RealSmartica

Educate parents and young adults in practical money matters

Facebook
LinkedIn
Twitter

Dirty, Money Secrets

By Leave a Comment

womanupsetpexels-photo-1071096

 

“You are my 50th birthday present to myself,” a woman said to me, as we sat down to meet.  “I’m tired of not feeling like an adult, it’s like I have a dirty money secret.”

I’ve heard variations of this same theme many times.  This is what women say to me when no one is listening.

I could fill a room with these women — then maybe they would see that many struggle with this very subject.

The trouble is no one wants to admit their deficiency – and if you stay silent, advice won’t find its way to you.  The longer you wait, the older you get; the embarrassment never goes away, it just deepens.

So for those of you who insist on silently flogging yourselves – start reading.  There are free courses online, such as Highbrow.  Every day a short email is sent, covering a specific topic.  Just five minutes a day spent reading these emails can inform you about basic concepts.

Share helpful links on your social media accounts and help other women who suffer from painfully shy financial curiosity.

Here are some of the top questions I get asked in a whisper:

  • What is the difference between a stock and a bond? Stock is ownership in a company (equity) and a bond is a loan.  Stocks have the potential to grow because the investor takes more risk to own it.  A bond owner collects interest on the money loaned to a company.
  • I have an IRA, what is that invested in? An IRA is a type of an account (Individual Retirement Account), not the actual investments. Think of the IRA as a bucket that holds investments.  You can own a wide variety of investments in there, such as stocks, bonds, and funds.  The IRA allows your investments to grow without the effect of taxes until you begin taking withdrawals (after age 59 ½ and no later than age 70).
  • What is a mutual fund? A mutual fund pools the money of all the investors to buy a mix of investments.  Funds can be broadly invested (total stock markets of the world) or can be very specific (energy stocks).  Funds can be actively managed (a portfolio manager chooses the investments) or passive (such as index funds, which own all the securities in the index).  An advantage of owning funds is that you own many securities and this diversification reduces the risk that comes from owning only individual securities.
  • What is an annuity? Annuities are an insurance contract.  This product offers the investors the ability to own investments and not be taxed on any gains or income from the investment until they take withdrawals.   Unfortunately, most people who own annuities do not need the extra tax sheltering provided by this investment. Many annuities have high fees as well as surrender fees and are sold because a salesperson earns a high commission on these products.  If you own one in a retirement account (IRA, 403(b), etc.) someone sold you this, because it makes no sense to pay extra for a tax-deferred investment when retirement accounts are already tax-deferred.
  • What is a 403(b) versus a 401(k)? Both are retirement plans offered by an employer. 403(b) plans are for people who work for non-profits such as schools, hospitals, churches.  401(k) plans are for employees of corporations. Both accounts grow without the effect of taxes; both allow employees to make contributions directly from their paycheck and lower their taxable income.  401(k) plans are generally more regulated and the employer must provide solid, low-cost options and education to the employees.  Most 403(b) plans are non-ERISA, which means there is little required of the employer in terms of vetting the investment choices or educating participants.
  • How do I know what I pay for my investments? It’s really important to know the answer to this, because fees are like overhead to a business.  The more you pay in fees, the more it cuts into your profit. FINRA’s Fund Analyzer allows you to look at the sales charges and fund fees associated with your investments.
  • I’m not retiring for 15 years. How can I keep this money safe?  When retirement is 10 years or longer into the future, being “safe” (keeping investments in CDs, money markets and short-term bonds) is very risky.  The whole point of investing is to grow your money for the future, which requires growing it faster than the rate of inflation.  Cash can’t do that.  In fact, keeping a lot in cash when you have a long time frame increases your risk of running out of money in retirement.

 I know there is so much more to know; hopefully, you take comfort in the fact I have been asked these very questions many times.  You are not alone; there is a way out of your confusion if you are brave enough to ask for help.

The good news is, there is no need to wait for your birthday.  Email me at dina@ritholtzwealth.com with your burning money question and I’ll answer it in a blog post – no naming names, of course.

Your secret is safe with me.

 

Ladies, First!

By Leave a Comment

A little more than two months before my due date, panic set in.  Though I had much experience as an aunt and babysitter, and in spite of my life-long fantasies of motherhood, the moment was quickly approaching where my life would change forever.

Change, even joyous change, can be terrifying.  In my case, a difficult twin pregnancy kept very dire possibilities hanging in the balance.  My husband was eerily calm; if I didn’t know better I would have thought he was medicated.

I spoke to my sister-in-law, whose support was always there for me like a welcoming smile.

“Were you scared that you wouldn’t be able to do it?” I asked.

“Childbirth?” she laughed.

