Ready to invest in real estate? Take a close look at your margins

April 29, 2016/0 Comments/in Finance /by Michael Rivas

Photo credit: Philip Taylor

We’ve all heard the mantra: “Location, location, location!” When buying investment property, a great location is often considered the #1 rule for success. But as we’ve all seen in that late night, drag-out game of Monopoly, location certainly isn’t the only factor at play.

A decade ago, we all learned more than we wanted to know about subprime mortgages. People were investing money they didn’t have using loans they should never have been given. The stage was set for the perfect storm. Home prices started falling, refinancing became difficult (especially with historically high debt-income ratios), and those previously attractive adjustable-rate mortgages began to reset at higher interest rates. Monthly payments rose dramatically and mortgage delinquencies soared. It’s the scenario that led to a shocking 3 Million foreclosures in 2009 followed by a complete overhaul of mortgage banking regulations. It took years for housing prices to climb back out of a deep, black hole—and even longer for people to recover financially and psychologically.

Prior to the housing crash, real estate had almost always been viewed as a solid investment, averaging over 6% for decades. Now that housing prices are on the rise, investors are once again turning their eyes toward rental properties. Many risk-averse investors gravitate to real estate as an attractive proposition. You can feel it. You can see it. You can drive by your property and know your investment is real. But is investing in property the right choice for you? The answer depends on one thing: the margins.

Many investors look at a basic equation, “money in and money out,” when calculating returns. It seems so simple. Purchase a $200k property that generates $1,300/month rent and earn $15,600 a year—it’s a risk free 8% return using borrowed money! But is it? There’s much more to the equation, and if you dive in and look at the details that deliver the actual margins and return, you may find your investment isn’t what it seems. Be sure you’re considering these key factors when calculating your actual profit margin:

Maintenance & turnover costs. Of course, installing that new water heater costs more than just your time, and your renters may not be very forgiving of an overgrown lawn. Maintaining any property can be expensive, and costs can escalate even further when you experience turnover. Cleaning, marketing, and preparing your property for a new tenant adds up, and every day your property is vacant becomes another drain on your margin.
Insurance & mortgage expenses. Insurance premiums for rental properties can run over 20% more than a typical homeowners policy, and additional liability insurance may be required. Also consider that mortgage rates are higher for second (and third and fourth) homes, and require a 20%+ down payment. Creative techniques to use personal lines of credit can be used to mortgage the property, but that means tying up your available credit that may be needed as an emergency fund during leaner times.
Liquidity. Speaking of liquidity, you pay a steep price for being able to ‘touch’ your property. While it may not be a tangible expense, real estate’s lack of liquidity creates costs when you need cash and timing is an issue. In most cases, completing a sale and seeing any cash in your pocket can take several months, which can force you to borrow money to cover expenses. And borrowing may be difficult if you’ve tied up your credit line with property.
Weighting. Many clients ask me, “How much should I invest in property?” Unless you’re building a career in real estate, an age-old rule of thumb is that your net worth should be spread evenly across three areas, with 33% of your equity in each: 1) real estate, 2) partnering with the great companies (i.e., owning equity), and 3) lending to great companies (i.e., owning bonds). And yes, your home must be included in this equation!
Estate & legal complexity. Have you seen what lawyers charge these days? As a landlord, you’ll need legal help to understand your rights, draft rental and operating agreements, choose which type of entity should own your properties, etc. If a tenant needs to be evicted or if you have a dispute, legal fees can skyrocket. Plus, estate planning for real estate can get complicated (and expensive) quickly with an LLC or partnership.

Capital gains & depreciation. It’s not uncommon for CPAs to recommend investment property to minimize taxes, but in reality, when the time comes to cash in your chips and sell that property for college or that summer home you’ve dreamed about for years, all depreciation is essentially recaptured by your diminished basis—and subtracted from your “earnings” and any return on investment. Capital gains tax ranges from 15% to 20%, so they’re an important part of your real margin. Postponing capital gains is simply robbing Peter to pay Paul…and it all comes around in the end. (Think you’re exempt? If you haven’t lived at a property for at least two of the previous five years, you’ll lose the capital gains tax exemption, which allows individual filers to keep $250,000 of profit from the sale tax-free.)

Tax complexity. It sounds great: write off expenses through the property to avoid Self Employment tax on your income. If you carry a loss, now you have stepped into Passive Loss Land. Income exclusions limits, at risk rules, passive activity limits, etc. Don’t forget property tax! All of this complexity eats up your valuable time, increases your expenses, and reduces your margins.

Compensation for your own hours worked. Here are a couple of questions for you: How much do you make an hour? Is your money working for you, or did you “buy” another job? For example, if you’re earning $150K annually working 40 hours a week (with a few weeks vacation thrown in), you’re making about $78/hour before benefits. It’s not uncommon for property owners to spend several hours a week managing everything from rent collection to fixing water heaters to dealing with vacancies and rental applications. Of course, if you’re paying someone else to manage your property, be sure to subtract management fees from your margin, and include your true hours worked in the equation as well.

So is buying investment property a wise idea? Is it the best way to build wealth? Is rental property really ‘risk averse’? Only if you can be certain that “sure bet” doesn’t turn into a financial drain that steals your precious time, overweights your net worth with investments that lack liquidity, and adds too much complexity to your finances. If you’re not willing to do your homework and consider these important factors, don’t expect location to save a poorly planned use of your life savings. Even Park Place won’t win the game if your margins aren’t in line with your costs.

