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Financial Planning Life Insurance Retirement Savings

Financial Planning Basics: Permanent Life Insurance

Financial Planning Basics: Permanent Life Insurance

By Scot Whiskeyman

Nothing lasts forever, but what if you could own something that at least lasted for a lifetime?

Last month, we covered term life insurance, and discussed the difference between your coverage through work and owning your own individual policy. We mentioned that it’s important to consider buying a term policy from a company with a good mix of life insurance products, and that offers you the option to convert your policy to a permanent one.

This week, we’re going to pick up where we left off, and discuss the different types of permanent insurance and its upsides and downsides.

The Permanent Insurance Universe

There are four major types of permanent life insurance: whole life insurance, guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance. While not exhaustive, this is the list of permanent insurance products that impact most of our clients, so it’s what we’re going to focus on.

Whole Life Insurance

Whole Life Insurance is the original permanent life insurance – well, actually, it’s the original life insurance, period. Designed to provide a death benefit that will last forever, whole life insurance builds cash value over a lifetime, can pay eventually pay for itself, and even help cover the costs of long-term care.

Choose Whole Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • To avoid the risks that come with investing in the market

How it works:

  • Sometimes referred to as “the Cadillac” of life insurance policies due to its features
  • Builds cash value that can be used throughout your lifetime, or in retirement
  • A “non-correlated” asset, meaning the performance insider is not linked to the stock market
  • Can often pay for itself after enough cash has been accumulated
  • Can provide tax-free income in retirement

Universal Life Insurance

What exactly does the “universal” in Universal Life Insurance mean?

To be honest with you I have no idea.

But I can tell you universal life policies have been around since the early 1980’s, and have changed a lot since then – for the benefit of the policyholder.

When they were introduced, interest rates – and inflation – were at all time highs. Major insurance carriers took advantage of this by creating a new product: one that was similar to whole life in that it built cash values, but different in that its interest rates were variable and paid no dividends.

The results? Catastrophe.

Policies collapsed once interest rates fell from double digits. Agents and insurance companies did not project the historically low interest environment of the late 2000’s. Thus, the cash value couldn’t even keep up with internal costs, causing policies to collapse.

Today’s Universal Life policies really share nothing more than a name with their predecessors. Rather than being dependent on interest rates, new policies function with performance linked elsewhere.

There are three major types of of Universal Life policies used today:

Guaranteed Universal Life Insurance (“GUL”)

  • Resembles term insurance in that it doesn’t build cash value
  • Resembles whole life insurance in that it is often guaranteed until your mid-90’s or beyond
  • Great for individuals 55+ with a permanent need for coverage, but who don’t want to pay the much higher cost of whole life insurance
  • “No-lapse” guarantee – the policy will last forever as long as you pay your premiums on time

Indexed Universal Life Insurance (“IUL”)

Choose Indexed Universal Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • More opportunity for cash value growth than you’d get in whole life insurance

Variable Universal Life Insurance (“VUL”)

You might consider variable universal life insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Premium flexibility – you want to be able to use policy cash values to pay for the premiums
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • The maximum opportunity for cash value growth in a tax-favored vehicle

Criticism of Permanent Life Insurance

You won’t hear many financial pundits say favorable things about permanent life insurance.

The common criticisms are that it’s expensive, and the cash value build up – at least inside of whole life insurance – would perform better if invested elsewhere, specifically a stock market index like the S&P 500.

Here’s my response to that criticism: first, financial security is expensive.

The powerful things whole life can do for you that term cannot more than warrant the premium.

Second, who was it that decided to compare whole life insurance to the stock market – or even call it an investment- in the first place?

“Buy term and invest the difference” makes a lot of assumptions (and it’s wrong to make assumptions in financial planning!).

First, it assumes that anyone who wants whole life insurance would also be comfortable being 100% in stocks. As you can see from the chart above, whole life offers lower growth potential, but it offers more guarantees.

Second, if you have permanent life insurance, you have to pay for it, or you’ll either lapse your policy or have to reduce your death benefit.

What’s at stake if I decide to turn off that automatic investment plan? Whole life insurance encourages one of the most important financial behaviors anyone can possess – disciplined saving.

Finally, the idea that one needs to either select term insurance or whole life insurance is a false dichotomy. Few individuals will be able to cover their entire insurance need with whole life insurance, because it would be cost prohibitive. However, there’s nothing wrong with having a foundation a permanent insurance – perhaps that’s guaranteed to be paid-up at retirement – so that when your term insurance is gone, you’re not left unprotected.

