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Declare your (financial) freedom!

Declare your (financial) freedom!

As we head into the Fourth of July weekend, almost everyone I know is making plans for a celebration. Barbecues. Fireworks. Family and friends. It’s a time-honored tradition of celebrating the declaration of our independence from England way back in 1776. And while we should never take those liberties for granted, one thing that can give you a great reason to celebrate every day is your personal financial freedom.

Sound like an impossible dream? No matter what the state of your finances today, here are five steps to help pave your way toward true financial freedom:

  1. Freedom from illiteracy. According to this 2015 S&P Global Financial Literacy Study, nearly half of the U.S. population rates as financially illiterate. Financial illiteracy’s close companion, innumeracy, or mathematical illiteracy, is also a challenge. Even many highly educated people don’t understand the impact of compounding, the difference between “good debt” and “bad debt,” or why working with a financial fiduciary is vital to financial success. No matter where you are on the spectrum, make it your mission to be a lifetime learner when it comes to money, investing, and your finances. The more you know, the better your decisions will be. A great place to start: read How to Think About Money by Jonathan Clements. This easy read will have you on your way to worrying less about money, making smarter financial choices, and squeezing more happiness out of every dollar.
     
  2. Freedom from chaos. If your financial files are in a constant state of chaos, you can bet your financial life is in pretty bad shape as well. No matter what the reason, know this: you’re not alone. Finances are complicated, but the longer you procrastinate, the more complex the challenge will be. If you can’t get yourself to dive into that growing stack of papers, or if you simply don’t know where or how to begin, set your pride aside and reach out to your financial advisor to get help now. Need more inspiration? Read my blog For your finances, getting organized can be the greatest challenge.
     
  3. Freedom from debt. Debt is a huge problem in the US. In 2017, the average US household held more than $8,000 in credit card debt, up 6% from last year. And that doesn’t even include auto loans and other “bad debt” which, in contrast to “good debt” such as a home mortgage, student loans, and business loans, doesn’t have the potential to generate benefits over time. Because “bad debt” reduces your income, adds no value to your wealth, and forces you to pay more every month for an item that is losing value, it’s one of biggest threats to your financial freedom. Use a debt snowball to reduce and eliminate the debt you have today, and avoid taking on more debt in the future. For more on how debt can impact your future, read my blog There’s no such thing as an unexpected expense.
     
  4. Freedom from mindless spending. Financial independence requires understanding that every dollar matters, and being mindful about how you spend each and every dollar you have. Does that mean every dollar has to be relegated to paying down debt or saving for the future? No. But it does mean creating a budget to plan how much you need to save and how much you can spend every month. By creating a cash budget, you’ll already feel liberated because you’ll be in charge of your finances, instead of letting your finances be in charge of you. To dive deeper into budgeting and learn how making mindful choices with your money can help you relax about your finances, read my blog Cold, hard cash! (Are you paying attention?).
     
  5. Freedom from the unexpected. A recent survey from Bankrate revealed that 57% of Americans don’t have enough cash to cover a $500 unexpected expense. If you too are living paycheck to paycheck, it’s time to create a “freedom fund” to cover 6-12 months of living expenses. While that may sound like a lot of cash, think of it like paying off a debt to your future self now, build it into your budget, and pay yourself first every month. Once your “freedom fund” is at the ready, you’ll be amazed by the sense of relief you’ll experience when you’re no longer living paycheck to paycheck. Want to learn more about this approach? See my blog Celebrate retirement planning week: Create a “freedom fund.”

Financial independence isn’t only for the wealthy. By being mindful about your finances now, you can intentionally work toward a level of freedom that ensures you can always stand on your own two feet. Best of all you’ll have financial peace of mind so you can relax about your money. That’s the kind of freedom you’ll want to celebrate every day of your life! If you need help getting there, I’m always here to help!

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Are you ready to become an investing Wonder Woman?

Are you ready to become an investing Wonder Woman?

The new Wonder Woman movie broke every box office record last weekend, and critics and audiences continue to shout praises, calling it one of the most entertaining—and empowering—movies this year. I had a great time seeing it myself, and while I’m no critic, I thought it was the perfect summer treat: a big, noisy movie with a woman super hero. What could be better?!

