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Family Finances: What I Learned from My Mother

Discussing finances with your family can get complicated, but it's worth the effort.

Discussing finances with your family can get complicated, but it’s worth the effort.

My mother, Elaine Sherman, and I participated in a webcast about talking to your parents about family finances. It was part of a series of conversations moderated by More magazine and sponsored by Wells Fargo. We were interviewed, together, by Jennifer Braunschweiger, More’s Deputy Editor. I hope our web audience learned at least a few things. But as I always do when listening to my mother, I did as well.Among them:

Family meetings are a fraught concept: Sometimes when families are faced with a crisis – an older parent lacking funds to cover healthcare bills or escalating living expenses – an adult sibling decides to call a meeting to sort it all out. Having everyone in the same place to talking about money and marshalling resources seems like it would be a great idea. But my mother pointed out that siblings who don’t have the resources of others may feel put on the spot. Another option? A series of sequential conversations to get everyone on the same page. Group emails can also be particularly helpful.

Parents may not mind being asked for help getting out of debt. Parents who have the resources to help may, in fact, be very willing, particularly if the debt was incurred as a result of a job loss or some other event not in the adult child’s control. That said, my mother suggested parents not to take on the full responsibility for paying down the debts. She’d want to see the child making headway on his/her own as well and noted that perhaps their contributions could be matched ala 401(k).

A financial advisor can be a partner for a parent whose lost a spouse. My parents always managed the family finances on their own while they were married – with occasional help from their accountants and attorneys. They never had a financial advisor. But when my father died, my mother lost her financial sounding board. Truth be told, she always managed the money more than my father did. But she’d bring big decisions to him and they’d hash through them together. Without him, she was on her own and not comfortable with that. She has found a financial advisor stepped into that role quite nicely. She’s comfortable talking to him about big money issues. He’s both manager – for things she doesn’t want to do anymore – and sounding board. In other words, a partner for hire.

Even when they’re adults, you can still talk to your kids in the car. One of the big problems with conversation in general is that technology stifles it. It’s rare to have a conversation these days over the phone without the computer or smart phone doing its attention-grabbing thing in the background. The truly important conversations, like ones about family finances, my mom suggested should be tackled where technology is not in the way – doing the dishes after a family dinner, perhaps. Or, as you did when they were teenagers, on a radioless drive in the car.

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Keeping Your Financial Goal in Your Mind’s Eye

Much like sailing, you must keep your destination in your mind's eye when planning financial goals.

Much like sailing, you must keep your destination in your mind’s eye when planning financial goals.

Planning for retirement and investing is a lot like sailing and the markets can be unpredictable like the wind. But no matter how choppy the water or how off course you may find yourself, you must continue with confidence and always with your financial goal in your mind’s eye.

I recently spent a few days on a sailboat on Lake Superior with a group of five friends. Lake Superior is the largest fresh water body of water in the world. When you are out on a sailboat, you hear the wind and water but otherwise it’s remarkably quiet. Once you leave the mainland, you no longer have cell coverage so it forces you to disconnect from the day to day chatter and enjoy your surroundings and friends.

We were sailing in the Apostle Islands which is a national park with over 20 islands and almost no development. On day one, we set sail with hope of sailing from Bayfield, Wisconsin to Stockton Island. Typically, this route would take five to seven hours, however that day, the wind was really blowing and we arrived in less than four hours. The next day, we wanted to sail from Stockton Island to Devil’s Island but found ourselves nowhere near our destination after six hours due to heavy winds of 15 to 20 mph. We were sailing directly into heavy wind and serious swells. We changed course and set anchor at Rocky Island, the location of the photo to the left.

Charting a course is vital when sailing, but adjustments may be required depending on wind and waves. This is very different than driving in a car or even a motorboat, where you can typically go directly from point A to point B.

This financial year, the wind is at our back and the equity markets have moved significantly upward. Yet, like my sailing trip, there are years when we would be tacking back and forth and not moving quickly or directly toward our destination. Patience is required. Keeping the destination in your mind’s eye is imperative. Charting a course is important but I‘ve come to recognize it won’t be a straight line to get there.

Have you charted a course for a key financial goal? How do you respond when the winds shift and your progress is slowed? Feel free to post your comments below.

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Your retirement needs are a numbers game

Those of us who understand that retirement is a numbers game and therefore calculate our retirement needs are more likely to meet them.

