My take on another popular money guru

Posted on June 22, 2012June 22, 2012 by Danielle

: Confessional dans la cathédrale de Bourges (Photo credit: Wikipedia)

There’s a lot to like about Dave Ramsey’s program, but don’t drink the Kool-aid just yet. Recently a couple of clients have come to me after attending one of his programs. I’ve read several of his books before, but this time I took a good look at his website and promos. There are a few, er, issues there.

Ramsey is what I’d call a conservative Christian, and therefore a lot of churches sponsor his programs, or religious organizations use his group to present programs for employees. But, as generations of journalists have been told, “If your mother says she loves you, check it out”. Don’t believe financial advice just because someone is a friend, or a brother-in-law, or claims to be religious. All scoundrels prey upon trust.

I’m not saying Ramsey is a scoundrel. I think he gives excellent advice on budgeting, and has a nifty tool on his website that takes your income and instantly assigns amounts to his recommended spending categories. His recommendation of 10% to charitable donations may be a little high for some people, but hey, it’s a good goal.

I have nothing but admiration for his method of getting out of debt (the “debt snowball”) and recommend it when clients have that issue. He has lots of good info on his website about purchasing a car for cash, managing a budget, etc. Or get one of his books out of the library: there are a bunch and they basically all say the same thing.

Gosh, the guy even emphasizes the need to work with a professional planner, which I gotta love, right? Um, not so much. There’s a tab called “Dave recommends” and, well, these folks are just plain advertisers. Maybe Ramsey likes them, but they’re paying for the endorsement. And what about the financial planners (he calls them ELPs—endorsed local providers)? They’re salespeople. How do I know? Because the first requirement is that the “advisor” be regulated by FINRA. FINRA regulates the brokerage industry. Fee-only financial planners are regulated by the SEC or the State (depending on the size of assets managed). If you go to a financial “advisor’s” website site, scroll down the page to the tiniest print you (can’t) see. If it says “Securities offered through [blah-blah]. Member FINRA, SIPC” well, you’re about to be socked with commissions or some dumbo wrap account. You are NOT looking at the website of a fee-only financial planner.

How in good Christian conscience Ramsey can recommend “advisors” who are going to cost his stressed or frugal clients huge management fees, significant commissions, and nightmares transferring accounts when they finally wise up, is beyond me. Look for advice from people who have no financial interest in selling you some crap (check out bogleheads.org, for example), or who are paid by you and are legally obligated to work for you in your best interest (fee-only advisors).

Dave needs to go to confession.

Skimping on the small stuff: is it a latte bunk?

Posted on June 14, 2012June 14, 2012 by Danielle

I think it was David Bach who coined the term “latte factor”, the term for how easy it is to piss away a lot of money by spending a little at a time, and I think he’s right. The clients I see who have the most assets to plan with are generally people who watch the small stuff. It’s a certain habit of mind that says Hold on to your dough. Think a long time before you dribble it away. And that habit tends to make people scrutinize purchases and eke out savings wherever they can. But people who focus on the latte factor can go wrong in two big ways.

The first way is sweating the small stuff and missing the big wins. Of course, if you’re not saving anything at all, you better do some sweating, and saving your lunch-and-Starbucks money is better than saving nothing at all, or even spending beyond what you make and ending up in the minus category. But I talk to too many people who would never buy anything full price, but never re-evaluate their car insurance, their cell phone bill, or even whether their Megahouse is really what they can afford. Cutting your car insurance in half, or buying term instead of whole life insurance can buy an awful lot of lattes. Ramit Sethi makes a lot of fun of the latte factor in favor of recommending the big wins, and I’m with him on that half.

The second way I see people go wrong is to save and save and save, then get rooked by some smarty-pants broker because they don’t really understand how to invest and some “Raymond Jones” invited them to a free fancy restaurant for lunch and called themselves a financial coach. Sure, they probably avoided individual stocks, but they sure got sold some expensive commissioned mutual funds or fancy “managed accounts” and they don’t have a clue what it cost them or what they actually bought. Here’s the truth—you’re going to pay for solid financial advice. Nobody helps you for free, just like few doctors or lawyers will work with you because you’re nice. Even fee-only planners have to eat and send their kids to college. But KNOW what you’re really paying. Even though you’ll have to write a check to a fee-only planner (it won’t be disguised in management fees, sales fees, wrap fees or whatever else the brokerage industry has cooked up) and gee, that hurts, it’s still going to be cheaper than the true cost of working with your friendly neighborhood broker. But even before you go to a fee-only planner, read something! There’s tons of free advice at NAPFA, Get Rich Slowly, Motley Fool or check out my list of recommended books. The best way to save yourself some money is come into my office already knowing something. You’ll benefit far more from advice you understand.

