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5. Investment Planning

Love and Investments

by Fern Alix LaRocca

in Investments

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I’ve always talked about the problem of falling in love with your investments and I’ve seen it all over the 20 plus years in my office – tears, marital fights, family arguments, etc. As a Wealth Coach it is my job to be objective and impartial. I’m the number cruncher who can show you the decisions that need to be made and explain the consequences. I can even make a list of the non-financial pros and cons of whether to buy or sell.

However, I now find myself facing the same dilemma as I oversee a team of professional cleaners – cleaning what was once my home in San Francisco. A hasty move happened due to a lengthy hospital stay. As my husband and I try to make sense of whether we should sell or rent it, I feel my objectiveness go out the window. I crunch spreadsheets to no obvious answer. I resort to a simple list of pros and cons which brings me to 50% sell /50% rent.

It occurs to me that no number can make you unravel the college fund of a deceased son, or sell the family summer cottage, or as in my case, sell my former home that I now stand in after a long medical journey. There’s a lot more there than numbers in personal finance and I feel like that’s why I so eagerly embraced the coaching profession. When people think of a coach, they think of a coach of an athletic team. But a professional life coach is not like that. Unlike my Financial Advisor career, I don’t try to “fix” the client but rather work with what they have and where they are at. I also do a lot more listening – deep listening, since most of my clients I have never met in person. All of my coaching sessions are over the phone. The coaching conversation model has the client talking most of the time and it generally follows these 5 components:

  1. Focus the conversation on what the ideal outcome would be like
  2. Discover the possibilities
  3. Plan the action
  4. Remove the barriers, and identify support and resources.
  5. Review and set the stage for next steps

More well known companies (Google, Kaiser, Dell, and Motorola) are embracing the coaching experience for their executives and the general public is catching the wave, too. The cleaners are gone now. I think I will call my Coach.

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Why You Need a Mortgage

by Fern Alix LaRocca

in 5. Investment Planning

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Mortgage

You need a mortgage. Sounds crazy right? Isn’t sound financial planning and wealth building strategies all about saving and investing? Not necessarily. It is about saving and invest and keeping more of what you earn. That means keeping a careful eye on taxes. One of the biggest tax deductions (other than your retirement plans like a 401K) you can take is the mortgage interest deduction. When you take out a mortgage most of your payment is interest and all of that interest is deductable. If you have a mortgage, take a look at your Schedule A Itemized deductions federal tax form.  Under interest deductions, you will see how much you wrote off of the total amount of yearly mortgage payments. Why so much? Because almost all mortgages are fully amortized, this means that each payment is part interest and part principal.  In the early years you will see that almost all of your payments are interest. You can get a mortgage amortization schedule of your mortgage on an online calculator if you really want to get exact.

Most people focus on the payments that they make on their mortgage. There wealth building strategy is to get a lower payment. That can be a really bad strategy in some situations. Let’s look at two in particular:

  1. John is getting ready to retire. His wealth building strategy is to pay off his mortgage so he has less debt. He will live on his social security, income from his 401K, and some part-time job income. What John doesn’t realize is that by paying off his mortgage, he may be paying more taxes than when he was working. Why? The income from his 401K and his part-time job is taxable. He doesn’t have any mortgage interest deductions to reduce that taxable income so his taxes are higher and part of his social security is taxed too. John is not happy about the choices he made.
  1. Sue bought a house 15 years ago. She has just come into an inheritance. She wants to refinance and use her inheritance to pay off most of the mortgage. She figures she will be able to work part-time if she doesn’t have a big mortgage. Sue refinances at a lower rate and uses all of her inheritance to pay off most of the mortgage. Sue now finds that she can’t live on her part-time income even with a lower mortgage. Her taxes on the lesser income are much higher and her take home pay is a lot lower than she expected. She will have to go back to full time work. She is not happy about the choices she made.

In both examples, there was good intention to do the right thing but not a holistic approach to the problem. You need to carefully consider tax planning with your Financial Advisor or Wealth Coach in any wealth building strategy that you choose but in particular with a mortgage or a refinance.

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Home or Investment?

by Fern Alix LaRocca

in 5. Investment Planning

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Home Buying

After 8 months of looking, and being outbid twice (yes, Bay Area real estate is still hot in certain areas), I finally found a home to buy. Every time I think that prices cannot go any higher – they go higher… and higher. What does this mean for all of us?

For people trying to get into their first home, it can be very hard.  They have to save faster than their rent will go up and faster than what the prices of homes will appreciate. There are options for them such as condos and TICs (tenants-in-common) properties which are similar in structure to the co-ops that are on the east coast.  These people will need a structured savings and cash flow plan to get into their first home.

