Can I Get A New Toy?

On a recent trip to Target I heard several kids asking their parents if they could buy a toy, a shirt, a game, and so on. The kids were relentless in their pursuit of acquiring something, anything. Their parents were equally relentless in the denial of their children’s wants. This is a battle that will be waged for years to come.

My daughter wasn’t immune to acquiring new toys. She had a strong desire to own as many My Little Ponies and Breyer Horses as she could. Her mom and I had to tell her no quite often. When she’d get upset, we called it the Green-Eyed Monster from the Bernstein Bears Book: The Bernstein Bears and the Green-Eyed Monster.

When she was five years old, we gave her a weekly allowance of $1. When she received her first dollar, she wanted to visit the toy store to buy a very large Breyer Horse. I knew how this was going to turn out as her dollar was going to fall about $45 short of her goal. She was not going to be happy. When we arrived at the toy store, she pointed to the horse she wanted to buy and together we looked at the price tag – instant tears. She was upset because she couldn’t buy the horse, and, worse, it would take her months to save enough money to buy it. It was a great learning experience.

Her allowance taught her how to save money for buying things she wanted. More importantly, she stopped asking us if she could get a new toy every time we went shopping. If she had the money, she could buy what ever she wanted. In addition to saving her money, she started to give some of it away to her Church. She was learning the gifts of saving money, living within her means, and giving money away to help others. As a young adult, she has kept these important habits.

Here are a few suggestions to help you turn your child into a super-saver and smart spender.

  • Give them an allowance. A few dollars a week will allow them to start saving money and give them a sense of ownership.
  • Establish a savings account. It’s easy to open a savings account. Since they’re young, you’ll need to be listed on the account as well. They will, or should, get excited to see their account balance grow. I still remember my first savings account at a local bank, I was thrilled to see it climb above $60.
  • Let them spend their money. If they have $50 in their wallet, let them spend $50 at the store. At some point, they’ll get tired of spending their own money on things that won’t last. It will also be painful for them to see their bank account get depleted.
  • Encourage them to give money away. Let them decide on how best to donate their money. They can decide when and where it makes sense to help others. The joy of giving brings happiness to all.
  • Teach them to invest. After they have saved a few dollars, teach them how to buy a stock or mutual fund. Let them identify a few companies they have an interest in owning like Apple, Facebook, Coke, Pepsi, McDonald’s, etc. They’ll take pride in their ownership. They’ll also learn about the stock market, the economy, and investor behavior.
  • Invest for growth. Young investors should invest 100% of their funds in stocks or growth-oriented investments.
  • Open a Roth IRA. Once your children start working and earning income, open a Roth IRA. A summer job might pay them a few thousand dollars, so contribute a portion of their salary to a Roth. Kids can invest 100% of their income or $6,000, whichever is less, per year to an IRA. Contributing to an IRA at age 18 will pay huge dividends when they get older. In fact, your kids can let their money grow tax-free for more than 50 years! Investing $1,000 per year in the Investment Company of America Mutual Fund (AIVSX) for 50 years is now worth $2.14 million![1] Not bad for a summer job.

It’s unlikely your five-year-old will ask you to open a Roth IRA or set up a dollar cost averaging program. However, giving your child money to spend, save and give away will establish lifelong benefits. It will change their narrative and make your trips to the store more enjoyable.

Don’t let anyone look down on you because you are young, but set an example for the believers in speech, in conduct, in love, in faith and in purity. ~  1 Timothy 4:12

July 9, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

[1] Morningstar Office Hypothetical: June 30, 1969 to June 30, 2019.

Spend It Like Beckham

A client called recently to let me know he was going to make a major purchase. He wanted to know if his purchase was going to affect his investments. After a few clicks through his financial plan, we determined he could make the purchase and it would not have an impact on his long-term goals. He made the purchase.

Over the years I’ve had several conversations with clients about purchasing big ticket items from cars to boats to planes.  I worked with a gentleman that purchased a sizable apartment in Paris. He had the financial resources to make it happen and the total cost was a fraction of his net worth. Another individual was building a home on an island in the Pacific Northwest. He was going to turn it into a B&B with Ferrari’s and an airplane (he was a former pilot for a major airline.) After completing his financial plan, I told him he couldn’t afford all his purchases. He had to choose between the home, the cars or the plane.

