Money Managers Live

Investment Planning For 2010

photo by vogliovento

With the New Year upon us it is a good time to reflect on the lessons learned from this past year.  With the state of the economy at the beginning of 2009 would we ever have been able to anticipate or predict how the year would end?  Or can we possibly know what 2010 will bring?  Of course not.  One of the biggest lessons we can take away from 2009 is the importance of having and sticking to a long term investment plan.  Factors influencing the economy will inevitably vary from year to year but implementing a long term investment strategy will ensure we are not influenced by the fear and emotion of the moment and keep our end goals in sight.

Happy New Year from all of us at Paragon Wealth Management.

 

How to Select a Financial Advisor

Finding a financial advisor can be daunting. This is because the title "financial advisor" is not regulated, and advisors range from annuity sales people, to insurance agents, to registered money managers.

The video  below explains what to look for in a financial advisor and how to quickly identify a financial advisor who is competent and offers you the best service for your money.

For more information, download "How to Select a Financial Advisor: The Top Seven Questions You Should Ask" on Paragon Wealth Management's website.

Can Your Happiness be Bought with Money?

photo by tony

This is a topic many have talked, written and argued about over the years.

Does money really make you happy?  If it does, can it buy you TRUE happiness?

Some people think that when they are rich, they will be happy. These same people think they will be happy when they buy a house, buy a nice car, finish school, get a better job, etc.

The point is you will never be truely happy if you wait for things in your life to happen before you can become happy. You can be happy at any point in life if you choose to be.

It is true that it is nice to have money and it makes life a lot easier when you have it, but money itself doesn't really make you truely happy.

Below is a personal story from Tina, one of the most successful bloggers I know. She recently quit her job and started blogging full time. These are her thoughts on money and happiness.

"I had a wonderful job at a phenomenal company. I had flexibility, an understanding boss, and a high paying salary. I loved my job. But after 6 years of expending myself on the job, trying out various professional roles, I felt that I’d grown beyond the fixed positions available at the company.

I’m not going lie, having a lot of money is nice. Money can buy you things, nice things.

However, the cliché is true - money cannot buy you happiness, and having it doesn’t mean that you are a successful person. After several years, I realized that the more money I made, the less satisfied I became. Days started to blend into one another, time flew by, and I deeply longed for something with more meaning.

Upon realizing that I was trading my time for money, I started experimenting with various passive income sources. I’ve started and ended businesses, I’ve turned hobbies into professional pursuits, and I’ve tested out investment avenues.

In the end, I’ve learned that it doesn’t matter what you’re doing. As long as you are doing something that expresses your passion, you will excel and you will gain satisfaction. I’ve also learned that starting something from nothing and watching it grow is deeply rewarding.

Through my quest to finding my passion, I discovered blogging as a platform where I can share ideas and lessons learned that are closest to my heart, as a way to serve others. For the first time in my life, I feel that I am living my life purpose.

Words cannot express the joy I feel while writing for Think Simple Now, and the numerous times when feedback from readers has brought me to tears. This just feels right.”

I agree with Tina. It is important to find your passion in life whatever it may be, and not rely on money to make you happy.

Feel free to leave comments about this article.

The Story of the New Debit Card

Written by Dave Young, President

My youngest son, Austin, turned 14 a few weeks ago. All he wanted was $300.

Before his birthday, he noticed ads for debit cards for kids. He decided to take all his money and deposit it into an account so he could have his own debit card.

Austin had to wait for two weeks to get his debit card. He is not the patient type so this was difficult for him.

He checked the mailbox every day until it finally came. He was so excited. It was his own personal debit card.

The first thing he decided to do was check his balance. His friend told him he could check it at another bank. Austin put his card in. The machine asked for a pin number. He didn't know what that was so he put his account number in.

After a few seconds, he heard a grinding sound. He asked the teller where his debit was. She told him that it had been ground up because he didn't put in the right number. He was so upset! His new debit card was destroyed!

He called me and told me what happened. He wasn't very happy. He asked for a new card, but he had to wait again until it came.

This story reminded me of what often happens if a person does not have a decent financial plan. If you don't have a good financial plan in place, often like the debit card, your financial life will be ground up. 

Financial Basics: Building a Reserve

Written by Dave Young, President

Everyday we have 24 hours in a day to do whatever we want with our time and money. No matter what we do, the clock keeps ticking.

