Pre-paying the Mortgage -- Should I or Shouldn't I?

Clients often ask whether we recommend accelerating their mortgage payments in order to retire the debt faster. It's a question that might have two answers -- one based on the economics and another based on your peace of mind and risk aversion.

The numbers side of the equation is fairly simple. It's a matter of comparing the rate of interest you are paying to the investment return you expect to earn going forward. Just remember, as you make this comparison, that the interest portion of your mortgage payment is tax-deductible, and reduces the cost of your mortgage. So, for example, if the interest rate on your mortgage is 6% and you are in a 40% combined (federal plus state) tax bracket, your after-tax cost for the loan is 6% x (1- 40%) = 3.6%. If you have the opportunity to earn more than 3.6% after taxes on relatively safe investments the numbers say you should not pre-pay. (Excuse the rhyme).

But beyond the numbers it's important to consider what is going to allow you to sleep peacefully at night. By doubling the equity portion of your monthly payment can pay off a 30-year, 6 % mortgage in less than 21 years. Reducing your fixed monthly expenses might allow you to retire sooner or at least cut back and take life a little easier. It's hard to attach a numeric value to that benefit, but the value is very real to many people.

Balance is one of the mantras we return to again and again in our practice. We seek balance in our own lives and try to provide it for our team members. And we encourage our clients to look for balance in their financial lives as well. Finding the right balance on this mortgage question is a personal decision, and not a purely financial one.

Annette Simon

Copyright 2009 Money Dames

My reasons for becoming a personal financial advisor

Annette had very compelling and personal reasons for becoming a financial planner. My story is not as heart-wrenching but personal nonetheless.

I started my career in finance on the institutional side. I have an MBA in finance and am a CFA (Chartered Financial Analyst). I began my investment career on the staff of a large pension fund which had substantial internal asset management. I then worked for a mutual fund company where I managed portfolios for pension funds and other institutions.

I first became interested in personal finance fifteen years ago when my husband and I went through the estate planning process. We used one of the most respected estate attorneys in our area and during the course of the planning the attorney spent a lot of time patiently explaining the estate plan and his recommendations. Even though I had spent many of my working years in finance and investments, and had the academic background, I remember being baffled by his explanations. I had no idea what he was talking about and why he was recommending that we purchase life insurance to fund an irrevocable life insurance trust for our children’s benefit.

When I asked the attorney who we should purchase insurance from, he gave us two referrals. The first agent sold fully loaded policies and the second a relatively new product – low-load whole life insurance. The attorney said he couldn’t make a recommendation on which policy was best for us and said we should go with the agent we felt comfortable with. This response instead of putting me at ease, made me very uncomfortable. I was baffled by the attorney’s reluctance to help us evaluate the relative merits of insurance policies and approaches. After all, he knew all the details of our family and financial situation! I really didn’t want to take the sole word of the insurance salesperson who was offering the policy. I realized that I would have to do the analysis as best as I could myself and dived into the illustrations and other material offered by the agents. I finally concluded that the low-load policy was the best for us and we went with it. At the time, I recall being surprised that we had no one to help us with this planning decision and realized that there was a need and gap to be filled.

My next brush with personal financial advisory was when I left the mutual fund company to join a small money manager who worked with individuals rather than institutions. During that stint I learned two things. First, that most of the clients at the firm were desperate for planning help and that many meetings were filled with questions from the clients on the topic of planning rather than investments. The second thing I learned was that no one at this small shop did serious detailed planning. There was some attempt to answer client questions, but the knowledge and tools available to a professional financial planner were missing. I soon left that firm and went into business for myself working with individuals and families. I was convinced at this juncture that clients needed both planning and asset management in order to best achieve their financial objectives. Although I had some basic planning insight I felt that I wanted to team up with an experienced planner to offer my clients expertise in both investments and planning. I was lucky enough to meet Annette and today in our practice we provide all our clients with planning help.

In finanical planning we say that as soon as the plan is printed it is out of date. And that's certainly true in my case. With the ending of our marriage in sight, all the estate planning we did is back on the table. Wills, medical powers of attorney and many other documents need to be re-thought and redone. The technical part of this is easy for me now. Harder is the emotional and personal arena that need to be probed.

Veena Kutler

Why Work with a Financial Advisor?

Does working with a professional advisor make a difference? We think the answer is a resounding yes. Here’s why:

1. We help clients set and stick to their most important life goals. That is huge. Most people think about what is important. Few write down those goals, even fewer monitor those goals, and an even smaller percentage measure to see if their goals are being met. Advisors who practice holistic planning help with that process. It is often profound for clients to realize after working with advisors for several years how much progress they have made toward their goals.