But while yes, having the power to win the battle of evil in the “war to end all wars” would be pretty great, what I really wish is that I could give every woman Diana-level confidence in a superpower she already has today. That superpower, of course, is investing.

Here’s the great news for all you warriors out there: Another study just came out that showed that women are better at investing than men. That’s something to celebrate! As a group, we plan better, we take less risk, and (this should be no news to anyone!) we’re more patient—and these are all factors that add up to larger returns in the world of investing. But here’s the not-so-good news: we lack the confidence of Diana. Despite the data, women continue to see men as better, smarter investors. Among 1,500 women polled last December, only 9% thought women would earn a bigger year-end return than men. That’s a disconnect that matters. After all, if we don’t see ourselves as smart investors, how can we ever overcome the earnings gap and finally take control of our own finances?

Whether you’re one of the doubters or you have complete confidence on your investing skills, here are five things every woman can do today to become an investing Wonder Woman:

  1. Own the fact that you have the mindset to be a wise investor.
    Diana has the skills to fight evil. You have what it takes to be a great investor. Know this. Research shows that when women take the helm for our own retirement planning, we tend to be smarter, more levelheaded investors. And yet in most families, men have the trusted relationship with a financial advisor, while women take on the role of a “financial child” in the household. It’s time to take a different path. Trust that you have what it takes to make smart investment decisions, and talk to your advisor yourself to be sure your investments address your own needs and are aligned with your own values. And if you need to build up your knowledge of the basics, start with my blog post When did it become ok to be financially illiterate?
     
  2. Make retirement planning your number-one priority.
    Longevity is a huge issue for women. According to the Centers for Disease Control and Prevention, women can expect to live about five years longer than men. At the same time, between taking time off to care for children and our own aging parents, a persistent wage gap that reduces our take-home pay as well as our future Social Security payments, and a historically lower pay rate, we typically have fewer resources to fund our longer lives. That means it’s critical that you start planning for retirement as early as possible. While you may not be able to overcome some of the gender barriers that can haunt any woman’s account balance, the combination of persistence and compounding can help close that gap.
     
  3. Pay your future self first.
    If you’re like most women, it’s easy to put saving for retirement on the back burner. But let’s face it: there will always be bills to pay and extra expenses to manage. To be sure your retirement doesn’t get lost in the financial shuffle, work with your advisor to determine how much you need to save, and then set a schedule to pay yourself first—every month. The more automated your contributions can be, the better. And rather than feeling deprived, think of that savings as a “freedom fund” for your future self. A June 2016 studyshowed that 83% of women in the US aren't saving enough for retirement. Don’t represent that statistic! By being diligent now, you can create your own financial freedom—no matter how you choose to spend your time later in life.
     
  4. Make conscious decisions about 'image' purchases.
    As a professional woman and business owner, I know all too well how expensive the societal pressures can be for women to spend on our images. We are judged by appearances much more than men, so the cost of a wardrobe, manicures, haircuts, and more can take a very real bite out of every paycheck—which is already smaller than a man's. (Just ask Hillary Clinton, who has said she was thrilled to put away her makeup after losing her Presidential bid last year; I doubt any male candidates felt the same relief!) It's a double standard, and whether you are paying your bill at Nordstrom or the plastic surgeon, it all adds up. Remember: your image is important, but that doesn't mean you need a Prada suit to look your best. Decide which purchases are necessities, which are optional, and be honest about what you can really afford.
     
  5. Fight like a superhero for equal pay!
    Women still earn less than 100% of a man’s dollar, and that will likely never change without pay visibility. For decades, corporations have promoted a culture of secrecy about pay. This reality puts women and minorities at a distinct disadvantage. After all, how can we advocate for ourselves if we don’t even know what our co-workers earn? By removing the taboos around pay transparency, we can end this inequality once and for all. At the same time, we need to start placing a real, tangible economic value on caring for children and aging parents—work that is largely taken on by women. By offering benefits such as disability insurance, health insurance, and Social Security credits for this very real and necessary work, we can finally begin to recognize that the care being provided is a valuable part of the fabric of our community and our society as a whole.