In order to make the best decisions with our time and money, we need to make goals and have a plan.

In order to build a reserve of money for the future, I suggest making these four goals.

1- Manage & Reduce Debt

Debt can get out of control and we need to make sure we manage our current debt. Make sure you know exactly how much debt you have and take steps to reduce it.

2- Get out of Debt

It will take time to get out of debt, but it is possible. Take small steps to reach your overall goal.

3- Build a three month reserve

You never know what will happen. I suggest building a three month reserve. Don't live pay check to pay check. Put money aside so that you could live for three months if something were to happen.

4- Invest for the future

Start investing for the future today. Open a savings account, add to your retirement plan through your work, open an IRA, etc.

Budgets may not seem exciting or even interesting, but they are the key to making your finances work.

A good example is when you make a goal to stay in shape. You can't get anywhere unless you start with a goal to know where you are going. Then, you must have structure in your eating and exercise. You can't just do whatever you want and hope you will get in better shape. Finally, you must exercise a lot of patience and persistence.

Do you realize how much money will go through your hands over the next 40 years?

$20,000 a year= $800,000 (save 10% and invest at 10% return, you will have $885,000 saved)

$40,000 a year= $1,600,000 (save 10%  and invest at 10% return, you will have $1,770,000 saved)

$60,000 a year= $2,400,000 (save 10% and invest at 10% return, you will have $2,656,000 saved)

Those numbers are hard to believe when we only see the numbers on our pay checks every two weeks. Over time what seems like a little, adds up to a huge amount.

It is important to take notice of where our money is going on a regular basis. Is it going to provide for our wants or our needs?

Teeter Totter Example

If you put your income on one side of a teeter totter and your needs (groceries, utility bills, mortgage, etc.) and wants (dining out, entertainment, new clothes, etc.) would the teeter totter be balanced? If not, it's time to reevaluate.

Money doesn't make you happy, but it sure helps your situation if you stay within your means and don't go into excessive debt. People are happy at all levels of income. If a person makes $40,000 a year and saves $5,000 they are probably happier than a person that makes $250,000 and spends $300,000. It is all relative.

The level of control over the resources (or money) that a person has does have a direct impact on happiness. The key to that control is developing and following a budget. This will help you build wealth over time.

Financial Basics: How to Stay out of Debt

Written by Dave Young, President

DEBT IS NOT ALL BAD. It does have a purpose. I realized this when I went to Tanzania recently.

As we road through the small villages, I noticed several unfinished houses. One had a completed foundation, another had a completed foundation with framing, another had a completed foundation, framing and sheetrock, etc. Each home was unfinished at a different stage and didn't look like it would be finished any time soon.

I was surprised to see so many unfinished homes. I asked our guide why they were like this. He explained that they didn't have an effective banking system for the common man, which meant they couldn't borrow any money. When a person wanted to build a home they had to save up for each part of the home and pay in full before they could continue. Each home took years sometimes to build because they couldn't borrow money.

Without debt, a society cannot progress.

In order to work effectively, debt must be used responsibly. Irresponsible debt can be devastating to your financial future.

To succeed financially, you must AVOID irresponsible debt like the plague. Remember that there are people who receive interest, and there are people that pay interest. Usually, the payers work for the receivers. My goal is to help you understand principles that will make you a receiver.

Debt is effectively compound interest in reverse.

Look at this situation for an example. A person puts away $100 a month for 30 years.

At 5% interest.............................................................................$81,886

At 10% interest..........................................................................$208,084

At 15% interest..........................................................................$564,082

At 20% interest........................................................................$1,567,624

Over a 30 year period, the amount accumulated at 15% is more than seven times greater than the amount accumulated at 5%!

If you are paying the interest rather than receiving it, the higher the interest rate you are paying, the more devastating the consequences.

A credit card has been defined as:

"A means of buying something unneeded, at a price you can't afford, with funds you don't have."

Let's look at some examples of how debt works.

Example 1

Two families have the same income, three children, education expenses to plan for that will cost approximately $33,500.

FAMILY A

Chose to meet this obligation by saving $50 per month over a 20 year period and earning 9% interest.

Their total out-of-pocket cost.........................................................$12,000

FAMILY B

Chose to meet this obligation by borrowing the $33,500 on their home equity line of credit. Their interest rate was 12%. Their payments were $368.40 for 20 years.