Financial honeymoons: advice for the engaged, newlyweds, old marrieds and the divorced

Posted on May 31, 2012May 31, 2012 by Danielle

It’s nearly June, which means weddings for a lot of people and of course I have some advice. Er, my record on marital success is not too good, so I’m going to stick to financial pronouncements here. While planning for wedded bliss, you should also have Plan B: that you may find yourself suddenly single again. Not necessarily divorce, but also losing a spouse to death, long periods apart for work or military service, disability or illness. Okay, maybe that’s too gloomy for June, but not as bad as having no plan and trying to cope with life’s surprises. So I offer the following for your consideration:

Consider a prenuptial agreement. Yeah, I know it’s anti-romantic. It’s usually suggested by the person with the most dough. “If he/she really loved me, he/she would sign/wouldn’t ask.” Et cetera. Now tell me, do you think it’s important to have homeowner’s insurance? What’s the likelihood that your home would burn down? But you still have the insurance (or you won’t get a mortgage) because the loss would be so catastrophic that it would be hard to recover. Divorce falls into that category, too—ask anyone who’s been through one and is looking at what’s left in their retirement accounts afterwards. When do you think you’ll make fairer, more loving decisions—when you’re planning for a life together or when you’re snarling at each other with dueling attorneys? Contentious divorces can easily cost EACH person $30,000-$50,000. Decide how income and assets (both marital and pre-marital) will be handled, and plan for the impact of childcare on the economic viability of anyone who stays home with the kids. If you never need the agreement, great—burn it at your 50^th wedding anniversary. If you do, you’ve saved yourself a lot of money and anxiety in an emotionally difficult time.
A corollary: don’t marry anyone who springs a prenuptial agreement on you a couple of days before the wedding. Really, cancel the ceremony—you now know that you are marrying a person who’s willing to exploit you in a moment of weakness and win by coercion. I guarantee this relationship will not work out, and it will be way cheaper to cancel the hall and eat the cost of the dress or the ring than it will be later, both emotionally and financially. BTW, that coerced prenup will probably not stand anyway, but you can double the costs of the attorneys fighting over it.
Maintain a credit card in your individual name only. If you’re in any kind of crisis—a job loss, disability of the other partner, sudden death or illness, or (guess what?)—it can be really tough to get credit, particularly if you’ve stopped working for any period of time. Hold on to one or two, even if you plan to use a joint account most of the time.
Keep some money of your own. Everyone deserves some discretion and decision making that they don’t have to account for to their spouse. If there’s ever an emergency, you need to be able to lay your hands on some cash. Besides, how are you going to buy your sweetie gifts? As a parent and a daughter, I can tell you there’s real joy in a surprise $20 handed to a child once in a great while. A separate account may be mad money, but it keeps you financially alive.
Both spouses should understand investments. If the most knowledgeable spouse can’t explain the reasons for the investment to the least knowledgeable spouse, well, ahem you really don’t know what you’re talking about. Or you’re off on some harebrained scheme that will land you in a financial planner’s office with nothing to plan with. Or the spouse will be the victim of some ruthless broker—er, financial coach, manager or whatever they’re styling themselves du jour—where your hard earned dollars will be buying the broker that home in Winnetka. Your home, maybe. It’s not cute to act like a dimwit. It’s not cute to act like big Daddy. If you’re old enough to get married, you’re old enough to think about finances and investing. The parent-child act gets old pretty quickly—usually about the time you have your own kids. Force yourself to read about investing. Start simple, but start.
Think a long time before you decide to stay home full-time with the kids. I’m not going to comment on the social and emotional reasons—they’re valid and I DID stay home with my daughter for much of her childhood. But realize that if you do, you are choosing something that will adversely impact your finances for most of the rest of your life. The loss of time in your professional field will mean that when you do return to work, you will be far behind your age group in skills, experience, and network. You may never recoup that loss. Also, the amount of Social Security benefits you earn may take a big hit. Particularly for a parent who stays home for twenty years and maybe had their children after 35, the effect can be devastating, particularly if there is a late in life divorce. You will only be entitled to ½ the former spouse’s benefit, and even with a high earning spouse, that monthly benefit is unlikely to exceed $1,200—giving you a retirement income from Social Security of $14,400. Woof. If you can manage to work part time or freelance, you’ll be far better off. Your spouse and your kids will respect you a lot more, I guarantee.
Keep any inheritance separate. It’s a nightmare in a divorce, but also, each person deserves some separate identity. Also, you may each have some asset protection in the event you get sued for something or need long term care. (This is murky and depends on the individual circumstances).
Talk to a lawyer about how to title house purchases. If either of you moves into a home owned solely by the other, and you split later, it’s lawyers delight. The non-owning spouse may have a claim on some part of the house if improvements were put in or the equity went up during the marriage. On the other hand, a jointly owned home can make a split pretty tough, too. Who gets the house in a divorce probably causes more wrangling than any other issue. On the other hand, if there are kids from a previous marriage and a spouse dies, the surviving spouse might find themselves homeless if title isn’t in order. (Another good reason for a pre-nup).
Update your insurance, account beneficiaries, and get estate documents prepared. Of course you’re going to be happily married forever. Nobody plans to die suddenly, but it happens. Here’s one where “If you really loved me” really does apply.