However, according to a Deloitte Center for Financial Services report from earlier this year, 58% of pre-retirees don’t have a retirement plan. This, as you might imagine, is a problem.

Why? Because those of us who face things head-on by calculating our retirement needs are more likely to meet them. This report was the result of an Employee Benefit Research Institute study, which found that the use of online retirement calculators and seeking the advice of financial advisors resulted in an increased probability of retirement income adequacy.

I don’t know about you, but that seems like a no-brainer to me. If you want to reach a goal, you have to first outline what, exactly, that goal is. Taking a shot in the dark isn’t going to get you there. Here’s how to win at the retirement numbers game:

Brace yourself. Just a word about this: The number given to you by a calculator or financial advisor might scare you. But it merely is something to work toward. Keep in mind that Social Security will factor in, too—and you’re likely to get raises in the future that will allow you to increase your savings percentage (in fact, you should do so every time you get a raise). Finally, matching dollars from your employer, count, too—you’re not in this alone.

Use an online tool. There are many, and they use varying algorithms, so I like to suggest running the numbers through a few and then comparing. Wells Fargo has one, and you can find many more with a simple Google search.

Break it down. People avoid running the numbers on retirement because it is daunting; it’s a classic head in the sand situation. But knowing where you stand and where you should be headed can be a powerful motivator. If staring at that big figure scares you, break it down into how much you need to save per week, month, or year. And then keep in mind the power of investing—you could earn more on your money, and when compounded, that adds a great deal to your bottom line.

Understand there are other options. If you find that you are approaching retirement and haven’t saved enough, there are strategies that can help give you a bit more wiggle room. One is to work longer—just a few more years in the workforce means your savings stays intact (and continues to grow), and you can continue to add to it. If full-time work isn’t an option, aim to find something part time that you enjoy. And then remember that you can always downsize—a smaller home will save you money, and it can make easing into your later years more of a seamless process.

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Ways to save money

One unfortunate fact of our psychological make-up is that humans, by nature, aren’t exactly wired to save. Still, we’re constantly looking for the best ways to save or, should I say, the easiest ways to save. Blame our caveman ancestors – we prioritize the here and now instead of saving for the future. Why pass up a current opportunity in favor of planning for retirement in 10, 15, even 20 years?

That’s why, instead of looking for ways to save money, many of us will buy the new shoes or the new handbag or the new television today, rather than put that money away as a rainy day fund. Deep down, you know that you should be saving. It’s just a matter of forcing yourself to save money do.

Luckily, there are strategies – money saving tricks, gimmicks, mind-games (call them whatever you like) – that can help you. These are ways to bypass buying on impulse and get money in the bank in spite of your instincts to do otherwise:

Make it automatic. If you have a 401(k) at work, you know how this works – money is pulled out of your paycheck before it ever lands in your bank account. You’re not given the opportunity to spend it instead. Jan says this is how she saves, because, in her words, she’s “very much like a dog.” If she sees the money, it’s there for the taking. If she doesn’t, she doesn’t think about it. You can mimic this 401(k) strategy with your other savings accounts by setting up automatic transfers every single month or every single pay period – have your savings account reach into your checking and swipe a set amount of money, before you can spend it instead. Most banks have an automatic savings plan that you can easily set up. Just ask them.

Lock it up. This goes hand in hand with the first point, and is again one of the reasons why saving in a 401(k) or even an IRA is so successful. That money is barricaded until retirement, and if you want to pull it out earlier, you’ll be penalized – heavily. There’s a 10% fee for tapping the money early, plus income taxes. Put it together and you might lose 30% to 40% of your money. It’s just not worth it. You can again mimic these barricades with other accounts – CDs, 529s, and other savings accounts to name a few.

Visualize the future. This tip sounds a bit kooky, but it works: You have to put a picture on your goals. You’re not saving for retirement; you’re saving for a three-bedroom house on the beach with a hot tub and swimming pool. Cut out magazine pictures. Then tape one to your fridge and wrap one around your credit card. Making the goal concrete means you’re more likely to get there.

Finally, small steps are the way to save. Struggling to start? Just do a little bit – put away 2% of your income for a few months. I promise you won’t notice it’s gone. Then, once you realize that I’m right, you’re not missing it, bump up your savings a bit more. Add more every time you get a raise, or receive a windfall (like a tax return) and you’ll be well on your way to a hefty nest egg.

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Taking steps to retirement isn’t always easy

Don't stick out your tongue at taking steps to retirement.