Their total out-of-pocket cost.........................................................$88,416

Example 2

A person decides to purchase a new car. They purchased it new for $25,000. They paid $2,500 down and financed $22,500 over five years at 9% interest.

ACTUAL COST.............................................................................$30,523

VALUE AFTER 5 YEARS....................................................................$9,000

Return on investment.......................................................................-71%

Example 3

A person buys a condo and borrowed $250,000 at 6 1/2 percent interest over:

Years                                               Payments                                                 Total Amount

15                                                    $2,177                                                        $391,998

30                                                     1580                                                            568,861

100                                                   1356                                                          1,627,490

500                                                   1354                                                          8,125,000

A 15-year mortgage is optimal. Any longer than 15 pays unnecessary interest.

When is debt okay?    

If it is used to purchase an appreciating asset such as a home, an education, a business, a car (to provide transportation to work), etc.

When is debt NOT okay?

When spent for any depreciating asset. This includes just about everything except what is listed above. Any time you are going into debt for something you don't need and don't have money for, it is NOT okay.

The key to staying in balance is the issue of NEEDS versus WANTS. Everyones needs and wants are different depending on your financial situation. Only you can determine specifically what your needs and wants are and your flexibility.

Four Steps to Help you Stay out of Debt

Step 1-

Put together your personal budget with serious attention to identifying your needs versus your wants.

Step 2-

After your bills are paid and a portion of your income is put into savings, determine what you have left to spend. This is called your discretionary income.

Step 3-

Make a list of wants or things you would like to purchase.

Step 4-

Prioritize your list of wants and then only purchase those things that you actually have cash to use. Do not go into debt by spending money you don't have.

Never spend money you don't have. It sounds simple. It is simple, but it takes discipline. Mastering the proper use of debt is one of the seven steps to building wealth (we will discuss those steps in another article).

Financial Basics: The Solution to Your Financial Problem

Written by Dave Young, President

YOU MAY BE SURPRISED to hear that one household in 50 declare bankruptcy a year. On average, when a widow receives a death benefit, it is usually completely gone within three years. Credit card debit is at an all time high. Payday loan centers charging effective interest rates up to 500% are thriving. Gambling is epidemic. In the richest country in the world, millions of Americans are experiencing major financial problems.

What is the solution to this problem?

Make more money?

Most people think that the only way to solve these problems is to make more money so they have more money to spend. In reality, that might help their situation, but it isn't the solution.

It may sound like obvious advice to spend less than you earn, but it is often ignored. According to an article in Smart Money, Americans collectively spent more than they earned after taxes for the past two years in a row. This bad habit afflicts people at all income levels-- those with less may feel as if the extra expenses are necessary evil, while those with more may assume their high income protects them from any future financial trouble. This mentality must be changed in order to build wealth over time and save money.

I've personally met individuals who earn $40,000 a year but save $5,000 of that for the future. Although it may seem like a small annual amount, that money adds up to future wealth and security. In contrast, I have met others who earn $200,000 a year and spend $220,000. This is a quick way to destroy yourself financially. While it may sounds simplistic, in order to build wealth you must spend less than you earn.

Politicians talk about change... beauty contest contestants talk about world peace... all great ideas, but not practical unless they have a disciplined plan.

The solution that provides the structure or the disciplined plan to help you meet your financial goals is:

First, understand your personal numbers (the money you need on a regular basis) and write down a plan to spend less than you earn by making a budget.

Usually when you mention a written "budget"people often start to groan. They don't like budgets because they take effort and force you to decide what is a real NEED and what is a WANT.

A budget is the cornerstone of any financial plan. It brings control to the "numbers". It also takes your numbers out of the "world peace" type of plan and provides some substance and a road map to meet your goals. Budgeting can benefit both frugal people and spendthrift types.

A budget encourages frugal people to balance their spending. It helps them see they can spend money on things like entertainment when they normally wouldn't have spent the money. It also helps spendthrift people balance their spending so they buy things they need first and then have money to spend on additional items. Budgets help them keep their spending under control so they don't spend more than they make.   

Six Steps to making a budget:

1- If you are married, include your spouse.

2- Make a list of all income.

3- Make a list of all expenses from the previous month

4- Determine your needs versus wants. Sometimes we may think we need something, like a new ski boat, when we actually don't. We would like one, but we don't need one at that time. Instead, a need may be something like groceries. You definitely need groceries on a regular basis. We will discuss this topic further next week in another post.