Why Someone Might Need Permanent Insurance Later

It’s common for people to think that beginning in retirement and beyond, life insurance isn’t necessary. Their rationale is that once they’ve retired, they’ll have accumulated wealth and have guaranteed income sources, and that they no longer have children who depend on their income. However, it’s important to understand that while the scope of your needs might change in retirement, the need isn’t altogether gone.

Many people aren’t aware that if both they and their spouse are collecting social security, the smaller of the two benefits disappears at the first death. This might not be a big deal if the smaller benefit is a negligible amount, but what if it makes up half of a retiree’s income?

Though less common, pensions have the same problem – the benefit is often reduced or even eliminated upon the first death. What will you have to sacrifice to live on that kind of reduced income?

If you’d thought about whole life insurance 30 years ago, you’d be relieved. Unfortunately, many people haven’t, which puts them in the unenviable situation of applying for insurance later in life, which dramatically increases the cost.

It’s also important to remember that life insurance death benefits are almost always tax free.

For those in states that have inheritance taxes (including Pennsylvania), this suddenly makes permanent life insurance much more attractive, especially after you consider income taxes beneficiaries will have to pay on inherited retirement accounts, court costs, and the time-consuming and expensive probate process.

The Bottom Line

Permanent life insurance has a place in everyone’s financial picture. The key to financial success is to think big and start with a small action.

Getting permanent insurance into place, or reviewing what you already have, could be that first step.

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Lifestyle Other Savings

A.I. will Now Fight Your Overdraft Fees for You

A.I. will Now Fight Your Overdraft Fees for You

DISCLAIMER: Neither the author, nor Providers & Families Wealth Management, LLC or its employees, are affiliated with, compensated, or endorsed by Cushion. This is not an endorsement of Cushion.ai and should not be read as such.

By Scot Whiskeyman

As a frugal consumer (and one that just hates paying overdraft fees), a new service caught my attention this weekend. Scrolling through my Facebook newsfeed, I was served an ad that said something to the effect of: “Wow! In less than 24 hours I had $427 in overdraft fees returned to me, thanks to Cushion.” Sound click-baity? It did to me, but I clicked (or tapped, rather) nevertheless. I want to talk about my experience, but first, let’s talk about A.I.

Boy, has it ever come a long way.

Back when I was in high school (about 15 years ago), I used AOL instant messenger to talk to classmates and friends online. There was no Facebook, and there was no Facebook messenger. No one owned a smart phone, because they didn’t exist. People communicated online either through e-mail or “AIM”.

One day, a group of individuals at AOL decided to try something radical: create a profile (in 2000’s vernacular, the term was “screen name”) for Artificial Intelligence. Enter SmarterChild, one of the very first artificial intelligence chat bots.

Simple in its design, SmarterChild was created to have basic conversations, learn from conversations it had with users, and adapt. It was rudimentary at best, but it was innovative and ahead of its time.

A screenshot of an AOL instant messenger conversation with SmarterChild.

Fast forward 13 years to 2017. Ever the networker, I connected with the owner of a successful Harrisburg-based technology business (not related to A.I.) while attending an event at a local healthcare institution. I followed up with him about meeting for coffee, to which he agreed, and looped in his assistant Sophie, to schedule it. We got a day on the calendar, only for him to be involved in a fender-bender and have to reschedule.

“So sorry, Scot! David’s been in a car accident and needs to reschedule,” she said.

“I’m so sorry to hear that! Please tell David I understand, and give him my best!” I responded.

“Absolutely,” Sophie said. “Will do!”

After more than a year (yes, a year – apparently David is very in demand) I managed to get an appointment on the calendar with him. My successful attempt was the result of me e-mailing not him, but his assistant. I was very impressed – I e-mailed her at 6:30 at night, and received a response fewer than 20 minutes later with his availability.

When coffee finally happened, I was sure to compliment Sophie. People that are hardworking, courteous, and professional are rare, at best. “Your assistant is awesome,” I told David. “She’s so polite and she responds very quickly.”

His response? “She’s A.I.”

I was flabbergasted. The last time I had communicated with A.I. was with my friend SmarterChild in high school. Had A.I. really advanced so far that I couldn’t even recognize I was talking to it?

Turns out that this A.I. that David used was part of a pilot program by a startup out of Silicon Valley. David managed to snag their services for free. For someone like myself, use of A.I. would cost about $400 per month, he estimated.

