Bringin’ Simple Back

That’s right. We’re bringin’ simple back. 2008 provided us with a wonderful opportunity to step back and ask, ‘what in the world are we doing?’ If you were an adult and had a pulse over the last decade, it would have been impossible to not notice all the complexity in the financial markets. I’m not just talking about the stock market. I am alluding to every aspect of your financial life. So often individuals feel like to make money or be successful, it has to be a very intricate and complicated process and only the super intelligent can achieve it. We were all tempted to invest in things we didn’t understand, buy products we couldn’t comprehend, and implement strategies that made our heads spin.  In today’s show I walk through a few areas where simple is not a bad thing.

Investing is simple. For the last decade, and maybe even the last two decades, individuals felt that it was neccessary to participate in complicated investment strategies. If you really wanted to build up that retirement nest egg, you needed to be in super risky hedge funds. You needed to seek out an advisor who could get you access to the best ‘private placement deals’. Hey, maybe even somebody as successful as Bernard Madoff could have managed your portfolio? If you had any equity in your home, you should liquidate it and invest. Only the most complicated trading strategies (often offered during a 2 AM infomercial) could possibly provide you with financial security.

2008 taught us that maybe all that isn’t necessary. Maybe now we can realize that things ‘too good to be true’ maybe are not true. So when it comes to investing, what is important?

1. Asset Allocation – check out last week’s show notes for a link to a great asset allocation tool from SmartMoney.com.
2. Consistent Savings Plan – the pyramids weren’t built in a day. Building assets takes time. Make a plan and stick to it.
3. Low-Cost Investment Choices – Think twice about investments that a salesman can make a huge commission on, or one that requires a 3-5% return every year before you break even.
4. Understand Your Investments – Make sure your adviser explains exactly what your money is doing and what it is invested in. Be weary of investments that you can’t personally track the performance of

Estate Planning is simple. Make sure you have an estate plan that matches 1) your financial life and 2) your wishes. If you have a very complicated situation, maybe complex strategies are necessary (i.e. previous marriages, business interests, special bequests, etc.). If your financial life is fairly uncomplicated and your net worth is below $2 million, you do not need a super complicated estate plan. So what is important?

1. Beneficiary Designations – Review your beneficiary designations for retirement accounts and life insurance to make sure they are in order. The person listed is the person who will receive those assets, usually regardless of any outstanding circumstances (i.e. divorce).
2. Will – You need to make sure you understand your will and exactly what it is saying. It should provide for disbursement of your assets according to your wishes and provided for loved ones such as dependent children.
3. Term Life Insurance – Make sure that you are protecting the ones you love. This is the most affordable type of insurance with the greatest amount of coverage.

Debt is simple. It’s time to own our lives again. For ten years the mortgage market has looked like a used car lot. ARMs, Libor-linked, balloon, interest only, 15 year, 30 year, and the list goes on and on. Mortgages were created to help individuals pay for a home. Right now, there is almost no reason to do anything other than a 30 year fixed rate mortgage. Check out the Year of the ‘Re’ podcast for more information. In the past 7 or 8 years, 72 month auto loans have hit the market. It doesn’t make sense to finance a depriciable asset that you will almost always be upside-down in ( owe more than it’s worth). We’re seeing on a grand scale how harmful bad debt is. It may be time to stop applying for those ‘10% today’ retail credit cards at your favorite furniture, clothing, or electronics store. Not only do all those lines of loose credit hurt your credit score, but they can really weigh on your overall financial well-being. So what is important?

1. The total amount of debt you carry should not exceed 36% of your gross income
2. The total amount of household debt ( principle, interest, taxes, insurance) should not exceed 28%. Try to shoot for that 10 year pay-off goal.
3. 30 year mortgages are cheap and attractive. Remember, however, that just because it is 30 year loan doesn’t mean you have to wait for 30 years to pay it off.

Emergency Funds are Simple. Cash is king again when it comes to emergency savings. We’ve seen now that Home Equity Lines of Credit aren’t always there for us and real estate doesn’t ALWAYS appreciate. So what’s important?

1. Saving money is cool again. You should try to save anywhere from 10%-30% of your income. The more you save now, the better lifestyle you can enjoy in the future.
2. 6-24 months of expenses should be set aside for an emergency fund. 2008 has shown us that this is a must.
3. Check bankrate.com and find who is paying the best on cash right now. Those who do their homework are rewarded.

We want to apologize again for our technical blunder last week. If it caused you to miss the show, please go check it out. This is a great time to take advantage of some of the topics we covered last week, and an awesome way to put money in your pocket.

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