2. We lead clients through mature, objective and deep conversations about very important family planning issues. Most couples avoid discussing contentious money matters and when they do it often devolves to a very emotional exchange, even an argument. As an objective, knowledgeable and trusted advisor we facilitate difficult discussions in a non-judgmental way. Moreover we help by providing advice and feedback based upon our years of experience. Often, this is akin to counseling albeit with three cups of technical advice, a teaspoon of humor and a half cup of reality testing questions.

3. Fiduciary, fee-only advisors evaluate clients’ financial situations objectively and weigh their options with only the clients’ financial success in mind. Because we are paid by and answerable only to our clients, we can help them cut through and ignore the noise. TV, newspapers, and websites are full of conflicting and often contradictory advice; friends and neighbors brag about their investment successes. Often this random information sounds impressive and compelling – but it may not be accurate or appropriate for every individual’s situation. A professional who knows the totality and specifics of her clients’ personal circumstances can protect them from chasing after the can’t-miss investment of the week.

4. A good advisor is a great resource for clients to help them manage their busy lives. We know smart, ethical attorneys, accountants, mortgage brokers and professional coaches, useful websites, pertinent books, strategies for problem solving, etc. Clients are consumed with their day-to-day activities and seldom come up for air to think about alternative ways of solving issues. We have extensive networks and can refer them to resource professionals who can help make their lives easier.

5. We serve as a sounding board, helping clients think through tough issues. At times that may mean we protect them from themselves by heading off bad decisions. In the horrifying days of mid-October, who didn’t contemplate going all to cash and wondering if any of their portfolio should be in the equities market? We provide sound advice in the heat of the moment to help them stay calm, reduce the emotion and make a rational choice based on facts, not hearsay. That model of measured advice and help in difficult times only comes from a trusted advisor—not from a salesperson.

Annette Simon

Copyright 2009 The Money Dames

Can One Live as Cheaply as Two?

Years ago, as a newlywed I remember learning that because we were married my boyfriend and I would now pay higher taxes than we did before although our incomes were exactly the same. That was my introduction to the marriage penalty inherent in our progressive tax code, where a married couple pays taxes at a higher rate than if they were two singles earning the same wages. I complained to an older married friend that this seemed really unfair. Her view was that married people get other breaks so maybe paying slightly higher taxes was OK. Recently I recalled that long-ago conversation.

Newly single, I realize how expensive it is for two people who used to live as one household to live separately. When I lived with my husband in one household we had to make the mortgage payment monthly, pay utility bills, grocery bills, property taxes, insurance and other such incidental expenses. Now we are in two separate households and the expenses have doubled. Instead of one mortgage payment, our incomes support the same mortgage payment plus an apartment rental. The grocery bills in my single household seem exactly the same as before, utility bills are no different, neither is landscaping, insurance and various other expenses. The only difference is that these expenses are being replicated across town in my ex's household.

Across the gap of 20+years, I recall that half-forgotten conversation; now I get it and can see for myself the breaks that marrieds get and why net income drops for both parties after divorce.

Veena Kutler

More Thoughts on Madoff

The Madoff affair has stirred up a buzz within the financial press and among financial advisors. Some advisors had client assets with Madoff and were caught in the fallout. Most advisors had no exposure and of these some are now congratulating themselves in the press for having the prescience to dodge the bullet. I find the extent of back-patting going on to be interesting and wonder how many of us advisors were lucky rather than insightful.

I remember a very smart, experienced analyst telling me once that even the best analysis can’t protect against fraud perpetuated by a determined person, because finding fraud requires detective work rather than analysis. Given that, what can be done going forward to protect assets from a fraud like this? Just as a good diet and exercise help us stay healthy there are basic investment rules that we can follow to help keep our portfolio sound. But just as diet and exercise alone can’t prevent every disease, the basic rules won’t always keep you out of the crazy pitfalls of the markets.

Transparency – It’s helpful to have securities that are priced daily and even if it is a fund to have regular reporting so the securities held by the fund are known and valued. This policy rules out using hedge funds that aren’t required by law to report their holdings, and until hedge funds are transparent we don’t believe in investing in them.

Show Me the Money – Having an independent custodian that hold the assets and is independent of the money manager introduces a good check-and-balance. Madoff’s investors sent their money to Madoff. Even large mutual funds use outside custodians (such as State Street Bank) to custody assets and don’t hold the money themselves. Separation of the money manager and the custodian is a good thing.

Diversification – Diversifying among managers, styles and asset classes is still the best and no-brainer way to reduce if not avoid risk. Keep in mind that the biggest losers in the Madoff fraud are those who had all their assets with the Madoff firm.

If it Smells Like a Free Lunch… – I’m not convinced that all Madoff investors were being greedy. My guess is that some felt that the returns of 8% - 10% a year that Madoff was targeting indicated a conservative strategy. Not being market professionals, they didn’t know that target requires a swing-for-the-fences mentality. Think about it – there’s no way 8% - 10% can be achieved consistently in down markets by using low-risk strategies.