Fast forward to this past weekend, when I would experience the wonders of Artificial Intelligence first hand once again. After clicking on the Facebook advertisement for Cushion, I was taken to a website, where I was prompted to enter my e-mail address to get started. Next was a list of financial institutions with a question: which of them do I use? I selected several of them (note – there was no option for “other.”)

What happened next surprised me a little. Expecting to be taken to an app I needed to download, I instead received a message from Cushion’s Artificial Intelligence via Facebook Messenger, where I was prompted to select a financial institution. If you’ve ever used Intuit’s Mint, or Fidelity’s eMoney, Cushion uses similar encryption techniques to securely log on to your financial institution’s website and download your account data – the difference, of course, being that Cushion combs through your transaction history and finds not just fees, but interest charges – and will actually negotiate with your bank to get them refunded to you!

Sound too good to be true? I thought so, so I did a little digging. In setting out to understand how Cushion works, my primary questions were a) how exactly does this artificial intelligence “negotiate” with financial institutions, and b) how did it make any money doing so on your behalf? The answer to the first questions is extremely straight forward: large financial institutions have e-mail, SMS, and online messaging services that allow you to chat with a customer service representative. Cushion connects with them, with your permission, on your behalf, and negotiates with them for you. A.I. had me fooled once – it can surely fool an unwitting customer service representative at a bank.

To make money, Cushion charges a hefty 25% of any overdraft fees or interest charges it manages to get credited to your account. I’m not sure of the exact mechanism the company utilizes to get paid, but I can tell you that because of my banking history, I knew this had to be an extremely profitable venture. Some research proved just how right I was: the most profitable banks in the United States collected $11.16 billion in non-sufficient funds (NSF) revenue in 2015, according to Pew research. Just imagine: if Cushion could capture just 5% market share, it would net nearly $140 million in revenue.

Is it worth a shot? That depends. Are you the type of person who pays a lot in interest charges, but manages to pay down your credit card balance to zero every 3-6 months? If you’re carrying a balance right now, you’ll have to first reduce your balance to less than 10% of your total credit, or Cushion will deliver you some bad news – financial institutions won’t negotiate with you unless you do. The other way you can save money is if you happen to pay a good deal in overdraft fees. If you don’t have time, or have exhausted all options talking to a branch manager, then what do you have to lose? 75% of the fees you already paid is better than 0% of them.

Bottom line: Cushion is simple, user-friendly, and easy to use. The downside is that because it’s so new, it only works with a handful of financial institutions (actually four, as of this writing). Still, it’s amazing to see how far A.I. has come over the past 15 years, and it’s incredible to see the innovative solutions it’s providing to consumers. Who knows where it will take us next.

You can check out Cushion yourself here.

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Financial Planning Retirement Savings

What Is An Annuity?

What Is An Annuity?

By Scot Whiskeyman

It’s a simple question, isn’t it? Unfortunately, annuities are complicated, so the answers we get aren’t always straight forward. There’s a lot of press around these products – some good, some bad, some scathingly bad. Regardless of your opinion on annuities, we can all agree that they are some of the most misunderstood products in the financial market place.

To understand what an annuity is, let’s start by understanding what an annuity was. Before insurance companies got creative, annuities were designed to do one thing: provide lifetime income to the recipient in exchange for a lump sum of money. For example: I hand the insurance company $100,000, and they promise me $500 per month, no matter how long I live. Pretty straight forward, right?

Although this type of annuity (known as an immediate annuity) still exists, but it’s no longer alone. In the 90s, we could all go to McDonald’s an order French fries. Are our options on the side were ketchup, and ketchup. But humans are fickle creatures, and not all of us like ketchup. Restaurants want our money, so they put out packets of ranch dressing, bbq sauce, honey, mustard, honey mustard, and so on. All of these fall into the category of “condiments,” yet all of them are slightly different and gears towards consumers’ unique tastes. This is not unlike annuities today.

Let’s return to the above example. I hand the insurance company $100,000, and they promise me $500 per month, no matter how long I live. But what happens after I die? Are you saying the insurance company just gets to keep my money, that I worked hard for and earned? Just like ranch dressing doesn’t sit well in some people’s stomachs, that concept of losing one’s hard earned money didn’t sit well with retirees. So insurance companies came up with death benefits that are also guaranteed. I die early, my wife keeps getting paid. We both die early, our kids get a refund.