Women can be great investors, but our mindset alone isn’t enough to change our trajectory. Just like Diana, Princess of the Amazon, we need to take real action. We need to see ourselves as the smart investors we are, focus on saving for our own futures, and balance our need to create a great image with our need to gain a greater financial advantage. And we need to fight the good fight for equal pay—even if it takes Diana’s God-killer Sword and Lasso of Truth to spur on salary transparency! Lastly, even Wonder Woman counts on the rest of the Justice League to help her succeed. Find a team you trust, and start taking control of your financial life today. Your future self will thank you for taking your job as an investing Wonder Woman seriously—no shield required.

Photo: TM © 2017 DC Comics

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Ready to be a successful investor? It’s time to rewire your brain

Ready to be a successful investor? It’s time to rewire your brain

If I asked you to make a list of your biggest financial mistakes, what would be on it? Overspending today and not saving for tomorrow? Taking on too much debt? Pulling your money out of a down market, or being guilty of too much hubris when the market was up? Investing in that “sure thing” that wasn’t so sure after all?

No, I’m not psychic. (If I were, I’d most certainly have beaten the market into the ground years ago!) The sad truth is that everyone can add at least one of those mistakes to their list at one time or another. Why? Because so many of the most common mistakes stem from the fact that we are hardwired for financial failure. And hardwiring is extremely tough to fight.

Jonathan Clements does a great job explaining this phenomenon in his most recent book, How to Think About Money. I covered Clements’s Steps 1 and 2 in my blog posts Money really can buy happiness and How long do you plan to live (and are you planning for it?), and while those steps were certainly important, Step 3, Rewire Your Brain, deals with issues I see my clients struggle with every day.The good news according to Clements (and I wholeheartedly agree) is that it is possible to be more sensible about how we manage our money, but changing that wiring takes great mental strength. Rewiring does not mean you need to be smarter or more educated than anyone else—you just need to stay focused on the right things at the right time. Here are four things you can start doing today to start to change your thought patterns and truly begin to think differently about money:

  1. Save like crazy. It sounds so simple, doesn’t it? But unfortunately, our brains aren’t nearly as rational as we’d like to think. Many people lack the self-control not to overspend, so they take on too much debt. My friend Lydia was always one of the most “fabulous” people I knew. She always had the best clothes, the cutest shoes, and the fanciest car. But Lydia was a victim of her own fabulousness. While she was dressing to impress, she wasn’t saving enough for retirement. Now in her late 60s, she has to continue to work—not by choice, but by necessity. In contrast, there’s the story of Carol Sue Snowden, a librarian who lived modestly and then made headlines for gifting the library where she worked over a million dollars in her will. As Clements says, “Growing wealthy is ridiculously simple, but it isn’t easy.” It requires saving early, saving often, and focusing on becoming wealthy tomorrow—not appearing wealthy today.
     
  2. Embrace humility. Are you a victim of the Lake Wobegon Effect? In Garrison Keillor’s fictional town of Lake Wobegon, “all the women are strong, all the men are good-looking, and all the children are above average.” The Lake Wobegon effect is the tendency to overestimate your capabilities and see yourself as better than others, and it’s a common affliction. The antidote? Embrace humility—and require anyone managing your money to do the same. Because when it comes to investing, average is good! But our hardwired brains want so badly to be above average that we feel a need to beat the market, or we hire someone who says they can beat it for us. But historically, active investors lag the market indexes. That means that “buying and holding” almost always wins in the end. While your neighbor may be bursting with the news of an approach that helped him beat today’s market, you can bet he’ll be quiet as a mouse when his returns fall behind. “The meek may not inherit the earth,” says Clements, “but they are far much more likely retire in comfort.”
     
  3. Find value. If you find it difficult to ignore fluctuations in the market, you’re not alone. It can be a challenge to turn off that voice in your head that starts making noise when the market dips. Remember this: your goal is to seek long-term value in your portfolio. Ultimately, the market is efficient (really!), and that efficiency makes it extremely difficult for anyone—even the most seasoned money managers—to beat the market over the long term. Focus on investments that are poised to deliver value, and then stay put. (For more on how to win this battle with your brain, see my blog post Market volatility making you crazy? 5 tips to managing your emotions.)
     