Want help deciding whether real estate is the right investment for you? Contact me to schedule a time to run the numbers.

Generation X? I feel your pain!

December 15, 2015/1 Comment/in Finance, Uncategorized /by Michael Rivas

Generation X has some problems—and not just their own. Perhaps the biggest one of all is that this group has everyone else’s problems too! On one hand, they’re dealing with aging parents. On the other hand, they have young kids, college-aged kids, or adult kids who are moving back home or need financial support because they can’t find a decent job post-college. And all this is happening right when stressed-out GenXers are in mid-career and trying desperately to build their own net worth.

If you’re in your late 30s, 40s, or early 50s, you know the scenario well. Your career is in full swing, and even if you are making a great salary, it seems money is just flying out the door. If you have kids, they’re more expensive than ever (who knew $100 cell phone bills, iPhones, laptops, and SAT prep camps would be part of the new parenting equation?) and college costs are skyrocketing more each year. Your house is another story. Even if you were lucky enough to purchase a home (or at least refinance) in today’s low interest rate environment, you’re still paying a higher percentage of your income than previous generations toward housing. And if you’ve been in the same place for a while, renovations can throw another blow to your budget. But it doesn’t stop there. You are the “sandwich generation.” Your parents are aging…and they need your help. According to the Pew Research Center, about one in seven GenXers is providing financial support to both a child and an aging parent. From helping your parents through illnesses, to getting them set up on Medicare, finding great assisted care, selling their real estate, and more, the tasks you have to tackle seem endless.

It’s exhausting just thinking about it. As an advisor, one of my most important roles is helping my GenX clients juggle these overwhelming responsibilities today while also planning for the future. Because no matter how mired you are in today’s challenges, your own retirement could be an even bigger problem—unless you plan well today. To help make the juggling as easy as possible (let’s face it: it will never be easy!), here are my top five tips for getting through the “sandwich generation dilemma” with your sanity in tact:

Take care of yourself first. With so much responsibility for others, it’s easy to forget to take care of you. But just like we’re told to put on our own oxygen mask first before helping others, it’s vital that you keep yourself healthy too. Get your annual physical. Get a flu shot. And see your medical team when something isn’t quite right. These are the years when preventive care makes a huge difference in your health today (so you can take care of everyone else) and helps to ensure your wellbeing as you age.
Start thinking about how you want to define “retirement.” Unlike your parents, you probably don’t see yourself retiring at 62. You expect to live a longer, healthier life, and you may be planning to keep working much later or start a second or even third career—something that invigorates you and keeps you socially, intellectually, and physically active later in life. You want to play by your own rules, but that takes money. Which leads us to…
Invest in yourself now so you can buy your independence and dignity later. Let’s face it: money is the key to independence. Once you’re ready to move on from your current career, you’ll want to have the assets to support your “non-retirement” dreams in the future. Whether investing in yourself means earning an advanced degree, nurturing a talent, or simply putting a percentage of today’s salary into a “next career” bucket, being proactive now can help you make your dreams come true down the road.
Lower your stress by getting your financial “house” in order. If you’re like most GenXers, your finances could be in better shape, in part because you’re money is so tied up in everything from your kids’ college tuition to your parents’ medical bills. That might be why 68% of GenXers report that they don’t have a good handle on cash flow, 53% don’t pay off their credit cards regularly, and 23% pay late fees. While changing this behavior may feel like one more thing to add to your to-do list, it will save you time—and stress—in the long run.
Keep an eye on your endgame. Yes, all this juggling can feel overwhelming, but it’s vital that you attack your finances with gusto as soon as possible. Don’t just get your parent’s estate documents squared away—tackle your own as well. Make sure your money is working for you every day, and be sure you have adequate insurance in place to protect your assets and your family. Just like taking care of your health, making your finances a top priority can help lower your stress, give you more time to spend with your family, and ensure you have the financial strength to keep all those balls in the air.

Need help with the financial piece of the puzzle? Contact me to schedule a time to review your specific situation. Together we can plan for the future—your own, your kids’, and your parents’.

Michael Rivas quoted in Investment News

November 19, 2015/0 Comments/in Uncategorized /by Michael Rivas

The following content originally appeared in an article by Liz Skinner on Investment News on Nov 8, 2015.

Forget boomers and millennials, Gen Xers need advisers’ help the most

Even though they are in their peak earning years, they have the poorest financial habits

Armando Castellano: Gen Xer turned to financial adviser for help with budgeting.

Despite having a nest egg of $5 million — much of it inherited — Armando Castellano was always uncomfortable spending money. So three years ago, the 45-year-old musician hired a financial adviser to help him and his wife set up a budget and do some long-range planning.

The adviser, Emilie Goldman, set up a budget with monthly allotments for clothing, cars and a dozen other spending categories. She also set up a plan to ensure that the couple won’t outlive their money.

“It’s completely freeing,” said Mr. Castellano, who plays the French horn in regional orchestras in the San Francisco Bay area. “Now I have stability and clear boundaries.”

Mr. Castellano is part of Generation X, sometimes overlooked by advisers who are paying more attention to baby boomers as they enter retirement or millennials as they look forward to inheriting their baby boomer parents’ money.

And yet, Gen X, those between 35 and 50 years old, may need more help than the other two generations. Even though they are in their peak earning years, they have the poorest financial habits, according to a January survey by Northwestern Mutual Life Insurance. The group includes more spenders than savers, and Gen Xers are also most likely to have more debt than savings, the survey found.

