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

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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

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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:

  1. 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 50th wedding anniversary. If you do, you’ve saved yourself a lot of money and anxiety in an emotionally difficult time.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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).
  8. 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).
  9. 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.

Should you roll over your 401(k)?

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Congratulations! You just got a get-out-of-jail card, you’re shaking that company’s dust off your feet, etc., etc. Unlike most people, you’ve actually managed to save some money in the 401(k) and now you’re wondering what to do with it—leave it parked, or roll it over into an IRA. Double points if you actually understand what it’s invested in currently. So, I’m going to give you 4 reasons to roll it over, and 4 reasons to leave it where it is.

Yes, roll it over if…

  1. Your current plan has bad choices, and a lot of them do. You may have been stuck with some stinker funds—high commissions, limited choices, high management fees—while you worked for the company, but no more. Move it to a no-load mutual fund company, and get some decent portfolio advice from a fee-only financial planner (that would be me, in case you’re wondering).
  2. You might forget about it, move, or be hard to find in the future. Also, as we all know from the news, heads of companies go to jail, retire, or flee the company and if your 401(k) is with a small company, there’s some probability that you might have a little difficulty tracking it down in 10 or 15 or 30 years.
  3. You’ve had multiple employers or have multiple accounts. Managing dribs and drabs into a consistent and reasonable asset allocation is a nightmare. The fewer the accounts, usually, the better the plan.
  4. You have a new job with good investment choices in the 401(k). You can roll over the old one into the new, and keep your portfolio to a manageable number of accounts. If your new plan allows, you also might be able to borrow against it in an emergency.

No, don’t touch it if…

  1. You intend to spend it. No, no, no, no. Don’t touch it and you might actually have a retirement instead of doddering in to work at 85 on your walker, like all those people who tell me they’re never going to retire. At least you’ll have enough money for an assistant to wheel you in.
  2. You’re in a profession or conduct activities which give you a high probability of being sued. 401(k)s offer slightly more creditor protection—although you might want to address that by insurance.
  3. You want to roll over a traditional IRA to a Roth. If you’re thinking about rolling a small IRA into a Roth, you might want to do so before you make it a big IRA. Even if you don’t roll over the entire amount, all IRAs will be taken into account by the IRS in figuring how much tax you owe. Also, I sometimes suggest that high income earners who are good savers consider contributing to a non-deductible IRA, then immediately converting it to a Roth. Can’t do it as easily if you have other IRA accounts. The details of this are too long to explain in this blog post, but I’d be happy to discuss them based on your specific situation.
  4. You’re not going to pay any attention to the investments or learn anything about portfolio choices. May as well leave it where it is. At least you won’t stick it in CDs or leave the check sitting on your dresser for 61 days.

None of this is intended as specific investment advice because obviously it depends on your personal circumstances. The biggest problems I see with 401(k)s are that they’re too small (at least contribute enough to get the employer match, and preferably contribute the legal maximum), and the employee has made dumb choices. Typical conversation:

            “Tell me how you selected this (absolutely horrendous) choice of funds.”

            Choose one answer:

            □ “The name sounded good”

            □ “My brother-in-law told me it was hot”

            □ “I saw their ad”

            □ “(Some idiotic) TV money guru recommended it”

            □ “I wanted my money to grow and this was called a growth fund”

            □ “I wanted my money to be safe so I chose the government fund”

            □ “Threw darts” (probably the best of all of these)

It’s your future, and I bet you worked hard enough to earn it. Take some time to think things through, do some reading, and get good advice.