Obviously buying and being tied down to a home is not desirable for all. In that case, you need to be prepared to pay the escalating rents that will happen to compensate landlords that are building equity in their property. Most renters I know are paying more than what my mortgage is for a much smaller space. But I am tied down to a locale and a mortgage and they are not. Pros and cons to each so it is an individual choice.

For those already in a home, you are building up quite a bit of equity. Now the problem begins if you should tap that equity or not. Depression era people believed in being debt free. The idea was to pay off their mortgage and live debt free and with high cash flow in their retirement. That sounds great — if it actually worked. What really happens is that the mortgage gets paid off and so goes the biggest tax write off they have and the high cash flow never happens.  Think you won’t need a write-off by the time you retire? Think again. Most retirement plan withdrawals will be taxable. On top of that, if you make a certain amount of income at retirement, your social security will be taxable too. You may end up paying more tax on less income at retirement if you don’t structure your investments properly.

What about that higher cash flow? Well, if you aren’t working at all then you can’t take any risk so your investments will probably provide a fixed income for the rest of your life. That sounds good unless a high inflationary economy starts. And what are the chances of that? With humans living longer than ever before, I would say most retirees will see another high inflation period that will eat away at their cash flow.  Does anyone remember the eighties?

Attracted to those reverse mortgages on the television?  Lenders are chomping at the bit to give seniors cash out of their homes — at exorbitant fees and rates. That’s because you won’t be able to qualify for much on a fixed income and the reverse mortgage will be your only option to get cash out while you are alive.

I don’t like to think of the place where I live as an investment. After all we all need someplace to live, but when your home has substantial equity in it; equity that you can use for retirement income or other purposes, it may be in your best interests to review your options with a Financial Advisor or Wealth Coach before you are retired.

I have experienced too many people living in multi-million dollar homes and can’t afford the heat or maintenance of their property because they didn’t plan ahead.

Coaching Question for you – what does your ideal home look like when you are retired or working part-time?

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Are You or Your Broker In Charge of Your Wealth?

by Fern Alix LaRocca

in 4. Identify Goals, Investments

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In order to build wealth you need a good financial plan. Most people start by talking with a Financial Advisor or a Stock Broker.  The most unfortunate thing that happens is that they ask for advice right away without even considering what it is that they want.  A financial professional can guide you to what to do with your money to make the best of it, but only you can decide on how those  funds will come about. Will it come from wages, self-employment income, inheritance, other investments?

Many people will just say that they want to make money. That’s a little like saying I want to be rich. Yeah, well that is nice but the  next step is what you are willing to do to get there. If you don’t have any idea of how much you can save or what action you can take to meet your goals, you will likely be disappointment. Why? Because you are counting on someone telling you what to do and right away you will say that you don’t want to do that.

So before you even discuss personal finance with a professional and I hope it is a fee-only professional, you and your partner should have an idea of actions steps that you would be willing to take to build wealth.  A good wealth coach can help you come to some conclusions about that. Options may be reducing debt, moving to a smaller home or less expensive one, saving more, sacrificing education plans for more retirement money, reduce spending on vacations, etc.

All of the above may sound difficult but let’s consider the alternative. You do nothing. That is a choice in itself. By doing nothing you are insuring that you will lose. It takes action to get ahead of taxes and inflation in order to build wealth. Are you ready to take action?

Don’t let a Financial Professional  tell you what action to take. They are there to guide you and a Wealth Coach can mentor you into the minefield of personal finance but only you can decide to take the actions to build wealth that will help them do a good job for you.

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7 Biggest Mistakes When Buying a House

by Fern Alix LaRocca

in 5. Investment Planning

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Home Buying

Buying your home is one of the biggest financial decisions you will make in your life and your first path to build wealth. Don’t hurry through this process or it will cost you dearly. These are 7 of the most common mistakes I see:

1.Getting a house in a neighborhood that does not support your lifestyle. For example, if you are a young professional couple with kids, why buy into a senior neighborhood?

2. Getting too big or too small a house without considering your health (stairs? no stairs? family size, etc.) Think about relatives and guests coming. How long will they stay? Will they be comfortable? Are there enough bathrooms to accommodate the family?

3. Not putting 20% down. You need this to get a little equity in case you know what happens.

4. Getting the wrong kind of loan. Determine how long you are going to stay in the home and do not purchase the loan with the lowest payment loan but the loan with the lowest interest and fees. That is how you save money on a mortgage loan (despite what a loan broker will tell you).

5. Not repairing your credit rating. The time to repair your credit is before you consider buying a home not after. Clean it up and you will save loads of money since you will get better loan rates. Better loan rates means you pay less interest over the life of the loan.

6. Not considering taxes, insurance, water, utilities, garbage, and assessment fees. Home ownership means you pay all of the extras too. Don’t underestimate these charges. They add up.