5- Structure your budget so that you are paying yourself first, i.e. paying towards your savings or debt reduction, and your bills second. It is important to put money towards your savings or debts first and then set your budget. If this is done in reverse, your savings and debt usually don't get paid.

6- Determine if your goals are realistic

Second, start setting financial goals after you have set your budget to determine your spending needs.

I suggest setting three goals. First, set two financial goals that you want to meet in five years from now. Second, set two financial goals that you want to meet three years from now. Third, set two financial goals that you want to meet by the end of 2008.

Last, exercise patience and evaluate your progress month to month.

Overall, with anything in life, it takes patience, self-control, patience and more patience to actually start accomplishing your goals. Over time, as you continue to use your budget and stay on track with your goals, you will see results.

Feel free to ask questions or make comments.

Money and Happiness

Written by Dave Young, President

A friend of mine, Steve Moeller, did research on the science of happiness. He gathered information to write a book about what really makes people happy. He gave me permission to share some excerpts with you from an article he wrote for Investment Advisor magazine. I found his thoughts very interesting, and hope you will too.

The assumption that more money will make us happier is etched into our consciousness. Happiness is something we all want; it’s the holy grail of Western civilization. Biologists have recently proven that all higher species from lizards up to humans are biologically programmed to pursue pleasure and positive emotions. It’s a basic subconscious drive that all creatures have. Everything we do, we do because we consciously or unconsciously believe that it will make us happy.

That more money will lead directly to more happiness is such a basic assumption that most people never stop to question it. When researchers at the University of Michigan asked research subjects what would improve the quality of their lives, the majority of the respondents said “more money.”

The assumption that more money will bring us more happiness is etched into our consciousness, championed by our culture, promoted with billions of dollars of advertising each year, and institutionalized in our public policy. And it is still the primary promise of benefits that many investment advisors focus on. But is it true?

“Happiness” researchers have conducted more than 150 surveys all over the world with more than a 1 million participants. Let’s take a look at what they have learned.

Since the end of WWII the purchasing power of American households has tripled. New homes are now twice as big as they were after the war, we have twice as many cars per person, and we eat out more often. The average American now lives much better than most of the kings and queens throughout history.

So are we happier? No!!

This spectacular increase in wealth has had almost no positive effective on our society’s happiness. In fact, from 1957 to 1996 the proportion of people telling the University of Chicago’s National Opinion Research Center that they are “very happy” declined slightly (from 35% to 30%.) Over the same time period; divorce doubled, the prison population quintupled and major depression rose tenfold, turning it into the fourth most common debilitating disease. America’s not alone; Europe and Japan have experienced the same basic trends.

One of the happiness researchers’ more noteworthy findings came from a survey of Forbe’s 400 wealthiest Americans. These cent millionaires and billionaires were asked to rate their life satisfaction from “extremely dissatisfied” (1) to “extremely satisfied” (7). Surprisingly, the respondents’ average rating was 5.7, only slightly above the average rating.

But here’s the really interesting part. Masai tribesmen from Kenya in East Africa also participated in the life satisfaction survey. Although they live in huts made out of dirt and cow dung, herd cattle for a living, have no electricity or running water, and don’t have any money, they also rated themselves a 5.7 in the life satisfaction scale.

Quite a few studies now show that believing that money is more important than other values—like relationships with loved ones, spirituality, a feeling that your life is contributing to the greater good—is actually detrimental to happiness. Clearly there’s more to happiness than wealth, luxury and material comforts.

So, how much is the right amount of money to maximize our happiness? Here’s the bottom line from the scientific research on happiness—once we have enough money to pay for life’s basics like food, clothing and housing, more money has very little impact on our happiness.

More money does buy more happiness and well-being if you are poor, and increases fairly quickly until you achieve a solid middle class income. But research shows once your household income reaches the middle class range, increased income has a diminishing positive impact on your happiness and well-being.

The point is, above a certain income level, which isn’t by any means “wealthy”, additional income alone has almost no impact on our happiness. And depending on the price you pay to earn it, more income could even reduce your quality of life.

In fact, a large and growing number of studies support happiness researcher Ed Diener’s comment that, “Materialism is toxic for happiness.” But most Americans don’t seem to believe this.