  4. Stay grounded. When the market does bounce around (and considerable bounces are inevitable), think like a smart shopper: when the market is down, the companies who offer stock haven’t fundamentally changed, which means their stock is on sale! Avoid mental errors such as over-confidence, loss-avoidance, anchoring, confirmation bias, and more. Stay focused on the long term, secure in the knowledge that market prices of securities will fluctuate, often wildly, in the short term. Over decades, the trajectory has always been up. By staying grounded in the knowledge that you own shares in real businesses whose value is derived from dividend yields and earnings growth, you will achieve the investment success to which you are entitled.

It’s natural: every time you think about money, your hard-wired, reptilian brain tells you that your very survival is threatened. But in this case, following your instincts may be the very worst thing you can do, leading to financial mistakes that can truly threaten your future. It requires great mental effort to save, stay humble, find value, and stay grounded, but by challenging your thought patterns, you can train yourself to think differently about money and help drive your own success.  And if you need help with the rewiring, give me a call. I’m here to help!

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Taking a stand for women’s health and wealth

Taking a stand for women’s health and wealth

Every Mother’s Day, our firm does something special for the women in our client family. One year we sent candy. Last year we donated to the Alzheimer’s Association. This year we donated to another nonprofit: Planned Parenthood. Our email was delivered a few days before Mother’s Day, and we were happy to receive many thankful notes in response. What I didn’t anticipate—and what drove some serious self-examination on my part—were the negative responses. There were only a few, but the vehement objections from women whom I respect and whose relationships I value made me wonder how an organization that does so much good in the world has the power to elicit such a response. I think what happened says a lot about the world we live in today and the long-term view of women’s health and wealth.

If you know me at all, you know I’ve been fighting my whole life to help women thrive in the face of oppression. I began working in the corporate world at a time when women had to fight for the right to smoke at our desks (not a good choice in retrospect, but having the same rights as our male colleagues was the point!), wear pants to work, and not be confined to a role as a “Gal Friday.” An issue that goes hand-in-hand with the fight for those rights is the fight for our reproductive rights.

Whether you agree with abortion or not, it’s a basic fact that, throughout history, women have had—and will continue to have—abortions. The reasons are as varied as the women themselves, which is why I believe not one of us has the right to judge or restrict that choice. And while I honor the views of others who feel differently on religious or other grounds, I also believe that regardless of those beliefs, all women should have access to safe healthcare, including ending an unwanted or unsafe pregnancy. I am old enough to have seen the repercussions of illegal back-alley abortions first hand, from the aftermath of poor (or no) follow-up care, to infertility, to death. I believe that the separation of church and state should protect the right to healthcare services that prevent these tragedies.

All of that said, my intent when choosing Planned Parenthood as our Mother’s Day charity this year wasn’t rooted in a desire to make a political statement. On the contrary, my goal was to contribute to an organization whose dedication to safe, accessible health services for women is unmatched. It's undeniable that Planned Parenthood has become a lightning rod for activists on both sides of the abortion issue. I believe that’s unfortunate, in that it misdirects people’s passions. After all, regardless of your stance on abortion, who can argue against the fact that safe, accessible reproductive health care is something every woman should have? The current political environment has managed to polarize our thinking to the point that we can’t even agree on the things we agree on. The issue of abortion rights has landed smack at the intersection of religion and politics, and while Planned Parenthood may invite its reputation as a hotbed of activism, I wonder how they could take any other stance and still promote the rights of women. It’s an issue that I hope all of us can somehow get past in the future.

We women still have a long way to go when it comes to equality as citizens of our society. Access to healthcare is just one piece of the challenge, and it coincides with the financial obstacles that continue to plague us. I worked my entire corporate career earning 60 to 70 cents on the dollar compared to men who did the same job, and today’s statistics aren’t much better. Women continue to pay the price of the “non-job” of child rearing with delayed retirement, lower Social Security checks, and lower personal wealth than men. As a financial advisor, I see these challenges play out every day. Women my age have paid a big price to get where we are today, but I have done this gladly. I believe that by fighting for women’s rights, I am helping to knock down at least part of that wall for future generations of women. I hope that my efforts will foster a greater sense of safety for tomorrow’s women in every area of their lives—including their health and their wealth.

I am sorry that our donation to Planned Parenthood offended even one client, yet after re-examining the matter with more careful research, I continue to support this organization. On this issue, I’d like to cross the political aisle and continue to stand up with Planned Parenthood as I fight the good fight for women’s health and wealth. I hope you choose to join me.