Veena Kutler

The Making of a Financial Planner

What makes someone want to become a financial planner? In my case you might call it a series of unfortunate events.

My father died from pancreatic and liver cancer almost 15 years ago. In the last year of his life he suffered terribly not only from the ravages of his disease but because his financial life began to unravel at the same time.

For most of his life he had been a successful businessman. He and his brother sat atop a small empire of retail stores and a variety of investments in local businesses in my Midwestern home town--a family business my grandfather built after emigrating from the Ukraine. We lived very comfortably in our small community while I was growing up; in fact I'd say my brothers and I were pretty spoiled, never wanting for anything. I saw my dad as a savvy businessman and a person of the highest integrity.

Our fortunes first began to turn when my dad and uncle decided to open a new store halfway across the country in Nevada. Until then I had been unaware that dad was unhappy with his life, but he was restless and looking for a big change. Boy, did he get it! Our family voted (four to one -- I was the only one opposed) to relocate so that dad could manage the new venture. Soon after moving the family he left my mom and filed for divorce.

Not surprisingly, my mom chose to leave Nevada and headed back to the east coast where she had grown up. During her marriage mom had paid the bills, but dad really managed all other aspects of the family's finances. Every element of money management was new to her -- living on a budget, buying a house on her own and making big financial decisions -- and she was ill-equipped to deal with any of it. Over the years she was victimized by salesmen and brokers who won her trust and sold her inappropriate products with no regard for what she really needed.

Meanwhile my dad fell in love and remarried. While his love life was flourishing, changes in the IRS rules created massive tax liabilities for the family business. It was a financial blow dad never really recovered from, but he hid it from the rest of us even cooking the books to keep his brother in the dark. I think he believed his fortunes would turn and he would make it all right, but he got sick and ran out of time.

After his condition was diagnosed, dad began to count on a large life insurance policy he had purchased to keep the business afloat and to provide an inheritance for his wife and three adult children. The plan was in place and might have worked as dad hoped, but less than a month before his death my step-mother convinced him to transfer ownership of his life insurance policy to her. She promptly made herself the sole beneficiary and received the entire death benefit when he died.

That sounds like the end and enough to motivate me to want to learn more about financial planning, doesn't it? But there's more!

Dad's life insurance policy was what's known as key-man insurance, intended to carry his business partner--his brother--through several months during which he would find someone to fill dad's shoes and keep the business (which my dad had thrust deeply into debt) afloat. So it wasn't really dad's policy to leave to his children or his new wife, and it certainly wasn't his to transfer to a new owner. It's probably not too surprising that my uncle sued my step-mother and after months of very ugly back-and-forth they came to a settlement. She bought him out; over time she paid off and negotiated down the remaining debts. She owns and runs my dad's business to this day.

While all of this was happening I began taking CFP courses. I wanted to learn how to spare others from the mistakes my family had made.

Initially, I saw my step-mother as the villain who stole my inheritance. When my uncle sued her and won, he joined the bad-guy team. But as I learned more about personal finance I realized that my dad and my uncle had an agreement and dad had broken it first by changing the beneficiaries of his life insurance policy and then by giving it to his wife. So my uncle was a victim too. Even my "evil" step-mother was going to be stuck with credit card bills my dad had hidden. I could eventually see that she was doing what she needed to just to keep his wreckless acts from dragging her down financially. She wanted to save her house and the assets she had built up over a lifetime. I can understand why she did what she did.

My dad blew it by failing to plan, by denying the reality of his financial limitations, and of course by lying to everyone along the way. I'm even willing to see him as a victim -- a victim of unfair tax laws and even more a victim of love! He was so eager to please his second wife he didn't want to confess his failings; he wanted to give her everything.

And in the end, I don't really see myself and my brothers as victims at all. We were clearly last in line for the insurance money. We didn't receive any inheritance at the time of his death, but my dad put us all through top-notch colleges and instilled a work ethic that has allowed each of us to survive and flourish on our own. And his missteps brought me to a profession I love--that's a pretty good silver lining in my book.

Annette Simon

Copyright 2009 Garnet Group LLC

Budgeting -- Unpopular, but oh so Important!

In recent years the idea of living on a budget has fallen out of favor. Baby-boomers, we are told, don't care for budgets. They prefer a spending plan -- it fits more with their mindset.

Call it a budget or a spending plan or whatever you like, successfully managing your financial life starts with getting control of your cash flow. In the simplest terms, when spending exceeds income, you're in for trouble. This is true whether you make a lot of money or almost none at all.

That's the big idea, but most people are looking for more guidance than that. They're wondering, for example, how much they can reasonably spend on housing, or how much they should be saving for retirement. Here are a few benchmarks to start with, established by the Foundation for Financial Planning.

First some definitions:

• Disposable Income - This is your total income from all sources minus federal and local income taxes and your own contributions to your retirement plan(s). Taxes are not optional and we recommend treating retirement savings (at least 10% of your total income) the same way -- as though you have no choice about it.


• Living Expenses - Includes rent or mortgage (principal, interest, taxes and insurance) food, utilities, medical, transportation -- required expenses, none of the fun stuff.


• Discretionary Income - Subtract your total living expenses and debt payments (non-mortgage debt) from Disposable income to reach this number.

Using these concepts, here are some ratios that can help you determine whether your lifestyle is reasonable based upon your savings and income:

• Basic Liquidity Ratio - Divide your total savings (money in bank accounts and liquid or readily salable investments) by your monthly living expenses. The result is the number of months you can survive without an income, or your Basic Liquidity Ratio. This ratio should be greater than or equal to six, meaning that you could survive on your savings for six months if you were suddenly unable to work and earn an income.


• Debt Ratio - Find your Debt Ratio by dividing your monthly debt payments (excluding mortgage payments) by your total monthly income. A Debt Ratio greater than 10% is a red flag indicating that the interest on your credit cards or other loans is eating up too much of your income.


• Housing Ratio - This is your rent or mortgage payment (principal, interest, taxes and insurance) divided by your total monthly income. If your housing ratio exceeds 30% you are house poor -- spending too much of your income on housing, which leaves you with too little for retirement savings and other living expenses.

Use these ratios to take a good hard look at your lifestyle. If your ratios are out of line -- you are living with excessive risk and building a financial house of cards that will probably fall apart with the first strong wind.

Annette Simon

Copyright 2009 Garnet Group LLC

Five Financial Resolutions for 2009

I like New Year's resolutions -- even though they're often futile and left by the wayside within days, sometimes hours. Because once in a while a resolution sticks and we succeed in making real change. Here are some financial resolutions for 2009 you're welcome to adopt:

1. Procrastinate in a productive way. We're all great at procrastinating-- I do it constantly when it comes to tedious work, household chores, doctor's appointments and other less than exciting activities. Try taking that natural ability to procrastinate and using it to postpone and maybe avoid unproductive habits, like impulsive spending. Put off buying those great new shoes for a few day; wait another month to shop for a new rug. It's likely you'll forget about the items that seemed so essential and move on. This sometimes works for binge eating too (admittedly not a financial issue). Wait an hour to eat the cookie that is calling your name (I hear one now). The craving may pass and you'll be glad you waited.


2. Save and invest regardless of market conditions. This is important for a couple of reasons. First, saving and investing consistently is by far the best way to build wealth over your lifetime. Stopping because of market conditions (or because you have increased your spending) puts you at risk of dropping a good habit. Moreover, investing when the market is beaten up, as it is now, is like buying everything on sale. Many advisors and economists think that we are in for higher than average growth in the markets over the next few years as a result of the dramatic declines that occurred in 2008. There's no guarantee this will happen, but it's a good bet that this is a bad time to stay completely out of the equity markets.


3. Start a family conversation about money issues. This might be with your parents, your children, your siblings or your spouse. Money is one of the last taboos -- most people would rather talk about their sex lives than discuss money with their family. Do you know if your parents have adequate resources to support themselves through their lifetimes? Have they prepared wills, durable powers of attorney and any other appropriate estate planning documents? If you explaing why, even young children can understand that saving for the future is an important family value and we can't buy everything we want just because we want it. It's much easier to learn and keep good habits when you are young than it is to change bad habits as an adult. Are you and your spouse on the same page when it comes to spending, saving and charitable giving? Opening the lines of communication with your family about financial matters a good way to avoid hurt feelings and potentially unwelcome surprises down the line.


4. Have your estate planning documents reviewed. If your documents are more than five years old or you have had significant changes in your life or family structure (e.g. birth or death of an immediate family member, divorce, all children now over 21) it's likely you'll need to update your estate plan. There have been changes in estate planning laws in many states that make it important to update the language in any wills or trusts as well. And if you don't have, at a minimum, a will, a general, durable power-of-attorney, and a medical power-of-attorney you need to see an attorney who specializes in estate planning to draft and execute these basic documents. Estate planning documents that are clear and properly drafted are especially important for unmarried partners who are not protected by most states' laws.


5. Diversify, diversify, diversify! Yes, every asset class was hit this year, but some more than others. No one can consistently predict the future (even the smartest guys in the room) and successful investing is more often than not the result of diversifying as broadly as possible and keeping your emotions out of your investments. Falling in love with a stock or a piece of property (we saw a lot of this in recent years with real estate investments) will almost inevitably break your heart and your bank.

Here's to a better year. Cheers!

Annette Simon

Copyright 2009 Garnet Group LLC