Social Security Statements: Get them online!
Social Security has released an online portal to view your social security benefits. The portal is called mySocialSecurity. It takes a few minutes to setup; however, once setup, you can easily see your earnings history, view projected benefits, and more! It should be a great tool to help the financial planning process, as you will be able to more accurately project your benefits.
The Social Security Administration also recommends checking your earnings history. This history is what largely determines your benefits – if you find an error you should contact the SSA to correct it as soon as possible. SSA recommends checking your benefits at least annually.
The see the new portal and create an account you should visit: http://www.ssa.gov/mystatement/
Enjoy!
Sunk costs: Ignore them to make wealth creating decisions
What are sunk costs? Well, they are the costs that are in the past and gone – the result of prior decisions and, therefore, “sunk.” Whenever you evaluate an investment decision, you should always ignore such costs. Weather you are considering an investment opportunity or trying to decide what type of household appliance to buy, you should ignore these costs.
Here’s a great example: Deciding if you should refinance your mortgage. Let’s say you refinanced 2 years ago when rates were about 5%. To refinance, you paid origination and other fees that totaled a few thousand dollars (let’s say $2,500 in our example). Today, rates are about 3.75%. This could save you a lot of money over the long term by shaving off 1.25% from your mortgage rate. To accurately calculate the NPV (net present value), you should ignore the $2,500 in previous closing costs to evaluate the investment opportunity (in this case, refinancing).
Your analysis should only factor the cost to refinance (today) and the expected future cash flows (in this case – the monthly savings from a lower mortgage payment). The big variable in this analysis is how long you will receive those future cash flows – stated another way, how long will you live in your current house?
You should not base decisions on sunk costs – doing so will lead you to avoid/reject potential wealth creating decisions.
Do you ignore sunk costs when making a decision?
Good credit card debt?
Most of the time you hear that all credit card debt is bad – which is generally true; however, there are some good reasons for having credit cards and even carrying a balance on those cards. The best reason for having a credit card is to establish your credit worthiness.
Your credit score is affected by several factors. Some of these factors include length of credit history (time), credit utilization, payment history, types of credit, and credit inquiries. Let’s look at each of these:
1. Credit history: The longer your account has been open, the better. Showing that you’ve paid an account for 5 years is better than an account that’s only 3 months old. For this reason, it’s good to open a credit account (like a credit card) just to show good credit length. Make sure it’s in your name to actually build credit. For example, I took out a credit card only in my wife’s name so that it would build her credit score. Make sure you’re not just an authorized user on someone else’s account.
2. Credit utilization: The lower the balance to credit limit ratio, the better. For example, if you have a card with a $10,000 credit limit it is better to only charge $1,000 a month on the card then to charge $8,000 a month. Generally, you want to keep your utilization below 30% (10% is ideal). Even if you pay off your card each month, the utilization ratio will be reported as your month-end billed amount. If your utilization is too high, call your card company and ask for a credit limit increase. If that doesn’t work, you may think about opening another account just to keep your utilization down.
3. Payment history: This is self-explanatory. Don’t make late payments – this negatively affects your credit. Also, carrying a balance is not necessarily a bad thing for building credit. In the long term, you don’t want to carry credit card debt; however, to build credit you can carry a balance for a few months. First, put a few charges on your card, then pay the minimum payment (or a little more), and then payoff the cards in a few months. This payment history looks very good on your credit report.
4. Types of credit: The more types of credit, the better. Different types of credit include revolving (credit cards), installment (car payment), mortgage, retail, etc.
5. Credit inquiries: If you apply for credit too many times, your credit is negatively affected. For example, if you tried to get a credit card 5 different times in a few week period, it would negatively impact your credit score.
Consumer debt is not something you generally strive towards, but building your credit is important to having access to the credit market for when you need to finance major purchases (like a home or auto).
What does your credit look like?
Why your kids shouldn’t get life insurance
Should your children receive life insurance proceeds? Well, yes and no. Many people list their spouse as the primary beneficiary and their children as contingent beneficiaries on their life insurance policy. This strategy seems logical enough, right? If you die, the money goes to your spouse. If you spouse is already dead, then the insurance money goes to your children.
However, children usually cannot receive those proceeds directly. Depending on the state, these funds would be held by a guardian until the child reaches either 16 or 18. There are two main problems with this situation:
1. The court may appoint someone as guardian who is not the person you would have chosen to manage the finances of your estate. It could be a stranger or a relative that you would not be thrilled to have managing your estate’s assets.
2. You may not want your children to have access to the funds at such an early age. Most 16 or 18 year-old teens have a few more years (or even decades) of maturing before being capable of managing a large sum of money.
There is an easy fix for this situation. First, you want to have a provision in your will that creates a trust at your death, specifies who will manage the assets for your children, and determine when your children will have full access to the money. Second, whenever you name beneficiaries on a life insurance policy, be sure the contingent beneficiary is the trust created in your will – NOT the children directly. Structuring the beneficiaries this way will allow you to avoid the pitfalls previously mentioned.
Before you make any changes, you should consult with your financial planner and/or attorney. Everyone’s situation is different and should be discussed before making any changes to your policy.
Who are your beneficiaries?
So How Much Money Have We Pumped In?