7. Not making sure all appliances, electrical outlets, plumbing, lighting, window and roof leaks. Many people rely too heavily on home inspectors who really don’t thoroughly inspect the things that you are going to be using every day.  Take the time to turn on and off all of the appliances, check water temperature and flows, look for good sealed windows and insulation, etc. It will pay off in fewer home maintenance fees –especially in the first couple of years.

Once you are in, don’t have buyer’s remorse. Look at the mistakes as a learning experience and look at your home as something you will enjoy for years to come.

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What’s the Best Wealth Building Investment Right Now?

by Fern Alix LaRocca

in 5. Investment Planning

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wealth building

I get that question all the time and I laugh. What’s good?  What is on a hot streak? There are lots of investment products out there that can build wealth and people treat these things like shiny new objects to pick off the shelf.

Every investment will have some sort of risk, some range of return, some tax implication, and some expense associated with it, and more. Sounds complicated?  It is!  But when you come from a perspective of looking at these things on the shelf and comparing them to each other, you come from a sense of poverty. You immediately assume that you are lacking something- whether it is a higher return on your money or a feature you like, or whatever it is that attracted you to that in the first place.

Each shiny object on the shelf tells you of something that you need or want or have to have. It could be a higher return or a tax feature or a safety element or a low expense ratio. But that doesn’t matter. What matters is that you are looking for investments to build your wealth through the perspective of not having what they offer. No wonder you feel confused! Everything looks attractive and you want them all but you can’t afford them, so you ask friends and relatives and read the paper and listen to television anchors for financial advice. What you get will be advice for things that worked for your friends- their situation, their tax bracket, or you will get people trying to sell you stuff in which they get a commission. In other words, your need to choose and compare investments will be clouded by other people’s judgment and conflicts of interest.  Sounds familiar? It is no coincidence that so many people have gotten burned with financial advice that was given by close friends and commissioned based sales people (remember your first experience buying a car? Ugh!) . We want someone to help us and we figure if it worked for Warren Buffett, or our rich buddy on the golf course, then it is good enough for us. We don’t have to do any due diligence because it obviously must be good. This strategy usually doesn’t end well- just look at all the friends and families that invested in Bernie Madoff.

In order to build wealth for ourselves and our families, we must take a bigger perspective. We must come from opening the lens to acknowledge the existing wealth that we have. When you can honestly acknowledge what we have, then we can see what we need to accompany what already exists. In other words, your investment decisions will become much clearer and easy because you come from a perspective of abundance- not poverty. With this approach you can begin to open to what your true needs are to choose the right investments at the right time to enhance what you already have. This clarity makes your personal finance life much smoother and less stressful. You can now concentrate on exactly what your needs are because you have insight into what you have more than what you lack.  That perspective is the one of abundance and wealth. This is what you need to cultivate in order to pick the right investments that suit your tax bracket, your risk tolerance, and your needs and goals. Focus on your wealth- however big or small, and you will drawn easily to the right choices.

 

 

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Build Equity Build Wealth By Knowing How to Refinance

by Fern Alix LaRocca

in 5. Investment Planning

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build wealth

To build wealth in real estate you need to know when a good time to refinance your mortgage is. Getting a good rate and at a low cost helps build equity fast and increases cash flow. The general rule has been if you can get two points below your current rate then that is a good time. Well, one thing about the financial industry is that the rules are always changing, and I am breaking the rules and you should too as part of your wealth building strategy. Here is why.

I got a call from a loan officer saying that the interest rates on my home loan had fallen and that I should consider a refinance now.  By the time I discussed it with my husband and ran the numbers to see when we would break even on fees, the rate had gone up. I missed my window of opportunity. Stubbornly I figured I will wait it out until I got the rate I wanted. Well, it took close to two years for the rate to fall a little more than 1% below what I am paying now (the rate I wanted). This meant a substantial drop in my monthly mortgage payment so I jumped on it to find out more. I chose a 5/1 ARM tied to the LIBOR with a 2.25% margin and had 0 points and I would pay closing fees. (Remember, there is no such thing as a 0 point 0 fee loan, or a free lunch. They just bundle it into the loan but you will pay.)

Let’s take a closer look at those closing costs:

Appraisal $665

Credit Check $6

Processing fee $550

Flood Clearance $20

Title -$1781

That is a total of $3,022. This lender allows me to use my own title company so I chose EntitleDirect, so my title only costs me $845.  My total cost now is only $2086, a savings of $936.  Woo-Hoo!

Let’s assume for example that my new mortgage would be $1,000 a month and my old mortgage was $1,500 a month, it would take three months before I would start to save money on my mortgage after I have recouped the fees.