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When risk is a good thing, embrace it!

When risk is a good thing, embrace it!

Risk. It’s a word that makes most of us feel uncomfortable—at best. Even if you’ve been blessed with an appetite for adventure, when it comes to taking risks with money, you may find your stomach feeling a bit queasy. While I can’t recommend skydiving or cliff jumping (especially for my retired clients!) taking the right amount of risk with your money isn’t a bad thing. In fact, it’s often the best way to help grow your assets to meet your retirement goals.

Anne is one of my favorite examples of a smart risk-taker. She loves (and I mean loves!) Las Vegas. She loves pitting the thrill of victory against the agony of defeat—even when it is her money at stake. And yet, despite her penchant for slot machines, she’s clearly not much of a true thrill-seeker. She has had the same gambling budget since the first day she walked into a casino over 30 years ago, and she’s never lost more than she can afford to lose. “I started with $100 of ‘play money’ in my wallet, and I promised myself I’d never let myself dip below my $20 reserve,” she says with a smile. And she does have something to smile about. Over the years, Anne has won (and lost) thousands of dollars, just playing the slots. “For me, it’s my favorite form of entertainment,” she says. “It’s a ‘safe’ risk that makes my adrenalin go crazy!”

A ‘safe’ risk. What an interesting term.

The dictionary definition of risk—“exposure to danger, harm, or loss”—sends a pretty clear message that risk is something we should avoid if at all possible. And yet, as counterintuitive as it may sound, when it comes to investing, risk is the one thing that drives reward. In fact, in a capitalist economy like ours, investors are paid to take risk. It’s that simple. Every time you invest in a company you are, in essence, assuming ownership of that company and are entitled to the rewards that owners receive. When earnings grow, you reap the rewards. If the company fails, your investment will fail as well. That’s the risk.

In skydiving, the risk is pretty clear—particularly if your parachute doesn’t open! In investing, risk is a bit more complicated. To understand why investment risk is something to embrace, let’s look at the three basic kinds of risk:

  • Credit risk. When a bank loans money to a borrower, there is a risk that the borrower may default on the loan. If that happens, the bank loses the principal of the loan, and the interest associated with it. That’s credit risk. Your own credit rating dictates your ability to borrow money and the interest you pay, and the same is true for bonds. Lower-yield Treasury bonds are “safer,” so they pay less than high-yield or “junk” bonds. That means that, as a bond investor, when you take more risk by lending to less credit-worthy borrowers, you get paid more interest.  
     
  • Term risk.When you buy a bond or CD, you are lending money for a fixed period. When the bond is due, your money is repaid. When you lend money for a few days, that’s a short term. When you lend money for ten years, that’s clearly a longer term. Long-term is riskier than short-term because you don’t expect the borrower’s situation to change in a month, but in 10 years? Anything can happen. That’s term risk. That is why a one-month CD pays far less interest than a five-year CD. So, term risk is another way investors get paid more to take on more risk.
     
  • Equity risk.Every time you hold stock in a company, you accept the risks of ownership. As an owner, you are paid a share of earnings, and the value of each share increases with company growth. Because of the risk of ownership, investors are paid an equity risk premium to bear uncertainty, price fluctuations, bear markets, business failures, and other perils. Earning the equity risk premium is how investors get paid more for owning stocks.

As an investor, by definition, you must be willing to take some level of risk to reap the rewards. Whether you take on credit risk, term risk, equity risk, or a combination of all three, risk creates value. While risk and reward may not be a perfect relationship, if you add time and discipline to the equation, it’s nearly perfect. It’s what capitalism is all about, and it’s what gives every investor (including you!) the opportunity to leverage assets for continued growth.

Of course, just like Anne and her slot machines, the smartest way to play is to know how much risk you can accept. If you’re a younger investor with years of saving ahead of you, you have time on your side. You can breeze through a bear market, happily buying up equities at sale prices, and waiting for the inevitable bull market to come your way decades from now. If you’re already retired, you may still have years ahead to enjoy growth, but you’ll need a strategy to meet your changing income needs. Whatever your life stage, remember that risk is your friend. Unless you’re skydiving, in which case I can only recommend that you check that parachute just one more time before you jump!

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09 November 2016

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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >