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Lauren’s blog covers topics that impact your finances, your family, and your future. Is there a topic you’d like Lauren to tackle? We’d love your suggestions and feedback.

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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Caveat Emptor: It’s your money. It’s your responsibility.

Caveat Emptor: It’s your money. It’s your responsibility.

When Linda and Bill came into my office, I could sense their hesitancy right away. And when they told me their story, I could understand why they were so apprehensive about meeting with a financial advisor. They had, quite simply, learned not to trust.

Like many people, they’d realized they needed to stop being “do-it-yourselfers” and begin working with a financial professional. What they didn’t know was how to find a good advisor whose advice was based on their needs—not the advisor’s pockets. Unfortunately, it took them many years to understand the difference. “When I retired, our advisor gave me all the reasons why I should roll over my retirement savings into an IRA, and it seemed like a good idea,” said Linda. “But what I didn’t understand was that it was probably more of a good idea for him than for me.” That understanding came when a friend pointed out the fees she’d paid—and how much her advisor had earned in commissions from the transaction. Linda handed me the article her friend had shared with her that called out the practice of advisors receiving big perks (“say, a six-day, five-night resort vacation in Maui”) for selling a particular product. Ouch. Then Bill chimed in: “When I was 68 and had been collecting Social Security for two years already, someone told me I should have waited to claim until I was 70…that it would have added 30% to my monthly check,” he said. “When I asked our advisor why he hadn’t advised me on this, he said I’d never asked. I hadn’t, but I didn’t know what I didn’t know!”

The conversation got me thinking: with news about Trump signing an executive order delaying the DOL Fiduciary Rule—and even potentially doing away with the Dodd-Frank Wall Street Reform and Consumer Protection Act, investors need more education than ever. And if these regulations do fall away in the wake of the new administration, caveat emptor—or “let the buyer beware”—should be the phrase on everyone’s lips, and it should be driving every financial decision you make, from how and where to invest your hard-earned savings to whom you choose to work with to help guide your financial decisions.

The good news for consumers is that many of the anticipated benefits of the DOL Fiduciary Rule have already taken root. The media attention on the rule brought the idea of “fiduciary responsibility” into the mainstream, shining light on the difference between a fiduciary who is legally bound to act in the best interest of his or her client and ensure no conflict of interest, and a non-fiduciary advisor who is typically compensated by commission and is held only to a suitability obligation. (For more on this topic, see my blog When did it become ok to be financially illiterate?) But even with that knowledge, how do you choose an advisor who is not only working in your best interest, but is also a good fit for you?

The first step is to do your research. Get referrals from investors and other financial professionals, and be sure the advisor is a fiduciary who is, indeed, working in your best interest. When you meet face to face, here are five questions to ask to help you get the information you need to make a smart, informed choice:

  • What are your credentials? The most trusted in the industry are Certified Financial Planner® (CFP®), Personal Financial Specialist (CPA/PFS), and Chartered Financial Consultant (ChFC). This article talks about the benefits of each.
     
  • How are you compensated? Fee-only advisors minimize conflict of interest by receiving compensation only from the client. Fee-only advisors receive no commissions or other perks for the products they recommend. Other compensation models include fee-based, which is a combination of fees and commissions, and commissions only. If the advisor does earn commissions, ask if they come from product sales, from securities trading, or both, as well as specifically how much that commission is. (Yes, it’s okay to ask!)
     
  • May I see your ADV? Every Registered Investment Advisor is required to file a Form ADV with the SEC. The ADV outlines the details of the practice, including compensation, experience, service offerings, and any disciplinary history. Consider the ADV your advisor’s resume.
     
  • What services do you offer? Know what you want and, even more importantly, what you need. Investment management may be at the top of your list, but what about financial and retirement planning? Do you need a Social Security claiming strategy? Do you have the right type of insurance and the right level of coverage? What about estate planning? Understand what your advisor offers and if she has a network of trusted professionals to support the needs she doesn’t provide in-house.
     
  • How can you help me simplify and improve my personal finances? Like Linda and Bill, you may not know what you don’t know. This question can help you uncover unexpected ways the advisor can help you make changes that can lead to greater financial confidence and a better long-term financial outlook. After all, your financial success—today and far into the future—is the ultimate goal.

In our own Investment Policy Statement (and no matter who you choose to work with, be sure you receive and review this contract carefully!), we break down the roles and responsibilities of the three key partners in the road to financial wellness: the custodian (whose job it is to hold and protect your assets), the advisor (whose job it is to design and implement a financial and investment plan based on your needs and goals, and to regularly monitor the performance of that plan), and the investor—that’s you!—who has three key responsibilities: 1) to oversee your advisor, 2) to understand what you want to achieve and communicate those goals to your advisor even as they change over time, and 3) to carefully review your statements and be sure you understand how your money is being invested, how you are being charged, and if your plan is fulfilling your needs. If you’re clear about those roles and responsibilities and do your part, a well-chosen advisor should serve you well.

No matter how you feel about what role the government should play when it comes to protecting consumers, ultimately, you alone are responsible for managing your money. Trusting your advisor is important, but the person you really need to trust is yourself. Keep in mind the definition of caveat emptor: “the principle that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made.” And remember, it’s your money. It’s your responsibility.

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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 >