Okay, great, insurance companies are to fast food conglomerates as annuities are to condiments. What else do I need to know? Well, there’s a catch. You want more benefits, you pay for them. (It drives me nuts when I have to pay extra for a side of ranch!) In our running example, the insurance company just might offer you $400 per month instead of $500 if you want death benefits.

Fast food wouldn’t exist without preservatives. Sure, they’re often terrible for you, but they keep products from spoiling, and profits from falling. Because we as fickle consumers, want things when want them, and not when they’re available, preservatives have found their way into our whopper jrs and chicken nuggets to make their ingredients last longer. This is not unlike deferred annuities, which are designed for people who want money later, but not right now. If I use retirement money to buy an annuity, but plan to work for two more years, why do I want to take income right now and pay tax on it? I’m already earning money through my job.

You might be thinking: who needs an annuity if they don’t need income now? It’s another great question, and the simple answer is that not everyone is comfortable leaving their nest egg parked in other investments that are exposed to market risk. Enter deferred annuities, many of which are fixed, and earn a set interest rate, or at the very least cannot lose money. For someone who has gone through major recessions like 2001 and 2008, the peace of mind that comes with guaranteed growth might be worth the opportunity cost that comes with risky investing – especially if they are only a few years out from retirement.

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Financial Planning Investing Retirement Savings

Why Every Young Professional Should Consider a Roth IRA

Why Every Young Professional Should Consider a Roth IRA

Roth IRA egg and nest
Image source: Jillonmoney.com

By Scot Whiskeyman

Compounding growth is an amazing thing. Using that that growth tax free? Even more amazing.

If you had contributed to a Roth IRA between December 31st, 2007 and December 31st, 2017, at a rate of $100 per month, you would $19,097* that you could use 100% tax free in retirement. Of course, there’s a catch. First, you must be 59 1/2 or older. Second, you  must have opened your first Roth IRA (not Roth 401k!) more than 5 years ago.

Okay, Scot – the title of this article references young professionals! Why are you talking to me about Roth IRAs if the benefits don’t come until retirement? Here’s why. You can access your contributions penalty and tax free, regardless of age or waiting period. Basically, you can double up on having an emergency fund and retirement savings in one go. That’s the short-term reason.

The long-term reason is this: imagine having two jobs – one which paid you taxable income, and the other which paid you tax free income. How much extra you might you take home by having a tax free income source? Less taxable income means less taxes for two reasons: one, tax-free income isn’t taxed. Two, taxable income is taxed at a much lower rate.

Not convinced? Here are some more reasons to consider a Roth IRA as a young professional:

  • You could eventually be phased out. It might some crazy now, but there may come a day where you have to worry about making too much money. At $120,000 of income, single earners start to be phased out ($189,000 for married earners filing jointly.) This means that the amount you are allowed to contribute to a Roth gradually decreases. You are fully ineligible at $135,000 and $199,000, respectively.
  • A Roth 401k is not enough. If you leave your job and roll your Roth 401(k) to a new Roth IRA, you have to wait 5 years – no matter how long your Roth 401k has been there. Those taking advantage of Roth options through group 401ks would be advised to open a Roth IRA today, even if it’s only funded with a few hundred dollars.
  • It’s a great way to leave a legacy. If you die, you can leave your Roth IRA as a tax free legacy to your spouse, your kids, and even their kids. In theory, it could last generations.
  • Tax laws can change. Will Roths be around forever? It’s hard to say. There’s no better time than today to get started.

Lastly, remember that Roths are just the brand of clothes, and the cash inside is the person. People come in a shapes in sizes, and so do investments – they can be cash, CDs, stocks, mutual funds, and more. You can start up a Roth IRA with very little investment risk. See the infographic below for more information on investing inside of a Roth IRA.

Roth IRA infographic
Source: bankrate.com

The Bottom Line

If you haven’t opened up a Roth IRA, now is a great time to start. Talk to your investment professional about opening an account.

*Assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor’s 500® (S&P 500®) for the 10 years ending December 31st 2017, had an annual compounded rate of return of 8.3%, including reinvestment of dividends.  It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.

The contribution limits for Roth IRAs referenced in this article are for tax year 2018. For current Roth IRA contribution limits, see IRS publication 590-A, section 2 on Roth IRAs or visit www.IRS.gov.

