To be truthful, I was on vacation when the debt ceiling debacle was being decided and when the stock market decided to take a tumble. Despite being subjected to Fox News and CNBC at least twice a day by family members who watch that stuff, my stress level was pretty low. Why? My clients are being protected against market losses by design. You could be, too.
Bear markets require different strategies
We are in a secular bear market – that is, an extended period of time when the stock market is ultimately down. There are always cyclical bull markets within a secular bear, but the overall trend is down. Money has to be managed better. Examples:
• My clients who implemented my tax-free retirement income strategy lost no money.
• My clients who have signed up for the Mutual Fund Analyzer lost very little. The signal told them to get out before the worst happened. I had a client who had to pay $600 in fees to move her money out of mutual funds an into a money market fund, but saved herself $15K. Remember, in a bear market, it’s not so much about what you make as it is about what you don’t lose.
• My clients who are up on my wealth management platform, using a variety of investment strategies lost 25% less (on average) than the S&P500 did.
You don’t have to go to work and lament to your colleagues that your 401(k) is a disaster. You don’t have to stress about your retirement. But you do need to do things differently, and some of those changes are pretty small.
My kids are pretty young, but as I talk to more parents and read more about money management and children, I’ve learned the following items for older kids. Remember, give them lots of opportunities to screw up when the stakes are low. That way, when the stakes are higher, they are way less likely to repeat the mistake. College is not the time to learn how to manage money. That’s too late.
Allow teens and young adults more money management opportunities
Without waxing philosophic about how “kids these days” seem to do less than my generation, I encourage parents to get kids more involved with money as they get older. Some ideas:
• Kids should be able to balance a checkbook by eighth grade.
• Kids should have a bank account by the age of 10.
• Consider buying your kids stock (even if just a few shares) and take them to a shareholder’s meeting. Google would be an interesting choice.
• Kids should have a checking account by the age of 16 and it should have a debit card attached to it.
• Kids should work during the summer for money, preferably not in the family business. Paychecks should go into the checking account.
• Once they get a job, open an Roth IRA for them. They can put in half, and the Bank of Mom and Dad can put in half.
• At some point, kids should have a credit card. It might have to be secured, but that’s okay. Keep the limit low. Let them use it and pay it off every month (or not). It’ll build credit history, it’ll teach the cost of borrowing, and teach them how to pay bills on time.
• Consider letting your kids do the household banking. Let them pay the bills or enter the data into Quickbooks and run the reports.
• Let your children do their own tax return when they get that first job.
• Do a cash-flow plan before they leave the house for college or their first job. Let them learn the cost of living outside the home before they leave home.
• If you’re worried about “boomerang” children—those that leave home but then return in their mid-20s to live with Mom and Dad again—make it clear that you intend to charge rent and you expect them to work or be actively pursuing work. Do not let your kids stay home for free.
Schools these days do not teach money management. That has fallen into the hands of parents. Get the basics in their hands, before the stakes are big and the consequences serious. Remember that compassion and light-heartedness go a long way. Lectures never do. Let the consequences do all the teaching, and enjoy unexpected rewards of financially savvy kids.
In the last two entries, I’ve explained how important it is to teach children early about money so that they have the skills and the values you want them to have to build their own wealth. I’ve also outlined what I do at home to help teach these skills. While I knew that this would benefit my kids, I never saw some of the hugest benefits that we’ve gotten.
When the law of unintended consequences works in your favor
Here’s the beauty of this allowance plan:
• Grandma loves to set up my allowance envelopes. Gives her something to do when she visits, and she loves doing this for her grandkids. She sets up six to seven months in advance.
• The kids learn to identify and count money.
• The kids engage in conversations about what it means to give away money, why, and to whom.
• The kids engage in conversations about why long-term savings is important, what it can be used for, and the cost of things like college, cars, and houses.
• The kids can be fined for not doing chores or responding to requests or repeatedly not turning off the bathroom lights. Kids don’t like chores, but they really don’t like to be fined.