(Related read: 5 reasons advisers should be targeting GenX clients)

Advisers said they see many in this group who already have made big mistakes. Some have failed to save enough to pay for their children’s college educations; others have bought homes that are too expensive or co-signed loans for adult children. Advisers also report the average Gen Xer typically has signed up for too many well-marketed credit cards, and taken on monthly cell phone, day care or private-school tuition bills that stretch the family finances too thin.

“There are a lot of Gen Xers who make $200,000 to $400,000 a year and they’re going broke,” said financial adviser Ted Jenkin, who started oXYGen Financial seven years ago to focus in part on serving Gen X.

STRAPPED FOR TIME

Many in the group are strapped for time, have lost track of their personal finances and don’t even read their bills, which likely come in electronically and may be paid out automatically online, too, he said.

While Gen X incomes may be rising, expectations — what its members believe they need or should be able to provide — have ramped up, compared with baby boomers’. Many more of those in Gen X are sending kids to expensive private colleges, taking exotic and posh vacations, and otherwise “chewing away at the growth of their incomes,” Mr. Jenkin said.

The No. 1 goal financial adviser Philip Olson works on for Gen X clients is to help them clean up consumer debt.

About 38% of responding Gen Xers said they have more debt than savings, compared with 31% of the overall population, according to theNorthwestern Mutual Life survey.

(More on GenX: Gen X lags boomer generation in retirement savings)

“Most advisers don’t get paid for helping with debt strategy,” so there hasn’t been much incentive to become expert in the craft, Mr. Olson said.

Ms. Goldman, Mr. Castellano’s financial adviser, helps clients gain a handle on spending and “lumpy” sources of income such as sales commissions or restricted stock units, or even inheritances. Many also consult with her before deciding whether they can afford to buy a bigger house or remodel their existing home.

Gen Xers appreciate the help, but as a group this demographic is pretty skeptical of financial professionals.

About three-quarters of Gen X investors said they believe most financial professionals are just out to sell them something, according to an Allianz Life survey conducted in November 2014. Many blame the financial sector for the 2008 financial crisis, from which they may have lost jobs or value in their homes and investments, or even watched their parents’ retirement accounts get crushed.

COOL WITH STOCKS

However, Gen X wasn’t as traumatized as those from the younger Generation Y set about investing in the stock market, according to advisers.

Ms. Goldman, founder of Tamarind Financial Planning, said they seem more willing to let their long-term investments ride than those coming after them.

“Generation X saw assets grow before the 2008-09 crisis hit and they have that positive experience,” she said. “Generation Y stepped in when it was horrible and now they don’t’ even want to try.”

Financial adviser Jennifer Harper, who started a practice in January aimed at Gen X, said she sees people who need help saving for college, an expense that will be a bigger issue for this generation because many married late and therefore will be at an advanced age when their kids are in college.

She pointed out that many Gen Xers will still be paying for college during “the retirement catch up years” that many former generations have used to sock away money the decade before retirement.

As it turns out, even Gen X’s idea of retirement looks different than past generations’.

Adviser Michael Rivas, founder of Bienvenue Wealth, whose clients are 90% Gen Xers, said about half of his clients don’t plan to retire in their 60s or really, ever. Instead, they want to open restaurants, or start new businesses or begin new careers.

“This is a change from the last generation, who set their clocks for 62,” he said.

Mr. Rivas encourages clients to “invest in themselves ahead of time,” by starting early to get any additional education and training they’ll need to pursue new careers in their later years.

He also helps them figure out how to fund their dreams, whether that means coming up with a large sum to start a venture or just preparing to live without an income stream for a number of years while the next endeavor gets going.

Mr. Rivas, 49, knows of what he speaks in this area. He opened his financial planning firm five years ago after a career working on the floor of exchanges in Chicago and in other financial services positions.

He said an adviser’s fee structure can make him or her more attractive to Gen X.

Transparency is the most important aspect with this suspicious group. They’re on the lookout for the “gotcha moment” when they find out what they will really pay for financial help, Mr. Olson said.

Spelling out all the fees is important, and many prefer paying a monthly charge, as opposed to annual fees, because that’s the way they’ve grown up thinking about their finances, as monthly obligations.

A New Age of Opportunity

September 28, 2015/0 Comments/in Finance /by Michael Rivas

Change may be a given, but even when we know it’s for the better, shifting our own thinking can be quite a challenge. Charlie Chaplin’s film Modern Times is a classic—not only because it’s Chaplin at his most brilliant, but because it does such an amazing job at contrasting the positive and negative impact of the last century’s industrial revolution. Imagine it: machinery was replacing “traditional” jobs at breakneck speed, and in a span of just 40 years people saw the invention of the telephone, the lightbulb, the airplane, and the Model T Ford. The changes were a shock to nearly everyone’s way of life.

I’d love to see Chaplin’s take on the rapid change we’ve seen over the past 40 years. Computers and other advancements have altered how we earn our dollars, how we spend our dollars, and how we shape our own futures. And just as it was in the early part of the last century, there are pros and cons to every change.