Be wary. The mortgage industry needs to make it easier for people to understand why they should refinance and the costs involved instead of just selling the public on the lowest rates.

I hope this example has helped you understand the structure of how to figure out if a refinance is right for you and when you can save money net of the fees. This wealth building strategy also applies to rental homes, and second homes.

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Municipal Bonds-Safe Haven or Risky Business?

by Fern Alix LaRocca

in Investments

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I once practiced in an office building where a large legal firm was right next door.  A few times I would have casual conversation with the attorneys. I remember one in particular who was wary of investing in the stock market.  He had amassed a large portfolio of municipal bonds that he boasted about. He thought he had a secure financial future, and a guaranteed income tax free income stream from those bonds. I guess he never got the memo about being diversified to build wealth because his secure financial future is about to come apart.
JPMorgan Chase & Co. CEO Jamie Dimon announced today that there have been six or seven municipal bankrupties and more are on the way. That means more defaults on municipal bond income. Diversification, folks- it’s for low risk not no risk.

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Build Wealth In Down Times with These 5 Tips

by Fern Alix LaRocca

in 5. Investment Planning

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In challening times like this it is hard to build wealth . As part of your personal do it yourself financial plan you need to be able to ride out economic downturns associated with high unemployment, slow consumer spending, and a depressed stock market.  You can keep your head above water with these five tips :

1. Think past frustration, fear and/ or anger and get educated about possibilities . Your greatest worry in the unknown. Focus on what you can do and figure out when you should do it. Make it something you do regularly. For example, at the end of every quarter, I review my brokerage statement. It gives me peace of mind throughout the rest of the year, that I am on track for my financial goals.

2. Time to look at all the options. Rarely is a situation so black and white that workable options don’t exist. Shop around for the best investment that you can afford, make sure you understand it and contemplate if it works well for what you want to accomplish .

3. Plan for the next phase of your investments by reviewing your risk tolerance . Can market opportunities overshadow risk for you? This will avoid the shock of a failed investment. Know the risk and make sure that you can stomach losing money. If not, then stay away.

4. Sit tight. Now is not the time to make risky career moves. Keep your job by staying in tune with the needs of the company and be flexible. Reconnect with past business colleagues and keep up your networking .

5. Focus on you and your family’s goals and plan your investment strategies to meet those objectives.

A clear understanding of your needs, knowing what to expect, and being prepared is the key to success . You need to where you stand and what you can do now and into the future. A strategy conversation is an opportunity to understand your concerns and help you move forward from where you are to where you want to be even during a recession. Get one now with a Wealth Coach to insure your long term financial success.

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How to Build Wealth without Fear of the Unknown

by Fern Alix LaRocca

in 4. Identify Goals, 5. Investment Planning

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Do you invest to build wealth because of fear of the future?  You probably will say no but many financial firms want to change that. Here is why:

I get lots of financial magazines targeted to the professional financial advisor and despite the ads touting investment companies boasting their benefits and value add to our clients, there is still a lot of slick psychological fear based marketing. Take this title I received,

“Advising Boomers in a World of High Taxes”

I didn’t know we were in a world of high taxes. In fact, we have been in a low tax rate environment now for the past 50 years according to the Urban Institute-Brookings Institution Tax Policy Center. They say  the tax rate are the lowest it has been in the past 50 years, with the exception of the period 1977 to 1986, when it was zero (but when there was no standard deduction, as there is today).

The article goes on to say,

“Taxes may be rising. Beginning in 2011 tax laws may change, and not to the benefit for many investors. Unless new proposals pass by year-end to eliminate or modify these changes, investors need to be prepared for higher taxes.”

Did you notice the twice used “may” word.  Doesn’t that make you just want to go out and change your portfolio to “prepare” for the coming higher taxes?  Of course, this financial firm has everything to gain by getting your funds moved over to them and you have everything to lose if the high tax rates don’t happen.

We live in a world of constant change. As a Financial Planner for over 25 years, I can honestly say that more changes are on the way. So how to we plan for those changes? We don’t. I always plan on what is happening right here, right now. We don’t know the future (no crystal ball here) and I would never give advice on what the Congress, the Senate, and the President, MIGHT pass into law.  When it is law, I give advice on what you can do about it, but until it is reality, you are just speculating on the future and do you really want to gamble with your hard earned money? (Some of you already did in the last downturn.)

So if someone wants to talk to you about financial strategies to build wealth based on proposed legislation, run -don’t walk the other way. And when some financial pundit, news anchor or newspaper article talks about the coming financial crisis, turn off the TV, or turn the page. We have enough to worry about in real time without worry about what “could happen”.  Don’t what if, shoulda, coulda, woulda your investments.  Invest to build wealth for what you know is real- this time, this tax rate and this goal that you have for your future.  Now that’s reality.

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