Lately there has been a lot of discussions, blogs and articles about giving up coffee so you can afford a comfortable retirement. It’s unlikely a cup of coffee will derail your retirement, but I get the spirit of the argument. Spending money on coffee or a Cartier watch makes sense if you have the money.

Money is a use asset. It’s designed to buy goods and services. It doesn’t make sense to die with millions of dollars in your bank account. Of course, blindly spending on things can destroy your financial future. So how do you know how much money you can spend? Here are a few thoughts.

Do the math. The stock market is performing well this year, rising 11.5%. A balanced portfolio of 50% stocks and 50% bonds is up 9.4%. If you started the year with a million-dollar portfolio in a balanced account, you’d be up $94,000.  Withdrawing $50,000, $60,000 or $70,000 from your account will not hurt you financially.

More math. If your account is averaging a 5% return every year and your withdrawing 4% from your account, you shouldn’t run out of money. For example, you start with a million-dollar portfolio and withdraw $40,000 for ten years. After ten years you received $400,000 and your account balance is worth $1.125 million. Here’s a real-world example: You invested $1,000,000 in Vanguard’s Balanced Index Fund (VBINX) 25 years ago and withdrew 4% of the account balance each year. After paying taxes and fees, your account balance is worth $2.5 million today, and you received $1.8 million in distributions.[1]

Establish a spending plan. A spending plan, or budget, will help you with your purchasing decisions. Knowing where your money is going is half the battle. Recording your spending habits is a liberating experience.  Setting up a slush fund for impulse items will allow you to make stress free purchases. Your budget will also help you with buying big ticket items. The best place to start for your spending plan is to review your bank and credit card statements for the past 6 months.

Create a financial plan. A financial plan is a difference maker. In addition to reviewing your spending habits, it will incorporate your assets, liabilities, hopes, dreams and fears. Most of my clients have completed a financial plan so when they call to ask if they can make a major purchase, I’m able to answer their question in minutes. Also, when the market is falling like it did in December, I was able to tell clients their financial future was not in peril. A financial plan is paramount if you want to succeed financially.

If you have the money and the resources to buy something, go for it! Spending your money is acceptable, especially if you’ve run the numbers and it falls in line with your budget.

An investment in knowledge pays the best interest. ~ Benjamin Franklin

June 13, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.  This article has nothing to do with David Beckham. I’ve never met him, and I have no idea how he spends his money.

 

 

 

 

 

[1] Morningstar Office Hypothetical – 5/31/1994 – 5/31/2019.

Stocks & Yogurt

Consumers are stressed out over yogurt.

The Wall Street Journal recently published an article about declining yogurt sales – Yogurt Sales Sour as Options Proliferate. The main theme of the article is that consumers have too many choices.

According to the article “the average U.S. Supermarket carries 306 different yogurt varieties”[1] and the consumer is overwhelmed. The article added: “Some consumers say all that choice is giving them yogurt fatigue.”

Investors face the same dilemma as yogurt shoppers – too many investment choices. Morningstar’s database includes the following securities:

  • 115,000 Global Stocks
  • 27,000 U.S. Mutual Funds
  • 17,000 Global Exchange Traded Funds
  • 5,000 529 Portfolios
  • 13,000 Closed-End Funds
  • 15,000 Separately Managed Accounts
  • 208,000 Variable Annuity Subaccounts
  • 14,000 Unit Investment Trusts
  • 6 Million Individual Bonds

Wow! If a consumer is anxious about 300 different types of yogurts, how will they pick a few choice investments from more than 2 million securities? Information overload can cause investors to suffer from financial paralysis.

Being exposed to more choices doesn’t make things easier or better. In a famous 2000 study on jams, psychologist Sheena Iyengar and Mark Lepper published a paper on choices. The first test included 24 varieties of jam; the second sample included six. They found that the larger sample attracted more people, but less buyers. The smaller sample yielded ten times more purchases.[2]

Here’s a simple portfolio consisting of five different exchange traded funds. The funds are allocated to 60% stocks, 40% bonds and rebalanced annually. Dating back to 2003 it generated an average annual return of 7.05%. A $50,000 investment in 2003 is now worth $144,650. The best year was in 2009 with a gain of 15.89%, the worst year occurred in 2008 when it lost 20.05%.