Communication: Can you imagine life without a cell phone? 87% of adults in the US now use mobile phones, and it’s hard to remember a time when getting lost on the road meant searching for a pay phone for help! From cell phones to the Internet to Skype, it seems every time we turn around there’s a new way to stay connected. Instant communication has changed our lives in many ways. Yet who would have expected to pay hundreds of dollars each month for what most people now consider necessary technology?
Energy: The focus on alternative energy sources was fueled (pun intended!) by the need to reduce our reliance on fossil fuels and imports from the Middle East. As a result, natural gas is back on the map, and fracking is providing new sources of energy as well as jobs. To compete, oil companies have “turned on the pump,” making oil cheaper than it’s been in years. And while consumers are smiling at the gas pump, the downside is less incentive to continue to invest in solar power, wind power, and other alternatives that reduce the impact on natural resources.
Banking: Just 15 years ago, waiting in line at the bank to deposit your Friday paycheck was the norm. Then came the ATM. Then mobile banking. Now, apps allow you to take a photo of your checks for mobile deposits. We use Applepay to pay for goods and services, and Venmo to pay our friends. In the brokerage world, roboadvisors are streamlining processes and helping to reduce costs. Automation is, it seems, everything. As a result, traditional banks are fighting to stay relevant, and banking and credit card fraud have become a major global issue.
Healthcare: The Affordable Care Act, aka Obamacare, is reshaping American healthcare. Now that doctors are being compensated for keeping patients out of the hospital rather than filling hospital beds, they’ve had to completely rethink their business models to focus on patient outcomes instead of patient volume. In response, some physicians have left the insurance system entirely, creating concierge medical practices that strive to offer a differentiated level of service for patients willing to pay directly rather than going through a health insurance provider.
Robotics: Everyone seems to love the idea of self-driving cars, wearable technologies, and other artificial intelligence (AI), but unlike the industrial revolution that created jobs on a large scale, the AI revolution has the potential to do the exact opposite. On the plus side, all of this new intelligence is expected to give us more free time to do the things we love to do (less driving, more playing!). I’m all for that!

It’s an interesting time, to say the least. From a financial planning perspective, here are three things that can help see you through the changes that I’m certain will continue for a long time to come:

Build an emergency fund. If you’re in an industry that’s facing disruption, it’s important to have enough cash to cover 6 months of your current spending if you need to make a transition. One of the most important things you can do during a job search is maintain your dignity. Having an emergency fund can keep you from accumulating debt (no borrowing from your parents or racking up charges on your credit cards) and give you the support you need to make the best possible decisions when it comes to a change in your career.
Diversify, diversify, diversify. Personally and financially. As things shift, it’s important to embrace change. Educate yourself. Learn new skills. Take charge, leverage new opportunities, and never, ever, put all your eggs in one basket! And when it comes to investing, take a lesson from the Enron scandal. Few people would risk investing in a single company, but investing in a single industry can be just as detrimental. By investing in great companies and allocating assets among various industries, demographics, and geographies, you can hedge the risk of a major disruption in any single sector.
Continue to invest for the long term. Keep your eyes on your goals when it comes to your career and your financial outlook. Remember that even when volatility exists, the economy is on a steady upward climb. In the US, our economic data is better than it’s been in years. Unemployment is down to 5.1%—the lowest it’s been since early 2008. The GDP and housing starts are both continuing on a steady climb, and consumer confidence levels have rebounded. So take control of your investments, make non-emotional smart choices, and Invest in yourself while consistently building your wealth—regardless of changes around you.

Whenever societal changes reach the tipping point, the men and women who rise to the challenge are the big winners after the dust settles. So get excited about what’s happening. Adapt as quickly as you can and take advantage of new advancements to create a better future for yourself (even if a self-driving car tries to steer you in another direction!). Remember, you’re in the driver’s seat. It’s time to jump in, be smart, and get ready for a wild and exciting ride!
Ready to make some changes to your career or your finances? Let’s schedule a call to discuss what makes sense for you. I’m happy to help.

Is “breaking news” killing your financial plan?

July 22, 2015/0 Comments/in Finance /by Michael Rivas

The financial journalists have been in their glory these last few weeks. Greece was a great headline grabber, as was the exciting reaction to the craziness by the US and global markets. It was better than football, basketball, and baseball seasons all wrapped into one. Why? Because it got people tuned in and waiting for the next “breaking news” story. It spurred lots of web clicks. It got the news sites buzzing and, ultimately, I’m sure it sold a lot of whatever was being advertised at the moment.

The fact is, all that financial “news” means absolutely nothing to the normal investor. Sure, the play-by-play changes in the stock market may make a difference to the day traders—at least for the day. And yes, the clicks on CNN’s website will make a difference to some marketing genius’s commission check. But for anyone investing for the long term, none of it matters. It’s just noise.

Carl Richards, author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, gets it. He’s great at breaking down financial topics and explaining them through simple graphs and diagrams—on napkins (see above and below). Carl obviously shares my perspective on “important, global news” and its relationship to your personal financial plan. What he says here is true: there’s “very little overlap!”

But now you may be wondering, if the news doesn’t matter, what does? We all want to feel like we’re in control of our finances, and somehow listening to all that noise makes us feel like we’re doing something. “I’m paying attention!” “I’m staying informed!” And while the financial news may be a great form of entertainment, knowing the details of the Greek default, the plummeting price of Gold (yes, the 0% yield I talked about in my blog way back in July 2013 holds true), or the latest guesses on when the Fed will raise interest rates won’t help you reach your financial goals.

Instead, turn off the television, turn off the Internet, and pay attention to these 5 steps:

Make a plan and stick to it. If it’s complicated, work with a financial planner you trust, create a plan based on your goals, and make it happen.