Why, if we tell researchers that more money doesn’t make us happier, do we chase it so hard? We could blame it on advertisers and the media, two giant institutions that have a vested interest in having us consume more and more stuff each year. But there is another, more subtle villain; the subconscious workings of our brain.

Psychologists have developed a term “hedonic treadmill” to describe humans adaptation to more wealth and material goods. So if you get a new car, you will be happier for a while, but then you will adapt, and so think it’s normal. In order to maintain the same level of happiness through consumption, you must continually buy new things. This is what the concept of “retail therapy” is all about. Adaptation is great for the economy, but bad for you and your financial security.

As an investment advisor, I often work with people who believe that more money will buy them more happiness. As evidenced by this article, in reality, I should help clients determine what will really make them happy and then determine how much income their ideal life will require. It may be a lot less than they originally thought.

Financial Life Planning

Posted by Dave Young, President

Adapted from articles:  Financial Life Planning:  What do you want to be? By Diliberto and Anthony and 20 Tough Questions for an Easier Future by Liz Pulliam Weston

A new school of thought among investment advisors and financial planners is "financial life planning." Financial life planning takes an in-depth look at the bigger picture-- not only considering a client's investment goals, but a client's investment goals in conjunction with their life dreams, values and happiness. Instead of isolating only the monetary side of things, the life planning approach is more holistic and considers a client's most deeply-held values.

The objective is to assist clients in visualizing their goals, then home in on what's really most important in their lives. With the core values identified, an investment plan can be built to help make the dream an eventual reality, while helping the client incorporate those ideals into day-to-day living.

While writing the book, "The New Retirementality" by Mitch Anthony, Anthony would gather groups of professionals and half-kidding ask, "What do you want to be when you grow up?" He was always amazed at how many of these individuals, many in their fifties, dreamed of doing other things--of being something other than what they currently were.

An accountant talked about being a consultant. A consultant talked about being an investment advisor. A marketing executive talked about being a creative director, and a creative director talked about being a speaker and trainer. A speaker and trainer talked about going into television. A television personality talked about going into sales. A sales professional talked about being an executive coach.

When these people, who said they weren't fully engaged, were asked why they didn't just do what they dreamed of doing, without fail, they cited money issues as the reason. How many people have mortgaged who they are in favor of what they could get, and later wished they had made a more informed decision? Some estimate that it may be as much as 70 percent of our society. If it is indeed a money issue holding an individual back from his or her ultimate dream, then it may be permission from a financial professional that helps them move forward.

George Kinder, in the goals-setting portion of his "Seven Stages of Money Maturity" distinguishes between having, doing and being. What do you want to have? What do you want to do? What do you want to be? Americans have put who they want to be on hold for what they can have. The fact that so many people wish they were doing something else cannot be good for individuals, the family, the workplace or society as a whole. Change can be brought through a meaningful dialog around client goals.

For example, someone who thought he wanted an early retirement may find instead that the most important thing to him is spending time with his young children. He may decide to throttle back on his career and retire later so that he doesn't miss out on his kid's formative years.

Or a physician who focused on working harder and creating a more aggressive portfolio in order to retire earlier, when what he really wanted was to get out of medicine because he felt the stress was killing him. The doctor's fear of stress was creating much more stress. Ultimately, he decided to work half-time and reallocate his portfolio to be slightly more conservative, which reduced stress in his life.

The real work comes in trying to figure out how to change your life to reflect your values. Here are some questions to help accomplish this task:

* What's standing in between me and what I want?

* What's my plan for overcoming each of these obstacles?

* What do I have, in terms of personal strengths and outside resources, that will help me deal with these obstacles?

* What skills and knowledge do I need to add to accomplish this change?

* Are there other people I can call on for help in overcoming these obstacles?

* How can I make these changes happen sooner?

* Do I need my family's support for making this change?

* If so, how can I rally that support?

* How can I evaluate and monitor my progress toward my goals?

One of our goals at Paragon is to implement financial life planning with our clientele. Not only discovering your goals in regards to retirement, funding college educations, estate planning and family protection, etc., but also discovering what your desires are. Instead of the obvious "I want to retire in five years", "I want to double my money in 10 years", etc., the goal discovery process will include questions about a client's core values and what is most important in your lives. This begins a dialog between us and our client that results in a process that will help merge your money with your life.