“No.  I can’t even think about that!  What if I can’t do this job?” I was near tears.

Every twin book I read described delirium to the point of doubling up on feeding one baby, while accidentally starving the other.  Was this really something I would do?

She laughed and gave me the best advice I have ever received, “Stop reading these books because what they can’t tell you is how you will feel about your babies.  You will throw yourself in front of a moving train for them, and you won’t think twice.  It’s a lot of work and you’ll be exhausted, but your heart will be so full of love that you will be able to do things you never imagined.”

She was right, of course.

Though my sons are no longer babies, that reflex to put their needs ahead of mine is very strong (even when it is not beneficial to them, or me).  I am not alone in having mastered this “talent.”

Perhaps it is biology, or maybe it’s not, but women (in general) are too good at putting themselves second or third.  We would be smart to remember that there are no awards for martyrs — just tombstones.

The data backs it up, of course.  Women earn less than men because their careers have often taken a backseat to caregiving for children or parents.   They have less saved for retirement, because of this — yet they live longer, on average, than men.

Many times I have talked a mother out of funding a college savings plan in favor of contributing to her malnourished retirement account.  The “carrot” is for her to get financially secure and then she can eventually set up a college fund.  It’s obvious, but needs to be repeated:  There are no loans for retirement.

The often-used cliché is true — if oxygen masks come tumbling down on an airplane, parents have to put on their masks first before helping their children.  Here is what this looks like in the world of personal finance:

  • Fund an IRA or Roth IRA (maximum contribution rates are $5,500 or $6,500 for those 50 or older).
  • Participate in your employer’s retirement plan – whether there is a match or not.  If you are already contributing, work towards funding it to the maximum.  My colleague, Bill Sweet, put together a checklist that gives guidance on funding minimums among other useful information that can help you sock away more money and reduce your tax burden.
  • Set aside money every month to pay yourself first.  This can be used for an emergency fund if you haven’t established one.  Make sure any short-term funds (for goals taking place in five years or less) are kept in cash; money for longer term goals can be invested.
  • Pay off high-interest credit card debt.  Unless you have a special 0% financing deal, pay off this debt ASAP.  Reverse compounding is devastating to long-term financial health.
  • Make sure you have adequate TERM life insurance that will get your child through the college years.
  • Do not neglect basic estate planning — have a will, durable power of attorney and health care proxy established.  If your children are minors, make sure that you select a guardian (to raise them in the event of your demise) and a trustee (who will handle the finances).
  • Check the beneficiaries on life insurance policies and retirement accounts to make sure they are current and accurate.

If you’ve tackled this list – congratulations!  Now is the fun part.  You get to plan for your financial future so that your goals are not merely wishful thinking.

Mothers, if you have trouble finding the time and motivation to get started — think of your kids.  Being financially secure is not a selfish indulgence — it is most beneficial to those you care about.  If you’re not sure where to start, check out this blog that I wrote earlier in the year.

By taking these steps, you won’t need to throw yourself in front of a moving train to help your kids.  You might just be there with your feet up and a tiny umbrella in your drink guiding your daughter to be the financially savvy woman you have become.

Tell me where you are on your journey or what questions you have by emailing me: dina@ritholtzwealth.com.

 

 

 

 

The Gift Daughters Really Need

By 2 Comments

When it comes to money, age won’t make someone wiser or give them confidence if there is no real-world experience backing it up; even having a career won’t.  For women, the situation is particularly dire.

According to the Global Financial Literacy Excellence Center’s Working Women’s Financial Capability Study, working women lag men in basic financial literacy (31% vs. 52%); the gap is more pronounced in advanced financial knowledge (12% vs. 24%).

As a mother to sons, I may be all wet on this one; but I am a daughter.  I credit my parents, my father in particular, with being diligent in raising independent daughters.

My father, born in 1917, was nearly 50 when I was born.  As a first- generation American of Italian descent, his thoughts on gender roles were traditional with a capital T.  My mother stayed at home with their seven children while he worked.  It wasn’t until I was a teenager that I discovered he had dropped out of high school, earning his equivalency in his 40s.

Yet, my father was progressive in many ways.  He valued education, though he himself had little formal training.  He also encouraged all of his children to be independent, resourceful, work hard and to save money.

He invested religiously and even opened an IRA for my mother; he had money invested in joint name (men of his generation thought of earnings as exclusively theirs).

Perhaps he wanted his daughters prepared in the event of a sudden change in marital status.  Either way, we were not indulged in the way that fathers might spoil their girls.

He was practical and there were expectations placed on us.  When I went off to college it was understood that my degree would take four years; there was no margin of error for a “bad semester.”  I had to  live up to my end of the bargain; frankly, it never occurred to me not to.