Balance your savings, spending, debt, and risk. Part of your plan should include building your wealth while also managing spending and reducing both debt and risk.

Diversify your investments. The old saying that you shouldn’t “put all your eggs is one basket” is probably more true in investing than anywhere. Diversify, diversify, diversify.

Plan for future expenses. Don’t spend what you don’t have. It’s much better to save today for the new car you know you’ll need next year than to finance it and pay a whole lot more for what you get. For more on this, see my blog 7 Steps to Start Building Wealth Now.

Focus on your own goals. Stop getting sucked into the latest financial news frenzy, and remember that your neighbor’s “big stock win” has nothing to do with your long-term plans. Carl Richards’s napkin says it best: “When it comes to investing, the only goal that matters is yours.”

Spoiler Alert!

Whatever you do, remember that journalists have no dedication—much less any fiduciary responsibility—to you, the investor. And to take a little fun out of their game, here are my big spoilers: Greece will eventually pay back at least a sizable portion of what they owe; Germany won’t stand for any less. Gold will continue to yield a big, fat 0%. And neither of these “news” items will affect your retirement outcome. But maybe (just maybe!) the Saints will be lucky enough to make it to Super Bowl 50. Now that would be some news to pay attention to!

Need to create a long-term plan based on your own financial goals? Contact me to schedule a time to meet. We can dive into your finances together and put a plan in place that works for you.

Doing more chores than your spouse? (You must be the mathematician!)

June 24, 2015/1 Comment/in Finance /by Michael Rivas

photo credit to: “Sharon & Nikki McCutcheon”

For most couples, dividing up the chores is one of the first items of business when they start a life together. Taking out the trash, doing the laundry, cutting the grass, scrubbing the toilets. We all know the list. And paying the bills, which is on there too, is typically handed off to the partner who is either best at math or has traditionally been the most responsible with money. What most couples don’t realize is this: the mathematician in the house is getting a pretty raw deal.

Sure, the chore of “paying the bills” is pretty straightforward. In the beginning, finances are simple. The most important tasks are budgeting, paying every bill on time, and managing monthly cash flow. Not so bad. The chore is done in the time it takes to cut the grass. But as time moves on, finances get more complex. Suddenly “paying the bills” includes finding the best rate on a home mortgage and figuring out how much to contribute to your 401(k) and 529 plans. Deciphering complex benefits packages and navigating corporate buyouts are added to the list of responsibilities. Juggling FSAs, HSAs, and insurance claims fall into this category too, as does trying to pick stocks, diversify investments, stay educated on the market, and think about tax liabilities. It can sure make scrubbing the toilets seem a lot more attractive than it did in the early days.

Lisa and Matt called my office a few weeks ago, and it wasn’t a happy discussion. They’d hit a breaking point, and they needed help. Lisa had been their family “CFO,” and she was proud of how she’d handled the finances over the years. But two things had changed. First, Lisa felt she could no longer do the job well; they were trying to buy a second home, and she felt overwhelmed by the decisions that needed to be made. Second, when they initially dove into the financing process, they got some unhappy surprises. They were in much more debt than they’d realized, and their FICO scores had dropped below 700. Matt accused Lisa of mismanaging their money. Lisa didn’t know what she could have done differently. Things were a mess.

Lisa and Matt’s story is all too common. No matter how hard they try, most people don’t have the knowledge they need to make complex financial decisions. In worst-case scenarios, a serious error has been uncovered: taxes are misfiled, assets are lost, or there’s been hidden overspending by one spouse or the other. That’s when I become as much a mediator as a financial advisor. And I hate to see it, because today’s troubles could have been avoided years ago—back when the chores were being divided, and “paying the bills” and “cutting the grass” where somehow seen as equivalent. The fact is, the grass never gets more complex, but your family finances are a dynamic, moving puzzle that requires both time and expertise.

Whether I’m talking to newlyweds just starting or older couples who have hit a treacherous fork in the road, here’s what I recommend:

1. Take on joint responsibility for your finances—NOW. As partners, you should share equal responsibility for all aspects of your money. Sure, one person may be dealing with the basic bill paying, but you should each consider it your fiduciary responsibility to your relationship to make mutual decisions about the budget and how your money is being spend. No one wants to have to ask permission to make a major purchase—or be criticized for financial decisions that were made when they were simply doing the best they could.

2. Don’t wait until there’s a financial tragedy to get help. Inevitably, your finances will get more complex and you’ll realize it’s time to start working with a professional. All too often, it takes a misstep of some kind—a financial wake up call—to take this step, and by then, there’s a mess to clean up. A good rule of thumb: if managing your money is taking longer than it takes to cut the grass, it’s time to get some help. If, like Lisa and Matt, you know it’s time for some real advice and guidance, be cautious who you turn to. Co-workers, friends, and family may empathize, but rarely have any formal knowledge in finance. Google is… well… Google. And a salesperson (even one who goes by the title of “advisor”) may be selling rather than solving. Find the right advisor for you using these tips from the National Association of personal Financial Planners (NAPFA).

3. Know what you don’t know. Your math skills may be fantastic, but without formal training and experience in financial planning, you could very well find yourself in a mess like Lisa and Matt 10 years from now. A professional advisor can help you get back on track financially—and keep you there over the long term. Here are just a few of the questions you may want to ask an advisor in your first meeting:

How do we balance saving for our children’s college education and saving for our retirement?
Should we try to pay off our mortgage early, or is there a better way to leverage our assets?
How can we include our aging parents in our plan?
What can we do to plan today for tax-effective asset distribution in retirement?
Are we doing everything we can to keep taxes to a minimum and spread out our tax liability?
Do we have enough and the right type of insurance, including life, disability, healthcare, etc.?