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Behavioral Finance Credit Credit Score Debt Emergency Funds Financial Planning Investing Retirement Savings Student Loans

Accomplishing Your Financial Goals by Weighing Each Part

Accomplishing Your Financial Goals by Weighing Each Part

A man walks into his doctor’s office for his annual checkup. After checking his heart beat, taking his blood pressure readings, and flipping through his chart, the doctor breaks bad news to the man: that he’s got to lose some weight, or suffer some serious health consequences very soon. The man, very annoyed, explains to his doctor that he has tried to lose weight, but “nothing works.” He eats a salad for lunch every day. He cut out soda and beer. He has vegetables with every meal. It’s just genetics!

Not so fast. Further prompting from his doctor reveals the problem: the man dumps croutons, breaded chicken, and ranch dressing on his salads, making them no better than a fast food sandwich – and he does this daily. The vegetables he eats are always accompanied by high calorie dips. And his daily snacks of ice cream and M&Ms add nearly 1500 calories to his daily intake. Turns out they’re more than just a treat – they make up half his diet.

For anyone who cares about their health, filling in the blanks is easy: calories in > calories out. For this man, it’s confusing. He eats vegetables and some sweets, so what?

A good habit does not cancel out a bad one. When it comes to accomplishing one’s goals, the summation of all of his actions are what results in the consequences, whether desired or not. It’s not the lettuce that’s the problem, it’s the deep fried chicken and carb loaded extras on it.

The same is true when it comes to money. It’s not saving money that’s the problem, it’s avoiding wasting it. Would lower interest on my credit card help? Sure, but if I keep swiping it to buy useless junk, how much will my balance decrease?

Successful people look at how their individual financial habits impact their financial situation as a whole. By addressing their financial situation in parts, they feel more empowered to make real changes for the better.

Consider your financial situation and it’s parts. What can you cut out of the budget, however tiny? How much extra change can you throw into savings, or at your credit card balance?

Whether it’s improving cash flow, saving for a vacation, or paying off a credit card, big change happens when the weight of each part is tackled bit by bit. Cutting out croutons from a salad can reduce it by hundreds of calories. Give it time, and the impact of cutting out croutons will speak for itself. The same is true for your bottom line.

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Insurance Life Insurance Long-Term Care Savings Taxes

3 Things Whole Life Insurance Won’t Do For You (And 5 Things It Can)

3 Things Whole Life Insurance Won’t Do For You (And 5 Things It Can)

Life insurance is confusing.

When it comes to whole life insurance, there’s a lot of myths, opinions, and partial truths, all of which find themselves muddled together with facts. Where does one begin if they want a straight answer?

Like any puzzle, it’s helpful to break it down into pieces and work backwards.

Let’s start with what whole life insurance will not do for you:

  • Make you rich
    • Whole life insurance is not going to make you a multi-millionaire. While there is cash value, that cash value builds slowly, over time.
  • Outperform the stock market
    • Did I mention that life insurance grows slowly? Don’t look at whole life insurance as a replacement of your stock market investments. (Better yet, look at not as an investment, but as an asset.)
  • Save you money on insurance right now
    • Tired of paying for life insurance through work? Term insurance premiums going up every year? Whole life won’t solve either of these problems. And that’s because whole life does more.

Now, let’s talk about what whole life insurance can do:

  • Help you build wealth
    • The key to building wealth is paying yourself first. Over time, the cash values that build inside your policy can be used while you’re alive.
  • Encourage discipline
    • It can be tempting to pause your savings strategy when more immediate demands for your money present themselves. However, there are some things that just cannot be paused – your mortgage payment or your groceries, for example. Whole life insurance is much the same: if you want the benefits, your end of the bargain is to pay it – no matter what.
  • Give you a death benefit you’ll never lose
    • A retiree losing their life insurance coverage. A father with a term policy expiring after 20 years of payments. A mother who needs life insurance, but now has a chronic health condition that disqualifies her from almost all types of insurance. These are actual circumstances my clients have faced which have resulted in unfavorable insurance rates, or lack of insurability altogether. Got whole life insurance? You’ll never have to worry about losing coverage because of the curveballs life throws you, as long as you pay your premium.
  • Save you money on taxes
    • Turns out that whole life can help protect against that second certainty in life. Used properly, the cash value of life insurance can be used tax-free. Imagine being able to fund your lifestyle with income that is not only tax-free, but not actually considered income at all. Why does that matter? Well, if it’s not considered income, that means your other income will be taxed at a lower rate.
  • Pay for the cost of a long-term care
    • In the morning, you get out of bed, brush your teeth, use the bathroom, take a shower, get dressed, and have breakfast. It’s a routine that it almost unfathomable to imagine needing help with. And because it’s a routine that’s repeated daily, it’s expensive to pay for help when we do. Enter whole life insurance with a chronic illness or long-term care benefit. Our bodies deteriorate as a natural part of the aging process, making daily activities increasingly difficult. Whole life insurance is permanent: no matter how old one gets, the protection is there – and that protection can be used to offset the cost of routine care.