Don’t stick out your tongue at taking steps to retirement.

Taking action toward any long-term goal can be daunting. The results can seem intangible and the rewards seemingly non-existent. However, taking steps to retirement in order to build a sizable nest egg should be a top financial priority for anyone working today.

Did your mother ever say to you should do something because “It’s good for you”? I know I’ve said that on more than a few occasions to my three kids. Whether it was “Eat your vegetables,” “Get some exercise,” or “Do your homework,” getting them to move from acknowledgement (“Ok, Mom we’ve heard that before”) to taking action wasn’t easy or automatic. Sometimes I even got the eye roll.

When I reviewed the results of our Wells Fargo retirement survey of middle-class Americans, I noticed a similar theme. Most agree that saving for retirement is important, but doing something about it doesn’t happen easily.

More than half of those between ages 40-60 explained that they should be taking steps to fund retirement, but they didn’t know how to start. Maybe that’s why nearly four in 10 of that age group said, “I’ll never be able to retire. I will be working until I die or am too sick to work.” So they know that saving is good for them but their picture of retirement sure is depressing. How can they move from acknowledgement to action? They need a plan! Our survey had some encouraging findings for those who said they have a written plan for retirement. While only three in 10 said they have a plan, that group had saved three times more toward their retirement goal than those without a plan. Those results were across income levels—for those making $25,000 as well as those at $100,000. Think of this plan as a retirement roadmap on how to reach your retirement goal. If you don’t have a plan, what’s your reason? The top two reasons our survey respondents gave for not having a plan were, “I have too few assets” and “I don’t know how.” So if we know a plan makes a big difference (read – it’s good for you), let’s address those two obstacles. Don’t have enough assets? Everyone can benefit from a plan, whatever your income. The sooner you start saving, the better. Don’t know how? Go online and spend a few minutes using a simple tool like the Wells Fargo My Retirement Plan to start your plan and get retirement tips from financial experts.

Need further proof a plan is good for you? Those survey respondents in their 30s were most likely of all the age groups to have a plan- and they were savings 6% annually versus other ages saving an average of 5%. In addition, the 30-somethings estimated they would need a nest egg of $500,000 versus those ages 40 and older, who estimated needing $200,000. The 30-somethings are more realistic and get it.

So do you have any examples of advice you’ve received or given around steps you’re taking to retirement?

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Think before you buy

Much like food, we consume things in the same mindless way and must learn how to control spending.

Much like food, we consume things in the same mindless way and must learn how to control spending.

Do you tend to think before you buy things? An article on PsychologyToday.com got me thinking about some of my mindless buying habits. If you’re a frequent reader of this blog, you’ve probably already keyed into the fact that I’m a frequent reader of their many blogs. They make me think – about myself, my family, my work and my money.

The post by Susan Albers, Psy. D. got me going on the latter. This, despite the fact that she didn’t write about money at all. She wrote about food, specifically about mindless eating. However, there are clear correlations between the two. Much like food, we consume things in the same mindless way and must learn how to control spending. “Clinical studies have examined the effectiveness of awareness and eating,” she blogged. “For example, Timmerman and Brown (2012) conducted a study on middle aged women who frequently ate out at restaurants. The intervention was just teaching the women how to be more ‘aware’ of their choices, hunger, fullness and mindless eating behavior. The result? The women ate 300 calories less each day.”

The point is that small mindless eating adds up. Just like small, mindless spending. If you’ve ever tried to track spending, you know that the little purchases add up. And just like many, many people have no idea how many calories they put into their mouths each day, many, many people have no idea how much money they pull out of their wallets or swipe on their cards. I did the math. Eating 300 fewer calories each day is akin to eating 2,100 fewer calories each week, 9,100 fewer calories each month and 109,200 fewer calories each year. Stick with that for 12 months and you’d drop 31 pounds. (Not that you need to.)

First – I just want you to be mindful before you buy. Note that the idea of being mindful, being conscious, is not about being the calorie – or the shopping – police. It’s about knowing what you’re doing when you make an active decision to eat that donut or buy that sweater. It’s not wrong. It’s not evil. It’s a choice. And because you’ve made it thoughtfully you should be able to enjoy it all the more.