• Mom and Dad rarely buy the kids anything they want in the store. Instead, my kids are told to save their money.
• The kids learn to save money for that special toy.
• The kids learn how awful it is to lose money. Let them live with this consequence. Don’t replace it. They will learn. Remember, better to learn now when it’s $5 rather than in 20 years when it’s $10K.
• The kids learn how awful it is to buy a disappointing or cheap toy. Let them live with this consequence. Don’t fix it.
• The kids learn to make decisions among the many toys available. (This is also the most painful part at first. Cumulatively, I’ve stood in Target for hours waiting for decisions to be made and tears to be had about what’s not getting bought.)
• The kids learn about bank accounts and watching savings grow by little bits over long periods of time.
• Being in the store and watching my kids look at toys they like gives me insight to birthday gift ideas and other presents. I’ve also learned a lot about child-directed advertising, child development and toys they’re attracted to. I’ve also learned a lot about gender-related merchandising, but that’s for another blog.
• I’ve had some of my proudest moments when I’ve seen my kids learn about “cheap” toys, toys that initially hold their attention but aren’t worth owning, choosing to wait to have more money to get what they truly want, and choosing a toy because they really love it (even though I wish it had stayed in the store). I didn’t have to teach these things. My kids learned them with direct experience all by themselves.
• The kids now expect me to say “no” when they ask me to buy them something. We still go through the exercise, but I can’t remember the last tantrum or the last time they didn’t just let it go.
These are huge benefits of managing money early. My experience as a financial planner is that few of us are taught how to manage money as kids, if ever. Few people are hard-wired to handle their money in a way that honors the time and hard work they sacrificed to get it. Give your children this gift. Teach them to fish.
Just as a general parenting philosophy, I believe it’s important to let kids have age-appropriate opportunities to screw up when the stakes are low. I’d rather a kid learn that it’s not such a great idea to put the heaviest block on the top of the tower when she’s three years old than to have her learn that at 15, when I ask her to stack the dishes in the cupboard. Same with money. I let my kids learn early.
Give an allowance and get out of the way
Once again, this is not my idea, but it is one that I have implemented in my house for years with great unforeseen success. I got this from Kathryn Amenta, a wonderful financial counselor that I have mentioned previously.
Give your kids an allowance. Allowance is not tied to chores. They get it because they are part of the household. My kids have to make certain sacrifices in their lives to have two full-time working parents, and they get to enjoy the spoils of the money that comes into the house. Yes, my kids do chores, too, but they do that because they’re part of the household, and we all do chores as part of the family.
My kids receive each week a dollar for every year they are old. My 7-year-old gets $7, and my 9-year-old gets $9. I know, it seems like a lot of money. Keep reading. My kids are required to give away 10%, save 20% in long-term savings, and they get to spend the remaining 70%. They have individual places to put this money. For years, we’ve used a divided piggy bank. Coffee cans would work just as well. Every week they get an envelope with all their money, with the denominations available to make the allocations. You will need to help the little ones. We started this when my kids were 5 and 3. Neither of them could do as much as they can now. Help them.
Eventually the kids will want to go shopping. Take them. I recommend not having them bring their money. You pay for it, and have them pay you back when you get home. This avoids lost money and also allows for conversations about how credit cards work and has them count money back to you. Usually, you also have to make change, which is also a valuable learning moment. Allot a significant amount of time to shop, especially early on. You want to make sure they have time to walk all the aisles, pick a variety of things, put them back, choose something else, etc. Here’s the real trick: Do NOT judge what they buy. You can set rules, but after that, hands-off. For instance, we don’t allow toy guns in the house and we don’t allow them to buy candy and junk food. Sometimes I will put the kybosh on yet another oversized stuffed animal. After that, they can pretty much get whatever they want. This will make much discipline your part. I promise it will be worth it. Bite your tongue.
This plan has incredible beauty that I just never saw coming. More on that next time. Get your envelopes ready.