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Emergency Funds Financial Planning Lifestyle Savings

There is No Free Pet

There is No Free Pet

Meet Sam: Pictured in “Innocence” Mode, Above.

One thing to know about my girlfriend’s family is that they are being fans of dessert. It’s not uncommon for her father to return from State College with 6 gallons of ice cream from the Berkey Creamery. One night after having dinner with her parents, the dessert of choice wasn’t ice cream, but rather homemade chocolate chip cookies – with extra cocoa. Great for people (at least, not lethal.) Not so much for cats.

Nevertheless, my cat Sam decided he would taste them while were away from home at the office. Always hungry and never discreet about his hunting, we returned home in the evening to find remains and crumbs of cookies, as well as the plastic bag that housed them, scattered across the kitchen floor and even into the living room.

Amazingly, he was fine. Considering how toxic dark chocolate is to cats, I thought we’d gotten lucky. Wrong.

A day and a half after his cookie binge, Sam threw up his regular diet (of actual cat food) onto a carpet on our basement. Things progressively got worse over the next several days. Normally a proverbial quadrupedal vacuum, he now barely ate. And what little he did it was thrown up immediately. It got to the point where he would walk right by his bowl, sniff his food, and not even take a bite. We knew something was still wrong.

There wasn’t much choice but to take him to the emergency vet to get checked out. An x-ray revealed that he was “backed up” – none of the food he was eating had anywhere to go, if you catch my drift. Enter the resolution – an enema. I’ll spare you the details, but suffice it to say we were fortunate that we didn’t spend more. Still, a 2 hour visit still set us back $400. Ouch, I thought. But it I’d deal with it.

Fast forward a few days, Sam had once again lost interest in food. So it was back to the vet – this time, the local one.  We dropped him off in the morning, only to find out in on an afternoon phone call with the vet that he needed some very expensive tests – which would set us back another $1500-$2000 dollars.

Just for context: We weren’t in a position to pay that kind of money. We had just gone through several months of expensive bills from Kalie – Lindsey’s 14 year old cat. Her frequent visits included dental surgery, and inspection of an abnormal spot on her backside. That spot become a lump. Ultimately, Kalie had to be put to sleep due to terminal cancer.

But back to Sam – the vet suggested keeping him overnight, instead of running the tests, which she admitted were costly. “I just keep going back to the dark chocolate he got into,” she said. She thought that if they kept him hydrated, he might be more willing to eat in the morning. And that’s what happened. He’s been fine ever since, and we’ve taken some preventative measures (elastic bands to keep his prying paws out of the cupboards, for example.)

The irony of having been gifted Sam as a pet isn’t lost on me. He was free! If you’re a pet owner, you know how much pets can cost. It’s a matter of when they’ll need to be treated by the vet.

Fully recovered & lounging on a soon to be installed dishwasher.

Need a good reason to have an emergency fund? Here it is.

The total cost of vet bills to get Sam health again was just over $1,400. Take it from me: it’s important to think of the cost of ownership in advance of taking on the responsibility of a pet. When it comes to animals, the emergency health issues they have are often completely unpredictable. Having cash on hand in the form of an emergency fund can literally be the difference between life and death for your pet.

Despite cash on hand being tight at the time, we managed to get Sam’s bills covered, and he’s home as happy and healthy as ever. He might be a member of the family, but we make sure he doesn’t get dessert anymore.

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Behavioral Finance Financial Planning Investing Retirement Savings

Just start!

Just start!

Editor’s note: this article was first published on LinkedIn on November 26, 2017.

In the 1973 classic Time, Pink Floyd member David Gilmour eloquently states how time can slip away, working against us if we aren’t careful:

You are young and life is long and there is time to kill today

And then one day you find ten years have got behind you

No one told you when to run, you missed the starting gun

Doubtful that Gilmour was talking about compounding interest, but these lyrics sum up an interesting point about life and how we move through it. As humans, we tend to focus on the immediate, and find thinking too far ahead difficult. The consequences of this are that by the time we get into a “distant” future, we take look around and have no idea how we got there. My hope is that after reading this article, you may feel empowered to not end up ten years older, trying to get your bearings and feeling broke, but rather happy that you took the time to be a diligent saver.