Finally – there are many ways to get a grip on your spending behavior. Expense tracking – writing down what you spend as you spend it – works very well because it forces you to stop and think as you act. Some banks even have online tools that you can use. Tracking expenses and setting up a self-enforced purchasing pause – making yourself walk away from the cash register or the online checkout before you buy – is also surprisingly effective. Dr. James Roberts, professor of marketing at Baylor University and author of Shiny Objects: Why We Spend Money We Don’t Have In Search of Happiness We Can’t Buy notes that some people even use “credit card condoms.” Laugh if you must. I’d never heard of them either. Essentially they’re covers (often self-made) you put over your credit cards that say things like, “Do I Really Need This?”

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Money matters and other notes to my younger self

If I could write a note to my younger self it would include money matters and other financial advice.

If I could write a note to my younger self it would include money matters and other financial advice.

If I had the opportunity to give a note to my younger self with life lessons on it, I would start with financial advice. First, I’d encourage her to engage with money matters as soon as possible and, also, to make money a friend. In the end, I made three fundamental financial mistakes and I plan to teach my daughter, using my own examples, so she creates takes a healthier financial path.

A note to my younger self would include many things. But as far as money matters go, these three bits of financial advice would be at the top:

1. Understand the context of the financial system

2. Don’t cash out your 401(k), ever

3. Create a budget focusing on giving, saving, spending according to your values

I can’t remember a time in life when I did not work in some capacity. I even managed to save $5,000 during high school to use toward college. I had no idea how quickly that $5,000 would be used! I managed to muddle through college and started using my first credit card, all the while not really understanding how the financial system worked, until I started my first job at a bank. Knowing what I do know now, having context on the broader financial system would have saved me much confusion in my younger years.

When I moved from New Orleans to North Carolina, I made the mistake so many younger professionals make – I cashed out my 401(k) to pay for moving related expenses. I know, I know – not bright, but at the time, retirement seemed so far away and, yet, my need for a washer/dryer and new furniture so real!

Finally, it was during my third job after college that I developed a budget for expenses and spending. These days you can get free financial advice and budget calculators everywhere, at your finger tips. (Note to self, include this in the note to self). Though through the years, my budget it has evolved tremendously as my finances have gotten more complex. I have evolved it from a spending budget, to a savings budget, to now include the plan for giving to non-profits that are important to my family. I hope to have it in terrific shape to send with my daughter as she goes to college in nine years – hoping that the financial evolution will continue to improve through the generations.What advice would you give your younger self about money matters?

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Reduce your monthly expenses and bills

Reducing monthly expenses begins with a bill audit.

Reducing monthly expenses begins with a bill audit.

Sometimes after I go through the process of developing a spending plan with someone I’m working with I hear that they’re having trouble making ends meet. Sometimes they’re not able to save. Sometimes, they can’t even cover their monthly expenses or need help with budgeting. Sometimes, they’re not able to throw as much money as they’d like against their credit card bills or other debts. Other times they’re just feeling as if there isn’t enough money to give them any wiggle room.

This feeling of living paycheck-to-paycheck is very uncomfortable. It causes trouble in relationships (marriages are much stronger, research has shown, when you accumulate assets including savings rather than debts) and it causes individuals to feel stressed, anxious and sometimes even develop physical symptoms like headaches and insomnia.

One way to clean out your finances is by coming up with ways to reduce your monthly expenses bills to make ends meet and allow yourself to breathe. And cutting those bills you get month in and month out is a good place to start. I’m talking about phone, internet, wireless, insurance, etc. How?

Start with a bill audit. This week, pull out the last few months of those bills (or if you receive them electronically, look at them online) and really look at them. You’ll find add ons you didn’t know you were still paying for or services you no longer use. In my case, I found I was still paying for one channel on demand ($4.95 a month, close to $60 a year) though my teens stopped watching it years ago. And that’s just one example. If you only watch a premium channel half the year because your favorite show is in season, cancel it the other half.

Ask for a better deal. It’s worth your time to check in with your providers every six months or so and ask them if there are newer, better deals available. Doing this with your cell phone company can, for example, alert you to the fact that if you were using the friends-and-family option, which allows you free calls to ten people on your list (no matter who their carriers are), you could scale back and buy fewer minutes a month. You can do the same with your cable/television provider. When another provider came to my neighborhood, I used the sheer fact of more competition to get my current provider to lower my bill. It took a single call.

Finally, think about unbundling or going without a contract. Yes, in the past it’s often been cheapest to buy your communications services from one provider and to get a low cost phone by signing a one- or two-year contract. This is not always the case anymore. So shop around and look at as many alternatives as you can palate, then make the call that’s right for you.