Below is chart that shows the monetary base growth over the past few years. As the economy has suffered, the Federal Reserve and the Federal Government have tried very hard to “pump” money into the system to stimulate GDP growth. This is associated with Keynesian economic theory – when the economy is sick, we create artificial demand by increasing the money supply and running federal deficits. The idea is that once the economy gets better, you back off the medicine (reduce the money supply and fiscal policy) and the economy can take care of itself. Unfortunately, the economy is still pretty sick and we’ve put a huge amount of money into the system. When the economy does recover, I fear that we will be battling inflation.
What’s bizarre is that we don’t “feel” that increase in the US money supply. Most of these funds are on the sideline, either in banks or stashed under the proverbial mattress.
Do you feel like the money supply has increased?
Lessons from Greece
As Greece experiences a de facto default on its obligations, the US is facing similar problems but of less magnitude. The ongoing struggle in our country to balance the common welfare with individual liberties is no different than the issues facing Greece. Greece has allowed their budget issues to fester for too long and now is incapable of helping itself. The rest of the EU must now pony up to pay for Greece’s poor fiscal decisions.
Personally, I’m worried about the growing divide in America between those that want social equality and those that cherish liberty. There is a great misunderstanding of what creates value for society. Our government (both left and right) is largely in the business of moving resources from one group of people to another. From rich to poor. From persons to corporations. From federal coffers to entitlement programs. We largely argue over how to divide the pie – who should get the biggest piece? Who needs to share some of their piece? This type of conversation misses the point. We need to make a bigger pie! If the pie (GDP) grows, then there is much better chance of everyone getting a bigger piece (a better job, higher standard of living, etc.).
Our nation needs to focus on fostering trade. Trading with one another is what creates value. It creates jobs. Trading will bake a bigger pie for all to share. How do we foster trade? We need to make it easy for people to start businesses. We need to not punish those who want to start enterprises. Those enterprises create value for society.
Next time you hear someone complain about the job market or the economy, ask them what they have been doing to foster trade. What do you do to foster trade?
Macro vs Micro: Why it’s difficult to earn a return in the stock market right now
There are plenty of solid, money-making companies out there. There are even some companies that are growing. But why is it so difficult to earn a real return on your investments right now?
This answer is that the macro-economic environment (what’s going on with the country at large) almost always trumps the micro environment (what’s happening at the company level). Companies are valued based upon our expectation that they will be able to produce cash flows in the future. If the cash flows are very certain, then it is quite simple to arrive at a fair value for that investment. If the cash flows are uneven and uncertain then it is much more difficult to arrive at a consensus for what the stock is worth. This is the situation we find ourselves in currently. No one is really certain where the economy will go and how that will affect consumers’ ability to buy goods and services. What will companies be able to earn next year. In the 3 years? There are so many wonderful companies that are worth owning in your portfolio; however, until we sort out the larger macro picture (how are we going to balance taxes & spending, how will we create jobs, etc.) almost every company will experience large swings in value and “stray” from the fundamental valuation for that firm.
Without doubt, this is a difficult time to earn a return on your capital. If you are not sure how to approach the markets or need a second opinion regarding your investments, feel free to contact me at Veritas Planning Group.
What are you doing with your investments?
Why the sky is falling
The stock market has been in a free fall during the past 2 weeks. What is causing it? How long will this last?
In my opinion, there are two main issues going on. One is a short term issue and the other is a much longer term issue. The long term issue is debt. It’s everywhere. Worldwide, people love to live beyond their means: families, governments, and businesses alike. I’m not saying all debt is evil, but I’m saying that society has pushed the limit on the amount of debt that we can hold and keep our balance sheets afloat. When there is a lot of debt, you need everything to go right. Think about if you have a mortgage, student loans, a car note, some credit card debt, etc. You probably need your paycheck to be deposited each month on schedule in order for you to meet all your obligations in a timely manner. If there are any hiccups, it could set off a whole chain of bad events. You may miss a few payments, start to accrue interest, etc. At that point, you are simply trying to stay afloat and crisis sets in. This is the state of our modern world.
In large part, consumers and banks took on too much debt leading up to 2008. In the past 3 years, families have shored up their balance sheets. They aren’t using their home’s equity to finance purchases and they are saving more. At the same time, the government has not been afraid to use the national credit card. To attempt to stimulate the economy, they government has ramped up spending in hopes of creating aggregate demand. In many ways leverage shifted from businesses and families to the government. We are still trying to live beyond our means. Our society needs to slowly and steadily work out of our debt (both public and private). When we get to a healthier fiscal position, we put ourselves in a position for sustainable long term GDP growth. Long term GDP growth will generally lead to higher real wages and a better standard of living. We need leaders in Washington to provide a credible plan that can contribute to long term GDP growth.
The second issue is the short term economy. Can we continue to grow in spite of all the moving pieces. Investors are fearful about potentially higher taxes, poor job markets, European debt issues, and a host of other issues. If all these issues create significant friction for our economy then growth will greatly slow. Slower growth affects corporate profits, employment levels, and consumer confidence.
Is there a risk of short term economic slowdown? Sure. But the long term fiscal issues facing the global economy are what we need to focus on. If our leaders can pave the way for long term growth, the short term economy will react positively and the stock market will likely rebound.
What do you think about the economy? About the stock market? What would you do?