Of course, the challenges are different for everyone. For Matt and Lisa, it didn’t take us long to identify how they’d gotten where they were and what needed to be done to help rectify the situation. Next we created a plan that took the decision-making off Lisa’s chore list and made the finances a joint project. By working together as equal financial partners, they now have a clear path toward a more successful financial future and, hopefully, an easier road to their own “happily ever after.”

Ready to take the finances off your chore list? Contact me to schedule a time to meet. We can dive into your finances together and put a plan in place that works for you.

7 Steps to Start Building Wealth Now

May 6, 2015/2 Comments/in Finance /by Michael Rivas

building_wealth

I have the same conversation with my Gen X clients all the time. We start digging into the details of their finances, and we see the debt piling up. And while certain debt is reasonable—particularly for appreciating assets like a home or business—racking up debt for depreciating assets does something most people don’t even realize: it depletes your buying power and actually steals your future earnings, effectively turning your dollars into zeros. And because it’s no myth that “you have to have money to make money,” those zeros impact your wealth over the long term—not just while you’re paying off that $50K Lexus.

In my December blog I talked about the power of invasive online marketing to sway our wisdom when it comes to buying stuff (lots of it!). Marketing’s goal is to turn almost anything into an impulse purchase. But the problem reaches far beyond marketing. I see many people—otherwise rational decision makers—buy themselves into a hole early on, and spend decades trying to dig themselves out at a time when, ideally, they should be building wealth for the future. The problem is a lack of understanding the true budget, versus what we think we should be able to afford to have or do. If that brand new (and well marketed) luxury item costs “only” $350/month, it can feel like a reasonable expense, even if the sticker price is far outside what’s reasonable for your own budget.

Start BUILDING your wealth—today

By being mindful of your debt-to-income ratio and leveraging your expendable income wisely, you really can start building your wealth now, regardless of how much debt you’ve already accumulated, and regardless of how much time you have to save before retirement. Here are a few basic steps to start making your dollars work for you, not against you:

Calculate your actual income.

For many—those receiving a salary from a corporation—this is an easy task. If you’re an independent contractor or business owner, it can get complicated. Be sure your actual income reflects your “take home pay”—after taxes. If you need to use an average, err on the low side.

Identify your fixed expenses
It’s true: few people actually have (and stick to) a budget. Even those who do often fail to identify every predictable and unchangeable expense. Start by listing the obvious expenses: your mortgage or rent, insurance (property, auto, health, life), utilities, food, estimated medical expenses, and car payments. (Note that luxuries like eating out, vacationing, and paying off existing credit card debt are not included in this bucket. We’ll get to those in a moment.)
Identify upcoming expenses in the next 12-24 months.
Do you need a new roof? Is your car more than 7 years old? Do you have a child heading off to college? Whatever your needs, it’s time to start saving for tomorrow’s expenses today. Divide the total into monthly “savings buckets.” This approach helps you avoid taking on debt to pay for expenses as they arise and increases your future buying power. Even if your savings doesn’t cover the total cost, it can significantly reduce the amount of that car or college loan—and put more money in your pocket.
Calculate your remaining expendable income
Once your fixed and upcoming expenses are covered, you can use the remaining bucket of money to build your wealth while simultaneously getting you out of debt. Subtract your total fixed expenses and your monthly “buckets” for upcoming expenses from your actual monthly income. You’ve now identified your true expendable income.
Earmark 40% of your expendable income for paying off existing debt.
Debt can be an emotional issue, which is one reason people are often just as irrational about paying off debt as they are at accumulating it. It may feel good to take that $5k bonus and pay down a credit card, but unless you’re also building your wealth, your money is still not working for you. Identify all current depreciating debt and start paying it down. Now. You can get that same great feeling of accomplishment by charting out how soon your debt will be erased under your new plan—and without taking on additional debt.
Earmark 30% of your expendable income for building your wealth.
Where this money is invested depends on how much you already have in an emergency fund, your time horizon until retirement, and other factors. Only your emergency fund should be sitting in an account earning 2% or less. All other assets should be allotted to longer-term, higher-earning appreciating investment vehicles. Of course, as your debt decreases, you can steadily increase the amount you’re able to contribute to building your wealth.
Earmark 30% of your expendable income for non-fixed expenses other than debt.
This is the fun part. Some of this will inevitably go to less-than-exciting (but still non-fixed) expenses, but once those are accounted for, you can start playing a little bit. Set your budget for eating out (yes, this should always be a budgeted item). Saving for next summer’s vacation. A trip to Europe. Your child’s wedding. Whatever your dreams, budget for these “fun” expenses now.

The word “discipline” has gotten a bad rap in our culture. We tend to think of it as anything but fun. But when it comes to getting disciplined about building your wealth, this step-by-step approach can simplify your day-to-day financial decisions, reduce your financial stress and, most importantly, help get you out of debt and into that enviable position of having your money working for you to build a more secure financial future.

Ready to get started today? Contact me to schedule a time to meet. We can dive into your finances together and put a plan in place that works for you.