Can you think of any ways to reduce your monthly expenses?

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A financial to-do list for same sex couples

The laws about gay marriage rights and benefits are constantly changing.

The laws about gay marriage rights and benefits are constantly changing.

It’s been a year since the Supreme Court struck down part of the Defense of Marriage Act of 1996, a ruling that allows people who live in states that allow same-sex marriage to receive the same federal benefits as heterosexual couples. In that time, much has changed. Today, 19 states and the District of Columbia allow same-sex marriage, up from 11 states (and DC) a year ago. The IRS, in response to the DOMA ruling, now recognizes all same-sex marriages in the U.S. for federal tax purposes. And just last week the Obama Administration extended more benefits (including plans to let government workers across the country take leave from their jobs to care for their spouses) to same sex workers.

“It’s been a very exciting time,” says Kyle Young Senior Vice President – Investment Officer with Wells Fargo Advisors, who specializes in working with the LGBT clients. Wells Fargo recently surveyed nearly 900 LGBT investors – some married, some not – to see how they were feeling about their finances in the midst of all the changes. “Some of the information was encouraging,” Young said citing the 95% of respondents who could “fully identify” what the law was in their state. But other results were disconcerting in that they laid bare the fact that – like heterosexual couples – 83% of same sex couples (including 67% who are in legal same-sex marriages) don’t really understand what the changes in law mean to them. As a result, they’re likely not doing anything about it. Worse, many aren’t even talking about it; just 37% say new marriage laws have teed up financial conversations.

So, with the anniversary of the decision as background, a financial to-do list for same sex couples to ponder – and perhaps pursue.

Consider a spousal IRA. When you’re married, you are allowed to make an IRA contribution based on your spouse’s income – even if you don’t have an income yourself. For 2014, the contribution limits are $5500 for individuals under age 50 and $6500 for those 50 and over. This applies whether you contribute to a traditional or Roth IRA; couples who are married filing jointly can make a full contribution to a Roth as long as their modified adjusted gross income is less than $181,000*.

Revisit beneficiary designations. Beneficiary designations are more complicated than people think – but very important. On IRAs, for example, the beneficiary designation overrides what’s in your will. “if you enter into a marriage to go back and reevaluate your beneficiary forms.” If you want to name your new spouse as beneficiary, do it on the account itself. If, on the other hand, you have a workplace retirement account, like a 401(k), your spouse is entitled to inherit those assets – unless he or she disclaims them (that requires a form, too). If you have children or a previous partner that you want to inherit instead, you have to do the paperwork to make sure this happens.

You need a Social Security strategy. This is something heterosexual couples are just now coming to terms with; it applies to same sex couples in states that have legalized marriage as well. In general, if you’re married and one spouse earns significantly more than the other, you’ll want to maximize the higher earner’s Social Security as much as you can (which means delaying when that person takes it.) That way, if and when the higher earner passes away the surviving spouse can get 100% of the higher earner’s benefits rather than just his or her own.

Pay attention at open enrollment time. The rules for same sex spouses are kinder than they are to partners when it comes to health insurance. This is easiest explained by example. Before the Supreme Court ruling, if you wanted to put your partner on the health plan from your company it would typically be allowed – but the value of that benefit would be added to your “income” for IRS purposes and you would be taxed on it. Now, that’s no longer the case. Your company may charge you to have a spouse on the plan (that’s the company’s prerogative) but the playing field is now level. What this means is that if you decided to stay on your health plan (or your spouse on his or hers) because you didn’t want to be taxed on that benefit, you should take another look.

Finally, you may want to consider filing jointly (and amending past returns.) According to the Wells Fargo research 18% of same sex couples file married filing separately compared with 3% of the heterosexual married couples in the country. Why is that? “They are doing this to keep tax returns a little more normalized,” Young surmises. There’s also a “misunderstanding around the benefits of joint tax filing – a lack of confidence of what that means.” What it means is that in most cases by not filing jointly you’re leaving money on the table. Of the survey respondents, 28% found that filing jointly cost them more money, 52% found it cost them less – and that their federal tax liability dropped by an average $2,000. The answer to why has everything to do with the marriage penalty, which is complicated, but the shorthand is: The bigger the income disparity between the two spouses, the more you could potentially save by filing jointly. And if it looks like you’ll save this year, you have the ability to go back and amend your returns for the last three years (assuming you’ve been hitched that long) as well**.

*Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½.

**Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.

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