at least enough to max out that matching and take advantage of that “free money.” If you can afford more, all the better. Don’t forget that saving is not limited to company-sponsored retirement accounts. Saving toward your emergency fund in a bank account or your child’s education in a 529 college savings plan is just as important.  As with your 401(k), you can set these types of accounts up for automatic contributions. Ideally, you would work with a Certified Financial Planner™ to figure out the exact percentage you need to contribute based upon your specific set of circumstances.
  4. Limit the number of credit cards you own.  The more cards you own, the more complicated it becomes to manage them. If you have several cards with outstanding balances, consider transferring balances to consolidate your credit card debt at a lower interest rate and save yourself a substantial amount in interest payments.
  5. Use an auto-pay service to manage and pay your bills. I have a Schwab checking account that allows me to pay thousands of vendors directly from my account. It also alerts me when I have a bill due. If you do not bank with Schwab, don’t worry – most banks now offer a similar service. Ask your local branch for help in getting this set up.

Some of these steps may sound daunting, but are actually quite easy to complete. I know you’ll be glad you did it. Ultimately, these steps will allow you more time to focus on the things that matter most to you.

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2013 retirement contribution limits

As we near the end of 2012, it’s time to start thinking about your finances for 2013. While some year-end planning might still be needed, it’s not too early to start thinking about next year. Many employers will start having their open enrollment periods over the next few weeks, and this is a great time to review your retirement plan contributions.

The new 2013 retirement contribution limits are as follows:

  • The elective deferral contribution limit for 401(k), 403(b) and most 457 plans increased to $17,500 from $17,000 in 2012.
  • The catch-up contribution limit for employees aged 50 and older into those same plans remains unchanged at $5,500 for 2013.
  • The maximum total contributions into a defined contribution plan rise to $51,000 for 2013 compared to $50,000 for 2012. For those aged 50 and older, the limit is $56,500.
  • If you participate in a Simple IRA plan, the salary reduction contribution limit increases to $12,000 in 2013, up from $11,500 in 2012. The catch-up contribution remains at $2,500.
  • The limit for IRA and Roth contributions increased to $5,500 from $5,000 in 2012. The catch-up contribution remains at $1,000 for 2013.
  • For traditional IRAs, there are a few different scenarios where different income limitations apply. These income limits increased from years prior and need to be looked at in more detail for each specific situation.
  • For Roth IRAs, the AGI phase out range is $178k-$188k for married couples filing jointly. For single and heads of households, the phase-out range is $112,000-$127,000.

If you’d like to learn more, you can read the IRS press release here.

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Postponing retirement

Many people are not optimistic about the chances of being able to retire at the traditional age of 65. In one survey, 39% of those surveyed said that they would work past age 70 or never retire.

A more recent study published by the Center for Retirement Research at Boston College paints a more optimistic picture. It concludes that almost half of households can retire at 65 and maintain their standard of living in retirement. For those households whose members can’t afford to retire at 65, 23% would have to work another 1-3 years, and 17% of households would have to work an additional 4-6 years. The study concludes that 88% of households should be able to retire by age 70 and maintain their pre-retirement lifestyle.

Postponing retirement is a powerful way to improve your chances of not outliving your money. Each additional year you work means more savings, more chance for your investments to grow, fewer years to draw down your savings in retirement, and greater Social Security (which increases as you delay claiming it until the age of 70).

While you might not be enthusiastic about the prospect of having to work longer, the reality may not be as bad as you think.

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The 529 Plan Series – Part III: The best 529 plan I know

Part I of this three-part series reviews 529 plan basics. Part II examines Washington State’s 529 prepaid tuition plan, the GET. This final section focuses on the best 529 savings plan I know, the West Virginia Smart529 Select.

Five years ago, my younger sister gave birth to her first child, a beautiful baby girl named Sydney. I was there at the hospital right after Sydney was born, and I instantly fell in love with her. When her 1st birthday came around, I decided the best gift I could give to her was the gift of education (or at least help with it). I set up a 529 account and began making monthly contributions for her benefit. My examination of 529 plans four years ago led me to the West Virginia Smart529 Select, and I believe it’s still one of the best 529 plans available today.

Why the West Virginia Smart529 Select?

I like the WV Smart529 Select plan for three main reasons:

  1. It offers access to a world-class family of funds, Dimensional Fund Advisors (DFA).
  2. The costs are low and very reasonable.
  3. Set-up, maintenance and contributions are simple and easy.

Dimensional Fund Advisors (DFA)

The WV Smart529 Select is the only 529 plan in the country where 100% of the investment options are DFA funds. Clients who work with Merriman may recognize these as the same funds we use in our investment portfolios. DFA funds are rooted in the science of investing, and we believe they offer superior exposure, diversification and returns when compared to most other mutual funds and Exchange-Traded Funds. Ordinarily, you can’t get access to DFA funds unless you are an institutional client or you work with a DFA-registered advisor. However, through the WV Smart529 Select, all investors have access to this great fund family for college savings purposes!

Costs

The WV Smart529 Select has no sales charges, application fees or set-up charges. There is a $25 annual maintenance fee, but that is waived if you enroll in their Automatic Investment Program and contribute $25 or more each month, if the account value is $25,000 or more, or if you’re a resident of West Virginia. The annual program expense ranges from 0.65% to 0.88% of the account balance each year, depending on the investment options chosen—very reasonable for this type of plan.

Set-up, maintenance and contributions

Setting up a WV Smart529 Select account was a breeze. I was able to establish and fund the account directly online, and also enrolled in the Automatic Investment Program which transfers money from my bank account into the 529 account each month. The minimum initial investment to open an account is very low, only $250.

The plan also makes investing simple by offering Age-Based Portfolios, which are managed by DFA and automatically shift in allocation every 3 years as the beneficiary grows older. For example, when the child is between 0-3 years of age, the portfolio will be invested in 100% stocks. When the child turns 19 or older, the portfolio will be 20% stocks, 80% bonds and cash. This provides for greater growth potential while the child is younger, but increases capital preservation potential as the child approaches college. The plan also offers Static Portfolios that don’t change with age, but for my money the Age-Based Portfolios are a simple and elegant solution.

Satisfaction

Four years into it, I’m still making monthly contributions into my niece’s WV Smart529 Select account. I intend to continue this until she finishes college, wherever she may go. She probably won’t realize all of the thought that went into selecting this plan for her; she may simply know that her uncle loves her and has planned ahead for her future. I, however, will know that I have used the best tool for the job, and that gives me tremendous satisfaction.

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The 529 Plan Series – Part II: Assessing Washington’s GET Plan

While all 50 states offer some type of 529 plan, only 18 states offer the prepaid tuition variety.  Some of these prepaid tuition plans are now closed to new enrollment, but Washington’s Guaranteed Education Tuition (GET) plan is still available to Washington residents (and WA residents only).  It is only one of five prepaid tuition plans in the country that is guaranteed by the full faith and credit of the state.  The GET was created in 1998 and is Washington’s only 529 plan.

How GET works

In a nutshell, account owners can purchase up to a maximum of 500 GET “units” at a specified price and redeem those units for college expenses in the future.  100 units represent the cost of one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university (either the University of Washington or Washington State University).  Individual units are worth 1/100th of that cost.  For the 2011-2012 academic year, GET units paid out at a rate of $102.23 per unit.  Account owners can use up to 125 units per year, plus any rollover units from a prior year, to pay the cost of qualified education expenses.

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