The mighty dollar: The good, the bad, and the ugly

January 30, 2015/0 Comments/in Finance /by Michael Rivas

How did we get here? In 2008, at the height of the recession, the dollar was sitting at an historic low. And while we’re still fighting our way uphill in many areas of the economy, the dollar is surging higher by the minute. In 2014, the US Dollar Index (DXY) jumped 12.8%. And it doesn’t seem to be slowing down in 2015. Add that strength to oil prices that seem to be dropping at an equally impressive rate, and US consumers are feeling pretty heady about the economy. Sure, we can all get deals on anything imported from abroad, and you may have just logged off of AirBNB as you daydream about that long-awaited trip to Europe. But is a strong dollar all good news? Here’s a quick peek at the good, the bad, and the ugly about a high-flying dollar:

The good…

Everyone of us wants more money in our wallet, and we’ve getting that from lower gas prices for months. Now the stronger dollar is giving us even more by delivering some hefty buying power. Pretty much anything imported into the US is going to cost less than it did last year. This goes for everything from Japanese cars to Chinese electronics to German pharmaceuticals. In 2013, the US bought $2.33 Trillion worth of imported products—up 45.5% from 2009—so the overall “savings” is huge.

The bad…

While we’re busy paying less for imports, non-US consumers and businesses are busy paying more—a lot more—for US exports. This means foreign companies are buying fewer US goods and services (just take a look at the disappointing earnings reported from Caterpillar and Microsoft last week to see the real-world impact). This backlash can hit US production, which can then result in a second hit to manufacturing jobs. US companies with operations overseas are bound to see losses as well.

The ugly…

If the dollar climbs too high, the issues can go global. In the US, our exports can be outpriced by foreign bidders, and tourism hotspots at home may become less attractive (read affordable) travel destinations for visitors from Europe and Asia. Despite the strength of the dollar, the balance can start to shift against US companies, leading to a negative impact on corporate growth, earnings, and the stock market.

The upside.

Despite that doom and gloom, we’re actually in a strong position for the time being. And we can stay there with a little planning. From an investment perspective, the average retail portfolio faces 100% dollar exposure, so if things continue the way they’re going, it may be time to hedge that exposure to diversify risk. The same is true for commodities, which are hard-hit by a strong dollar. Foreign markets are a mixed bag: a stronger dollar means US exports are more expensive, which can cause an uptick in earnings for foreign companies. But the strong dollar also hints at a growing US economy, which would lead to strong growth domestically. By keeping an eye on the global balance, we can work to leverage each opportunity.

The best scenario is a dollar that is strong, but not too strong. And while we certainly have no control over that strength, there are controls at play to help maintain global balance. It’s likely that supply and demand will help even out the playing field. The important thing to remember is that there’s always a boogeyman out there taunting the market. In 2012, it was the fiscal cliff. In 2013, the Federal Taper. Last year, Russia and the Ukraine. This year (so far) it’s been the strength of the dollar and (as of Sunday) the Greek election. But over the long term, this boogeyman will also vanish, and life—and the slow, steady growth of the market—will go on.

From my perspective, the US is the strongest economy in the world—and the most transparent—which tilts the balance in our favor. So jump back on to AirBNB and see if there’s a great spot in Europe you’ve been dying to visit. Now may be the best time to pack your bags and take advantage of the strong dollar to get a little more of just about everything for your money.

Questions about how the strong dollar impacts your own financial outlook? Email me and we can schedule a time to dive into more detail. I’m here to help.

Stop the online marketing madness!

December 23, 2014/0 Comments/in Finance /by Michael Rivas

Even if online shopping isn’t really your thing, it’s the time of year when many people turn to the internet for some serious help from the new “North Pole.” The web is a great way to stay out of the mall, out of long lines, and happily shopping away in your slippers. Better yet, the presents you buy are delivered right to your door—if not straight down your chimney by Old St. Nick.

So yes, I’m all for online shopping. Except for one serious issue: the power of invasive marketing to get us to buy more—and spend more—than we should. In my opinion, intuitive, online marketing is kicking the asses of American consumers, and most people don’t even realize it.

Here’s why it matters: When it comes to managing your life savings, one of the biggest success factors is slowing your spending. Making conscious, conscientious decisions about every purchase you make can have a major impact on your finances, but keeping a lid on spending can be a challenge—especially when we’re constantly inundated with marketing that is designed to lead us away from those conscious, conscientious decisions.

The power of intuitive marketing

If you search Google for “best deal on tires”—and you actually need tires—those ads popping up on Facebook for the next week may very well lead you to a great deal at a local tire store. But what if you find yourself dreaming about a brand new red Corvette? You don’t need it, but if Santa was feeling extra generous, it may be right up there on your wish list. So you do a quick search just to feed your fantasy. And then, day after day, that beauty keeps showing up everywhere you look! Facebook. Google. Yahoo! (Paid advertising is, after all, what keeps most of the internet free. The ads are the price we pay, just like the ads on good old network television.)

The truth is, when you plugged “Corvette” into your browser, you fed much more than your fantasy. With just a few keystrokes, you handed out your dreams on a platter and fed the ubiquitous internet marketing machine. And it’s a killer.

Why? Because intuitive internet marketing really works. Recent studies show that “click-throughs” aren’t the true indicator of success with online marketing campaigns. What seems to be working is the repeated image—much like roadside billboards. Suddenly, you just can’t stop thinking about that Corvette. You start to think you really need that new Corvette. Maybe it really is a priority. Or, just maybe, you’ve been clobbered by Chevy’s massive online marketing budget and its focus on behavioral targeting and online behavioral advertising (OBA).