The funds include:

  • iShares Core S&P 500 Fund – IVV
  • iShares Core S&P 600 Fund – IJR
  • iShares MSCI EAFE Fund – EFA
  • iShares US Real Estate – IYR
  • iShares Core US Aggregate Bond Fund – AGG

If five funds are too many, here’s a portfolio consisting of three Vanguard mutual funds. The funds were allocated to 60% stocks, 40% bonds and rebalanced annually. This portfolio originated in 1996 and it has generated an average annual return of 6.63%. A $30,000 investment in 1996 is now worth $130,793. 2009 was the best year for this portfolio when it jumped 25.21%. The worst year occurred in 2008 when it fell 23.3%.

The three funds include:

  • Vanguard Total Stock Market Index – VTSMX
  • Vanguard Total International Stock Market Index – VGTSX
  • Vanguard Total Bond Market Index – VBMFX

If three funds are too much, here’s one mutual fund – Dimensional Fund Advisors 60/40 Global Allocation Fund (DGSIX). Since 2003 it has generated an average annual return of 6.2%. A $10,000 investment in 2003 is now worth $25,180. Its best year was 2009 when it climbed 25.5%. Its worst year occurred in 2008 when it dropped 25.7%.

As you decide on the best investments for your portfolio, don’t make it complicated. A simple portfolio of a few, low-cost, funds is all you need. Your account will be easy to understand and follow. In addition, with fewer moving parts you’ll no longer have to watch the daily moves in the stock market.

So, dig in and simplify your investments.

The more you have, the more you are occupied. The less you have, the more free you are. ~ Mother Teresa

April 11, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

 

 

[1] https://www.wsj.com/articles/yogurt-sales-sour-as-options-proliferate-11554811200?mod=searchresults&page=1&pos=2, Heather Haddon, 4/9/2019

[2] https://hbr.org/2006/06/more-isnt-always-better, Barry Schwartz, June 2006 issue

The Supermarket

The supermarket is a Venus flytrap for unsuspecting shoppers. If you’ve been shopping without a grocery list while hungry you know what I’m talking about!

Store designers carefully dictate your flow through the aisles making sure you cover every square inch of floor space. When you enter, you’re drawn in by the powerful aroma of fresh flowers and the sweet smells emanating from the bakery. We must traverse the gauntlet of aisles as we fill up our carts with the items on our list. Healthy items are found around the edges while packaged goods are housed in the interior. The checkout aisle is the most tempting as we stare at candy, toys, and soft drinks while waiting to pay. The layout is not left to chance, nor is it random. It’s done so we make a few impulse purchases. In fact, “Two-thirds of what we buy in the supermarket we had no intention of buying,” says consumer expert Paco Underhill, author of Why We Buy: The Science of Shopping.

To maximize your time in the supermarket and minimize your food budget you must shop with a list. It will keep you focused on the items you need and help you avoid impulse purchases. It will be your guiding light, your North Star.

Of course, shopping without a list will expose you to several pitfalls like spending more time in the store buying things you don’t need.

Grocery shopping has similarities to investing. Like shopping, an investor would be wise to follow a list. The list for a successful investor is a financial plan. A solid plan is based on an individual’s financial goals and dreams. It will quantify her goals and guide her through all types of market conditions.  It will also let her know when she’s arrived at her financial destination.  For example, if she wants to purchase a mountain cabin in the Rockies for $300,000 she can check it off her list if she has saved the money.

Like a grocery shopping list, a financial plan will have multiple goals whether it’s planning for retirement, paying for college, or eliminating debt. As you reach these milestones, check them off your list.

An investor without a plan is more likely to make impulse decisions that may have severe consequences to his long-term wealth. Without one, he may chase returns or sell his holdings during a market correction. Furthermore, if he doesn’t follow a plan, how will he know how much money to save for retirement or other important life goals?

Does a financial plan really help? According to one study, investors who followed their plan had three times the wealth of those who didn’t![1]

The next time you head to the supermarket add a financial plan to your grocery list. It will bear much fruit for you and your family!

I am the worst at the grocery store. It turns into three carts. It turns into, ‘Oh did you see the truffle cheese? We’ve got to get the truffle cheese!’ ~ Guy Fieri
May 7, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  Our mission is to remove confusion, complexity, and worry from the financial planning and investment management process. For more information please visit www.parrottwealth.com.

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

[1] http://content.schwab.com/web/retail/public/owners_manual/principle-plan.html, website accessed on 5/7/2018.