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.

Are You Behind The 8-Ball?

Several years ago, I met with a couple in their mid-fifties who reached out to me because they needed help with their budgeting. I had known them for a few years, and it appeared they were doing well based on our past conversations and their Facebook posts. Looks can be deceiving, however.

As I reviewed their financial situation, I was shocked at what I saw. They didn’t own their home and they had a mountain of debt.  Their only asset was a small checking account. If they attacked their debt aggressively, it would have taken them more than fifteen years to become debt free. This assumes they were willing to curtail their spending, which was going to be a tall order. Their high debt level was robbing them of their ability to establish an emergency fund or save for retirement.

It will be challenging for this couple to make ends meet, especially in retirement. With zero assets saved for retirement, they’ll have to rely on Social Security. The average Social Security check is $1,400.[1] If they both received this same amount their annual retirement income would be $33,600 – before taxes.

In addition, one of the spouses was reluctant to go back to work because most of the jobs being offered were beneath his skill set and level of training.

During my career I’ve met with about a half-dozen families who were in similar financial situations. It’s heartbreaking. As a financial planner, I never want to tell anybody bankruptcy is their best option, but, on occasion, it is.

What should you do if you’re behind the financial 8-ball? Here are a few suggestions.

  1. If you’re in a financial hole, stop digging. Reduce your expenses. Stop spending. Create a budget. Cut up your credit cards. After analyzing your spending habits create a needs-based budget. What are needs? Food, clothing and shelter. Until your financial situation improves put your wants and wishes on hold.
  2. Reduce your financial footprint. Rent a smaller home. Sell one of your cars. Bring your lunch to work. Brew your own coffee. Get rid of cable. Play board games with your family. Visit a National Park for vacation.
  3. Contact your bank or credit card companies to negotiate better terms. They might reduce your interest payment or waive late fees. According to Credit Karma they may offer you a hardship plan due to a job loss or illness.[2]
  4. Find a non-profit or credit-counseling company to help you reign in your debt. These organizations will help you with budgeting and debt consolidation.
  5. Get a job. Any income is better than no income. As I mentioned, the husband in this article was reluctant to get a job that was beneath his social status. The current unemployment rate is 3.8% so finding a job shouldn’t be too difficult. At my local Home Depot, they have scores of orange signs screaming: “We’re hiring.” A sales associate at Home Depot can make between $11 to $14 per hour.[3]
  6. Cut your kids loose? Is it time for your adult child to support themselves? Are they ready to leave the nest? According to a recent Barron’s article, parents are spending $500 billion per year supporting adult children and their families.[4] This money is a drain on the parent’s resources forcing many to continue working well beyond their golden years. Chris Hogan, author of Everyday Millionaires, reports that 71% of millionaires do not provide monthly support to children over the age of 25. I love my daughter dearly, but after college she’ll need to start working.

Life is hard and balancing financial resources is difficult. I’m currently teaching a financial class at my church and one of the biggest benefits from the people attending has been identifying how their money is being spent. If you know where your money is going, you can make life changing decisions today. I know you can do it!

The rich rule over the poor, and the borrower is slave to the lender. ~ Proverbs 22:7

March 23, 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.fool.com/retirement/2018/10/16/heres-the-average-social-security-benefit-for-2019.aspx, Maurie Backman, October 16, 2008

[2] https://www.creditkarma.com/advice/i/negotiate-debt-credit-card-company/, Satta Sarma Hightower, December 4, 2018

[3] https://www.payscale.com/research/US/Employer=The_Home_Depot_Inc./Hourly_Rate

[4] https://www.barrons.com/articles/how-to-protect-your-retirement-from-your-kids-51553285595, Reshma Kapadia, March 23, 2019

More, More, More!

Retirement is a joyous occasion and a time for celebration.  After years of toil you’ve earned the right to enjoy the fruits of your labor.  You can travel the world, run on an uninhabited beach, read lengthy novels, watch movies, or volunteer your time.  Regardless of your goals it will take money to finance your dreams.

A person retiring today at age 65 may spend 35 years in retirement. How much money will she need to fund this stage of her life?  The answer is more, as in more than you think.  With a few key inputs like expenses or income it’s possible to calculate how much money she’ll need to fund her current lifestyle.  For example, if her annual expenses are $100,000 per year, then she’ll need at least $2.5 million.

As you approach retirement, if not sooner, I recommend calculating your annual expenses, so you can determine the amount of assets you’ll need to support your lifestyle.  A budget worksheet can help you determine your monthly and annual expenses.  Here’s a link to a budget worksheet: https://www.consumer.gov/content/make-budget-worksheet.

If the inputs are known, why should we plan for more income?   Two reasons: inflation and unexpected expenses.  Inflation has averaged 3% since 1926.  The value of a dollar in 1926 is worth 7 cents today.  Inflation will annihilate your cash and bond investments over time by reducing their purchasing power. However, you can offset this decline by owning stocks. Stocks have generated a real-return (net of inflation) of 6.8% since 1802.[1]  Stocks will allow you to maintain your purchasing power in retirement.

The second reason you’ll need more money is because of unexpected expenses like a new roof, air-conditioning unit, or car.  In addition, the odds of incurring medical expenses increase as you age, unfortunately. Unexpected expenses can also come from benevolent decisions like charitable donations or gifts to loved ones.

How can you insulate yourself so you can enjoy a fruitful retirement? Here are a few ideas and suggestions.

  1. Save more. The more money you save today, the more you’ll have tomorrow.  Saving an extra $500 per month will put an additional $260,000 in your pocket over twenty years.
  2. Reduce your expenses. After reviewing your expenses are there items in your budget you can reduce or eliminate? Lowering your expenses will give you some margin in retirement if you’re confronted with unexpected expenses.
  3. Pay off debt. Reduced your debt obligations before you enter retirement.  This will lower your expenses and increase your cash flow at a time when you need it most.  If you have money in the bank, use it to pay off your debt obligations.
  4. Create a new expense category. If you follow a budget, create a line item for unexpected expenses.  I’ve added a “black swan” category on my spread sheet for items out of my control.  Why a black swan? A black swan is a rare, and often unexpected, sight. The amount of this category should be 1% to 2% of your total expenses.  For example, if your expenses are $100,000 per year, then 1% to 2% of this amount is $1,000 to $2,000.  This figure is now part of your budget and will help you deal with unexpected expenses.
  5. Defer Social Security. You’ll be eligible to receive Social Security at age 62, but for every year you defer your benefit, you’ll get an 8% raise.  A monthly benefit of $1,500 at 62 could rise to $2,776 at 70, an increase of 85%.

Retirement is a wonderful time, I’m told, which probably is the reason it’s called the Golden Years.  A proper retirement plan can help keep your golden years free of tarnish!

The question isn’t at what age I want to retire, it’s at what income. ~ George Foreman

In all toil there is profit, but mere talk tends only to poverty. ~ Proverbs 14:23

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.  For more information please visit www.parrottwealth.com.

2/6/2018

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] Stocks for the Long Run, Jeremy Siegel, updated.