Three Lives, Three Different Choices

Let’s imagine three friends – Chris, Susan and Bill – graduate from college. They each enter into their respective career fields, fully employed. Their incomes are the same. Their decisions are drastically different.

Out of the three of them, two (Chris and Susan) begin saving right away.

Susan saves money for ten years, and then stops – perhaps she gets married, has kids, and her spouse is the sole bread winner.

Chris saves the same amount, but instead of stopping ten years from now, he continues to save all the way to age 65.

Bill doesn’t worry about saving. He decides that he needs to focus on paying down student loan debt. He uses this as an excuse not to keep a budget. Because he doesn’t budget, he unwittingly spends lots of money on drinks, shopping, and new furniture.

All three of them:

– Save $5,000 annually

– Earn the same rate of return

– Retire at age 65

Who comes out ahead?

The Results

Susan saves $50,000 over her lifetime. Bill saves $150,000 over his lifetime – and he didn’t begin until 10 years after Susan – when he realized that he needed to spend less money on partying. What does this mean for their retirement? Astonishingly, Susan will have over $60,000 more than Bill, who saved three times as much.

Now consider Chris, who started saving right away, and didn’t stop until he retired. By saving $50,000 more than his college friend over the course of his career, he ended up with over $1 million – nearly double both of his classmates.

Of course, this is all just a thought experiment – in real life, each of the three would like have different incomes, different amounts of debt, and different life circumstances. Nevertheless – the choices they made rippled through the years until washing ashore in retirement.

The Bottom Line

Time moves quickly, and it’s easy to let it move you forward without being aware of what you’re leaving behind. If you aren’t saving, start now. If you’ve been considering putting away a little more, start now. It doesn’t matter how much, how often or where – just start. Review your savings strategy on a regular basis – the difference could be hundreds of thousands at retirement, when you need it most.

What do you think? How have you overcome financial challenges to continue saving? Comment below!

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Behavioral Finance Financial Planning Savings

Budget Myths Busted

Budget Myths Busted

Intro

One late night in winter 2010, I was heading home from visiting a friend at Bloomsburg University, when snow began to fall. My commute took me over a series of Pennsylvania mountains with some very steep climbs. It was upon descent from one of these climbs that slippery roads decided to take control of my front-wheel drive sedan. Panic took complete control as my car began to careen into the left lane.

What does that have to do with budgeting? Is it that I should have budgeted in advance for a car with all-wheel drive? (Would have helped.) The fact is, like driving, there can be a lot of unexpected outside factors that can send us off of our chosen path. And very much like those scenarios in which we’re sent off course, what’s most important about budgeting isn’t controlling the unexpected, but controlling how we respond.

The Myths

Myth: I can’t keep a budget, because I don’t know what my income is. This is a common misconception, particularly for self-employed individuals, or those whose compensation is performance-based. The truth is that budgeting is not about controlling what comes in, it is about controlling what goes out. It is important to draw a line between cash flow planning and expense management. Once you do, you may find you have more control than you originally thought.

Myth: I made a budget, but I couldn’t stick with it because of (insert unexpected expense.) If you have made a budget in the past, congratulations – if you had trouble sticking with it, that’s okay. It’s important to understand that budgeting is a dynamic process. Unexpected expenses will always pop up. You can work these expenses into your budget, but you have to be prepared to give you dollars a different job. It’s not all or nothing. Reducing your dining out budget may be required. Budgeting can also help you be prepared by seeing the power of building in monthly savings to prepare for just such an emergency.

Myth: Budgeting means giving up control.In the words of Dwight Schrute: False. Budgeting means taking control. Now, repeat that 5 times. “But wait,” you say, “you just said that budgeting isn’t about taking control! You’re a liar.” First of all, ouch. Second of all, think of it this way: what is it in life that we have complete and utter control of? The truth is, very little. For example, if you’re a golfer, you may know that getting out and swinging your clubs every day will help you. But that won’t have any impact on a course that has bad turf-grass management. However, it will impact your overall score less if you decided you were going to focus on improving your swing, and not worry about outside circumstances. Budgeting is very much the same way: the more disciplined you are with what you can control, the less of an impact outside circumstances will have on your success.

The Bottom Line

The night that I lost control of my car, I could have blamed the weather, or made an excuse about the lack of the right vehicle for the conditions. Fortunately, I was taught – and had practiced – tapping the breaks and counter-steering. These two techniques kept my car (and me) in perfect condition, and allowed for a safe return home. The alternative could have been much worse.