I watched how friends of mine seemed to have an easier time; they had their way paid for, they always had more frills than I did.  I was envious.

But, when I graduated, I had a tremendous sense of accomplishment that really didn’t have all that much to do with the degree I had earned.  It was how I had earned it — and what it had cost me — that made it more precious.

Earnings from my summer job paid for all my books and living expenses; and I worked while I was a full-time student, contributing to my room and board expenses.  I had amassed some very manageable loans (a starting point for my credit history).

I felt strong, free and capable; and not beholden to anyone.  My parents were not “Plan B.”

Adages like, “It’s as easy to marry a rich man as a poor man,” are damaging.  The underlying sentiment is, “You better hitch your cart to a wagon better than your’s, because your potential is quite limited, sweetheart.”   My father never thought of his daughters in need of protection because we were fragile or less than; he protected us because we meant the world to him, as did his sons.

When it comes to money, age won’t make someone wiser or give them confidence if there is no real world experience backing it up.  Even having a career won’t.

Allow your daughters (and sons) to experience money in the simplest ways:

  • Earn it – There is no greater way to value money than to earn it.
  • Save/Invest it – Money can continue working, even when the work day is done.
  • Spend it, wisely – When money has been painstakingly earned, it’s harder to part with it on impulsive buys.
  • Donate it – Causes near to the heart are worthy of good will.

Build their confidence and self-esteem by showing them that they are able to direct their financial future so they can choose self-possession over being someone’s possession.

 

Destination Unknown?

By 1 Comment

90fdb43b2d561be45bc89d8349fb0d74

 

Imagine you’re about to set out on a road trip.  You would absolutely need to have an idea of where you wanted to go – north, south, east, or west.  You would have to work within the confines of how much time you had for this trip – that would determine how far you could go.

Your financial goals are no different than that road trip; failing to plan means planning to fail.

Even if you haven’t given retirement much thought, in terms of what it looks like and feels like, chances are you have an idea of when you would like to have the freedom to walk away.  For those of you bemoaning that you will need to work until you die, it’s time to see if that is really true or simply your worst fear taking over and freezing you in your tracks.

But, you have to set your goals.  You have to make this a priority.

The trouble is, unlike the mortgage payment or electric bill, there are no immediate ramifications if you don’t take the time to do this.  It is important, but it is not urgent. The consequences of your inaction won’t be felt for decades.  That is why it is easy to procrastinate – especially if you are suffering from paralysis.

There are a number of helpful calculators on line that can gauge where you are and where you need to be in order to meet your goals, such as the ones at Vanguard.

What I like about these calculators, is that they help you nail down the answers to the questions I raised in my last blog, A Plan to Overcome Paralysis.

If you are tired of worrying about the great unknown, here are your starting steps:

  • Determine how much will you need. The retirement expenses worksheet will help you get a handle on what your living expenses will be in retirement.  You may not have a mortgage payment in retirement, but perhaps travel or hobbies may constitute more of your budget in retirement then it currently does.
  • Take inventory of the money you will live off of every month from fixed sources (e.g., pension, social security, rental income etc.) and plug it into a retirement income worksheet. The end result of this exercise is you will have a better sense of how much you will need to draw from your investments in order bridge any gap from your fixed income sources.
  • Find out when you can retire. Vanguard’s calculator is easy to use:
    • Plug in how long you plan on living in retirement.  It is not unreasonable to expect to live into your nineties, so don’t short-change your life expectancy.
    • Enter how much you currently have saved and how much you want to be able to withdraw annually to supplement social security, pensions or other sources of income (see your retirement income worksheet).
    • Don’t forget to adjust the pie chart to the side, which asks for how your portfolio is currently invested (stocks, bonds, cash).
    • Once all that data is plugged in,  you can run a simulation to see the probability of achieving your goals and not outliving your money based on the amount/type of assets you have, and the time frame you need the money to last over.

In the event the results that you get are unsatisfactory, don’t get discouraged.  The numbers may not work, but you then can explore what it might take to reach that goal. You may need to invest more money, increase your allocation to stocks (if that risk level is appropriate), delay retirement, or plan on working a part-time job in retirement (or some combination of things).  Then you can decide which sacrifices you are willing to make and whether these actions are enough to move the needle in the right direction. The control is yours; you get to decide.

Once you have a sense of the parameters you are working with, you will no longer randomly throw money into an account without rhyme or reason.   You will know what you are working towards. Most important, this will free you up to actually envision what you want your retirement to be so you can begin to enjoy the process of planning with purpose.  Then, you will confidently know what your destination is and how to get there.