One of my favorite financial planner stories goes like this: This financial planner was sitting on a plane and the guy next to him strikes up a conversation and asks the planner what he does for a living. Upon learning that he does financial planning, the fellow passenger then said, “I just did all my estate planning. My kids will get everything. They’re set for life.” To which the financial planner responded, “Oh, you mean you robbed them?”
Kids need to know how to fish
The financial planner in this story then goes on to explain to the fellow passenger that it’s not the money you need to pass down, but the skills and values that have helped you build wealth. Money can disappear overnight, especially in the hands of those who have no skills to manage it. Losing money is not that big of a deal…that is, if you have the skills to rebuild it. The same old adage applies: Give people a fish and they will eat for a day. Teach them to fish, and you have fed them for life.
Stay tuned for suggestions on how to raise financially savvy kids.
I’m frequently asked whether it’s worth it to buy a house in San Francisco. Is this a smart financial planning decision? This decision is largely personal, but here is my $.02.
Buy house as a home, buy investment property elsewhere
Remember, this is a blog, so I get to oversimplify. This is my general rule, though: Buy a house in the San Francisco Bay Area if you want to own a home. If what you want is to own real estate as an investment, go elsewhere (preferably out of the state).
Owning a home is a decision driven by emotions, such as wanting to know the landlord can’t kick you out, the freedom to paint the walls or move them, the ability to have pets, creating a nest to raise one’s family, etc. Your home will most likely appreciate, but it is a secondary retirement vehicle at best. It’s not the focus or the foundation (pun intended).
I gravitate to “back of the napkin” analyses as a starting point. I love this one when it comes to home buying. Take the purchase price of the house you’re coveting and divide it by the cost of renting it for a year. That “rent ratio” is a guide of whether to rent or buy. 15 is the magic number. Above 15: rent. Below 15: buy. A million-dollar home in San Francisco rents for about $4K/month. $1M divided by $48K is almost 21. The financial answer: rent. I can always make a financial argument that if your rental situation is favorable in San Francisco, you should never buy a home. Of course, the emotional answer: buy.
If you want to own real estate as part of your portfolio, go where your money will go further. Go where the rental market is reliable and dependable. Go where you can hire a property manager and the numbers still work so you’re not fixing toilets at midnight. Go where non-payment of rent isn’t tolerated. Like Texas. When renters stop paying the rent, they send the sheriff out there to shoot them. I’m kidding, of course, but you get my point. It’s an investment. Be in a place where the investing environment is in your favor. You don’t have to live there. Just make money there.
In the meantime, love owning and living in your home here in San Francisco. There’s a premium for living here and enjoying the weather. That happens somewhere above 15 on the rent ratio scale. How to make it work? Just the basics: Don’t aggressively pay down your mortgage so more money is working for you in multiple assets. Find a fixer (if you’re up to it). Maintain your property. Living and owning in San Francisco certainly has its upsides, and you certainly can be a successful landlord here. But this is one place where money and love might not mix.
I remember this song taught to me as a kid that goes, “Stay on the sunny side, always on the sunny side, stay on the sunny side of life. You’ll feel no pain as we drive you insane, so stay on the happy side of life.” I love how whimsical the song is and how it makes me laugh. It does remind me to focus on the positive, so here it goes with the mortgage market.
You can buy a house and you can get a mortgage
Here is what we have been able to do in the mortgage world lately:
• More and more lenders are making appraisals easier. We are able to use AXIS appraisals, which are based in the Bay Area (fewer Fresno- and Martinez-based appraisers doing appraisals in San Francisco).
• We have a lender that will do 90% loans to $979,750!! That means we can do a purchase of a $1,088,000 home with 10% down.
• Rates are still low.
• Lenders are still lending on live-work lofts.
• Lenders are still doing recent condo-conversions (TICs to condo).
• We have lenders that will still fund in the name of an LLC or corporation.
• We have two banks that will underwrite and approve a borrower based upon his/her assets and derive an analytical income for qualifying for the loan versus using income derived from tax returns. This is like a stated-income loan for those with lots of liquid assets.
• We have banks that will allow for a community second mortgage or an employer second mortgage, such as the SF Mayor’s Office of Housing program or Kaiser employee loans.