Discipline and preparation could help keep you on course next time, too.

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Behavioral Finance Financial Planning Investing Retirement Savings

What It Really Means To Pay Yourself First

What It Really Means To Pay Yourself First

This article was originally posted by Scot on LinkedIn in 2017.

You’ve likely heard the statement “pay yourself first” before.

But what does it actually mean to pay yourself first? In short: it means saving for the future so that you can live a life of financial independence that you someday hope to achieve. Paying yourself first means saving for future you.

Not saving? You’re not alone. The average American couple only has only $5,000 saved for retirement, and only 1/3 are contributing to company retirement plans (if they’re lucky enough to have one.) It’s clear that there is very big gap between where people are and where they want to be. The gap is widened by what they’re doing with their money.

Saving Enough means Saving Excuses

It’s not unusual to hear the a few of these lines when talking retirement savings:

  • I can’t afford to save for retirement.
  • Saving (or saving too much) will interfere with my lifestyle.
  • I need to focus on paying down my debt.
  • I need to pay for my kids’ college/car/etc.

Do any sound familiar? The reasons above are at odds with most people’s (and likely your) financial goals. I’m not here to argue that the above items are unimportant. What I am here to argue, however, is that saving for the future needs to take priority. Here’s why.

Consider the following data on life expectancy, courtesy of the Social Security Administration.

A man reaching age 65 today can expect to live, on average, until age 84.3.

A woman turning age 65 today can expect to live, on average, until age 86.6.

And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

So, on average, someone who wants to retire at 65 should plan on at least 20 years of retirement. Anecdotally, most of the people I talk to have their hearts set on retiring earlier (age 60 is not uncommon.) Also, planning for a longer retirement is a more conservative approach.

Can’t Envision Retirement? Try This

Many younger individuals and families I talk to have a difficult time knowing how to plan for retirement because it is just so far down the road.

Here’s what I tell them: Imagine yourself retiring today. You have no debt, and no kids with expensive college bills. Your sole purpose: living the life you want. You have complete and total financial independence. What does that mean for you? World travel? A quiet lifestyle at home? Your vision of financial independence should serve as a guiding light towards the person you’ll eventually become – older you.

“I Don’t Want to Retire”

Often, I talk to people who tell me they’ll never retire (I include myself in this category.) It’s admirable to be passionate about your profession, but it’s naive to assume your body and mind will last forever. Whether you want to fully stop working, have a work-optional lifestyle, or continue working until the day you die, you should come face to face with the fact that one day, you might have not have a choice.

Breaking It Down

Now that I’ve sold you on the idea of saving for retirement (I hope), I’ll acknowledge that it can be a challenge to determine how much to properly save. In order to determine that, there are multiple factors that need to be considered. Some helpful questions to ask yourself include:

  • What does financial independence mean to me?
  • What would a monthly budget look like for me, if I were completely independent? (tip: break it down, item by item.)
  • How much can I reasonably expect my investments to grow each year, until I retire?
  • How much can I reasonably expect my investments to grow after I retire? (this is a separate question – remember, you can’t afford big losses after you retire, so you shouldn’t take as much risk.)
  • To what degree do I want to count on social security and/or a pension? (Fun Fact: 60% of millenials expect social security to be bankrupt by the time they retire. For younger generations, this means that in order to properly plan, you need to know what it will take to fully self-fund a very long retirement.)

Finally – don’t forget to factor in inflation – the inevitable fact that the cost of living goes up. Consider the 1987 prices of the following items, provided by bureau of labor statistics:

  • Gasoline, 97.0 cents/gallon
  • Apples, 73.0 cents/pound
  • Potatoes, 24.7 cents/pound
  • White bread 57.1 cents/pound (the avearge loaf of bread is 1 pound, 6 ounces)
  • Milk, $1.09/half gallon

In short: if you’re planning on a long life in retirement, you need to plan on things getting more expensive over time.

The Bottom Line

There’s no time like the present to start saving. With fewer financial certainties and longer lifespans, it’s up to you to take control of your financial future. That means saving early, and saving often – future you is counting on it.

Sources:

http://www.ssa.gov/planners/lifeexpectancy.html

http://www.forbes.com/sites/alexandratalty/2015/06/30/forget-social-security-pensions-millennials-need-to-plan-for-retirement-now/#3f1047d63f10

http://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

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