Putting a lid on OBA

If you’ve never heard of it before, OBA is the technique used by online advertisers to create smarter, targeted, and highly personalized marketing campaigns based on their knowledge of how, where, and when to attract your attention. It’s what fuels the ads for the items you just “happened” to be thinking about (in other words, you typed the search word into a browser, included it in an email, or posted it on Facebook). While it’s become nearly impossible to outwit OBA completely, you can take a few simple steps to significantly reduce your trackability.

If you don’t want Facebook or other participating companies to collect or use information based on your activity on websites, devices, or apps for the purpose of showing you ads, you can opt-out through the Digital Advertising Alliance. You can also opt-out using your mobile device settings.

To stop most online advertisers from tracking your activity, see this article by Kim Komando (skip to page 2 to get straight to the ‘how-to’ tips).

To stop tracking by advertisers on Google and Yahoo!, log into your Yahoo! or Gmail account and go to the Yahoo! Ad Interest Manager or Google’s Privacy Center. The “opt-out” buttons are on the front page of each site, along with a number of advanced options that let you decide which types of ads you would like to see if any.

For the marketing that does slip through the cracks, just remember to be conscious and conscientious about every purchase. We’re all going to make a few splurge purchases every now and then. For some of us, it may even be a red Corvette just in time for Christmas. But by reducing the flood of targeted online advertising and being more aware of marketing’s impact on our own behavior, we can all save a bundle this year. Simply limiting our spending to the things we really need and want will prevent us from being coerced by tech giants’ massive marketing campaigns.

Why ‘Tapering’?

September 10, 2013/0 Comments/in Finance /by Michael Rivas

Lately, the press has been beating their drums about the winding down of QE3 (Quantitative Easing 3) and the fancy name for the process is called ‘tapering’. The pundits insist inflation is soon to follow. After all of this money printing, certainly inflation is on the horizon, right?

How does QE3 affect the economy?

The Federal Reserve uses monetary policy to guide the economy. The Fed has two mandated goals:

1) Provide stability to the financial markets and

2) Control inflation.

It could be argued that when push comes to shove (and it often does) the Fed will temporarily disregard inflation if stability is in question. We are now nearing the end of that precise type of cycle. After the entire system came into question in 2007-2008, stability to the markets took center stage. In order to get markets to flow after this economic shock, the Fed took unprecedented measures. Covertly, they manipulated the players (Lehman, Merrill, Bank of America, FNMA, GSA etc) while overtly they supported financial flows (increased FDIC insurance, flooded the markets with cash (bought debt), eased interest rates, changed the rules at the discount window, and even supported stocks- taking equity in several companies etc.)

The Fed can look back over the past 5-6 years and affirm that they have stabilized the economy (domestically and internationally). Now its time to get back to part two of their agenda; controlling inflation.

Monetary policy is constantly manipulated by the Fed, that is nothing new. What is new, however, is the transparency of “Fed Speak” and the process the Fed used to implement their policy tools. In the past, the Fed wouldn’t announce policy changes, specialists and insiders would de-cypher Fed jargon and Treasury trades to queue rate directives. Today the Fed routinely announces their intentions publicly. In the past, monetary policy was generally concentrated in the short end of the yield curve (short-term interest rates) in hopes that long-term rates would follow in unison. Quantitative Easing ( QE, QE2, QE3) is aimed directly at long-term rates, intentionally relieving rates on mortgages, which is where the root of the previous ‘easy money’ crisis began. Mortgage burdens have eased significantly since, as millions of homeowners used this window of low long term rates to refinance their debt and immediately improve current cash flow.

Does quantitative easing definitively cause inflation?

The prevailing wisdom is that QE3 will lead to a spike in inflation as cheap money will fuel more speculative excesses. We believe their is enough slack in the economy and strong demographics at work that will counter these forces. As the process ‘tapers’, some players may scramble to borrow and force rates even higher temporarily. But interest rates returning to pre stimulus prices won’t have a long lasting push on inflation. As a matter of fact, they should actually slow the economy as borrowing costs rise. The Fed realizes if they just turn off the spigot overnight, they would shock the system. It should be noted that the average amount of cash on hand at corporations has swelled to over 20% of assets! The odds of these companies borrowing needs pushing interest rates significantly higher seems far fetched. Will these companies really need to rush out to borrow!?! UNLIKELY… A normalization of interest rates will probably allow these companies to put their money to work by lending (buying debt)!

Demographics at work…

Enter the baby boomers. Baby boomers are heading into retirement in droves. They have spent the last 6 years chasing yield and trying to stretch their dollars further and further in an abnormally low interest rate environment. These people will use any increase in interest rates to put their cash back to work too! Money Market rates and CD’s have paid so poorly, that many have taken more risk than they should carry. Higher interest rates will allow baby boomers the chance to improve their cash flow going forward, as they purchase fixed income products (Treasury, CD, Money Market and Corporate Bonds) once they retire.

The re-normalization of interest rates is a welcome sign that the economy is continuing in the right direction. The fact that the Fed believes it could now address the possibility of inflation, is encouraging. Quantitative easing has dramatically helped people and institutions refinance their debt obligations and improve cash flow when money was tight. “Tapering” will allow those awash in ‘cash’ to put their money back to work without shocking the system. The combination of demographics and historically large amounts of cash on hand will blunt most inflation pressures caused by a ‘normalizing’ of the interest rate environment.