• Most condos can be FHA approved by sending in FHA approval packages to the California office or HUD. Turn-around time is 2-4 weeks.
The rest of the market? Just as tedious as it’s ever been. If you have to get a mortgage, hang in there. The paperwork is oppressive and the conditions are often silly, but it will happen. Call us if you need some help.
401(k) plans are getting a lot attention in the press lately, largely due to new rules coming out that require plans to disclose fees and pro rate them among plan participants. This is a move by the government to bring more transparency to the 401(k) process, and in particular to the fees being charged by whom and for what. They are also getting a lot of attention because so many people are concerned about their retirement funds (or the lack thereof) and the fact that their money is tied to the stock and bond markets. I’ve seen many calls for more indexed funds and ETFs in 401(k) plans (lower fees, index-like returns, etc.). As if the lack of these investments is the problem.
A little education can go a long way
It should be no surprise to you if you’re following this blog that I’m not a fan of 401(k) plans. Most of my clients have them, though. They need help identifying the best funds, and they need a way to manage those funds. As you also have probably gathered, I’m a big fan of not losing money and taking advantage of opportunities to make money.
Time for shameless self-promotion. If you want to know if you’re in the best performing funds in your 401(k), and if you want to have some guidance as to when you should be taking advantage of the best times to make money in the markets, you ought to check out this tool: http://lanning.mutualfundmarketalert.com/. Please fill out the sign-in form and watch the video. I don’t spam. I don’t sell my database to anyone at any time for any price for any reason. You may have limited options with your 401(k). The least you can do is make the most of them.
Now that you have a sense of what you’re spending as a result of prior decisions, what you’re spending each week, and what you want to be spending money on, you’re ready to get control of all three. And have fun doing it.
Put your attention on your weekly money
What you want to do now is physically separate your money into different buckets. Here’s what you do next:
Here’s what I hear from people who have actually done this: People start to turn it into a game. They start to see where they could reduce their static expenses. They start to contemplate whether they really want that new grill (or purse or pair of shoes) or if they’d rather add that money to their “kitchen remodel” account. They watch their static expenses shrink, they get more present with their decision-making around the discretionary money, and they love to watch their “kitchen remodel” accounts grow. It’s a game. It’s fun. It requires little accounting, as most of it’s done automatically. You don’t have to watch every penny. You don’t have to know how to use Quickbooks. Brilliant. If you have success, I would love to hear your stories.
If you didn’t skip this blog post, you’re probably hung up somewhere in your life on cash-flow or budgeting. Most of my clients are in the enviable position of not having to watch every penny. They are also, by design from birth or consciousness, not over-spenders or spend-y. They can metaphorically stick a wet finger in the budgeting air and know whether the wind is at their backs.
For many, this strategy isn’t working, either right now or ever. Those folks need to watch where their money is going. I’ve long believed the trick to getting started, leave alone getting it right, is to make it easy and fun. I think I might have found it. Now, I stick to my inclination not to work with folks on budgeting, bail-outs and bad attitudes, but I’m always willing to share strategies that work.
Think of your money in three buckets—static, discretionary, and future
I will start with an admission: I don’t actually budget the way I’m about to describe. I’m stealing this idea from a Financial Planning Association conference I just attended (my whole life is continuing education). I’m one of those freaky people that keeps track of just about every expenditure, tracks it in Quickbooks with help of my assistant, and analyzes where money is being spent, where it can be saved, etc. Most people won’t do this, so I rarely, if ever, recommend it.
What I like about this idea is that it’s easy and fun. This step should take no more than an hour. Here’s what you do:
Here’s what you’ve done. You’ve gotten a clear picture of how much money you are spending as a result of passed decisions. That’s your static bucket. You’ve gotten a clearer picture of what you’re spending week-to-week on food, clothes, household goods, extra babysitting, pet expenses, etc. You’ve gotten clear about what you want to do with your money. This may take some tweaking along the way, but you’re on your way. See next week’s post on what to do next.
