Click to Watch Video

A low interest rate environment makes it difficult to earn a decent return on a bond portfolio, but it can help reduce living expenses if you are still paying an above-market rate on your mortgage or other debt. Historically, mortgage rates have been most closely tied to the yield on the 10-year Treasury bond. Why is that? The average 30-year fixed mortgage only has a life span of about seven years (due to the homeowner moving or refinancing). Since the yield on the 7-year Treasury note is generally similar to the yield on the 10-year Treasury, the current 10-year is most often used as a benchmark when setting 30-year mortgage rates. Why? Because the government issues 10-year bonds more frequently. Confusing? Yes, but I share all this simply to point out that if you see the yield on the 10-year Treasury bond falling, mortgage rates are probably headed down as well (and vice versa).

One can expect that there will always be a positive spread between the 10-year Treasury yield and the best 30-year mortgage rate available. Loans to you and me are more risky than loans to the United States (debatable?) and therefore, should command a higher rate. The spread varies over time, but today the difference is about 2%, or 200 basis points. If you would like to read more about how interest rates affect the housing market, click here.

Last week, 30-year mortgage rates hit another all-time low. According to BankRate.com, the national average for a 30-year fixed rate mortgage is 3.76%, and 3.02% for a 15-year fixed mortgage. Money is cheap (if you have good credit), but low interest rates are not reasons enough to purchase a new home. Many other factors should be considered and discussed before purchasing more house.

If you have a mortgage today and your rate is higher than 4.5%, give us a call. We would be happy to put you in touch with one of the best mortgage lenders in Central Texas.

Both candidates are likely to spend a fair amount of time talking about the maximum tax rate on capital gains (currently 15%) as well as the rate on qualified dividends (also 15%). One side of the argument is that a low tax rate encourages investment and the efficient allocation of capital. The other side will argue that raising the tax (a little) will not hinder economic development and will make the tax system more equitable.  In other words, many of our wealthiest citizens receive the majority of their cash flow in the form of dividends and capital gains, which are currently taxed at a lower rate than most Americans pay against their wages.  Ultimately, it will be up to the voters to decide come November.

In the meantime, think about your own personal tax strategy.  There’s an old investment maxim that says don’t let taxes direct your investment strategy.  That’s true, but we also shouldn’t ignore taxes when it comes to our investments.  Maximizing “after-tax return” is what really matters to individual investors.  The timing of investment transactions and the organization of your investments can make a big difference between what you keep and what goes to the government.  A good wealth manager will talk to you about taxes, and together with your tax advisor, will help you understand changes in the tax system and how those changes might impact your personal financial plan.

If you would like a second opinion on whether your investment strategy is aligned with the proper tax strategy for your individual situation, contact us for a confidential consultation.

While I believe that work is a reward in and of itself, I also believe that maintaining good financial health should be combined with the goals of maintaining good mental and physical health, as well. While we can’t time our death any more accurately than we can time markets or interest rates, there are certainly time-tested methods to improve the odds of success. Just like investing, we should focus on that which we can control.

I prefer to imagine a retirement that is active and stimulating. Traveling, playing golf, spending time with grandchildren–these are activities that will require good health and stamina. In conversations with older clients, we often hear them say that their top priority is to live independently for as long as possible. In addition to a solid financial plan, good health is imperative to achieve that objective.

Are you spending sufficient time and resources to maintain your health? Have you created a written plan to achieve your health objectives? Adopting a healthy diet and exercise regimen is a great start, but building a good relationship with your physician is also important. With our busy lives, it is easy to put regular health check-ups on the back burner, but that could prove to be a huge mistake. Perhaps thinking about your health in relationship to retirement might provide the extra incentive necessary to be more proactive in this area.

The Cooper Clinic in Dallas has been a leader in preventive medicine for over 40 years and has been named one of the top destinations for a comprehensive physical exam by Fortune and Worth magazines. If you are interested in taking your health to the next level, check out this brochure of their preventive medicine approach.

Here are a few observations about Jacob that I found significant:

• Spent between $5,000 and $7,000 per year for an entire decade
• Earned less than $70,000 per year during those ten years
• Married, no children
• Rides a bike, walks, or takes public transit
• Recommends spending $200-$300 per month per person for living arrangements
• Values experiences over things

Before you dismiss Jacob as nothing but a financial masochist, he does seem to have plenty of interests and hobbies.  He spends a relatively significant amount of money on martial arts training, has a goal of cycling across America, and stays current in geopolitics.  Recently, he accepted a quantitative trading position because it sounded like fun.

I’m not suggesting this is a lifestyle for everyone, but I enjoyed discovering his solution for a problem that most Americans struggle with on a daily basis–overspending.  As much as I value the concept of living a financially responsible life, I occasionally like to treat myself to certain things and experiences that happen to be expensive.  Let your income and financial plan dictate what is a healthy balance!

The primary tenets of his philosophy apply to everyone, regardless of income level:

1. Financial independence is more easily obtained by finding ways to control expenses than by trying to increase income.
2. A happy and fulfilling life can be achieved with much less money than is commonly assumed.

Jacob provides a “21-Day Makeover” for anyone interested in taking the concept of early retirement to the extreme.  He makes some interesting points which I found thought provoking.  See what you think…

• Live close to work.  Not only does this reduce transportation costs, but it can improve quality of life and create a more tight-knit sense of community.
• Join a challenge.  Examples might include, “buy no clothes for a year”, “live without a car”, “spend less than X dollars per month on food”.  Always working towards some type of challenge is motivating for me.  I use personal challenges all the time in order to achieve big goals.
• Find a free hobby.  Learn a language, develop a new skill, volunteer.
• Rethink groceries.  Consider giving up meat and dairy for a period of time.  The majority of the world survives on beans and rice.
• Increase deductibles.  Insurance should be used to protect against catastrophic events.  Set up an emergency fund, raise your deductibles, and watch the premiums go down.

We would love to hear your thoughts after visiting Early Retirement Extreme.  Do you think he offers any valuable takeaways?  Or is he just plain nuts?

What is your system or strategy? How do you maintain a lifestyle within your means? Regardless of income, we all need some type of method (formal or informal) to help us live responsibly and stay out of debt. Thankfully, we don’t all need to create a detailed budget in order to implement a successful cash flow system. Listed below are just a few of the strategies that have worked well for our clients:

Traditional Budget – Set monthly spending targets for expense categories. Track actual spending versus planned spending over time. Make modifications to lifestyle or budget, as appropriate. If married, both parties need to “own” the budget and be accountable to each other for making it work. This system appeals to those who are organized and detail-oriented.

Forced Budget – Set detailed savings goals and allocate money to these “buckets” as soon as it is earned. Spend whatever is left, but don’t run out of money before the end of the month. Those that use this system generally have very little left in their checking account at the end of the pay period. This simple system appeals to those who are busy, disciplined, and focused on long-term goals.

Frugal Spender Budget – Some people have minimal needs and wants. Overspending is not a concern and cash tends to accumulate. Often, the Frugal Spender will be risk-averse and may keep too much money in low-yielding checking and savings accounts. The appropriate strategy is to have some amount of money transferred from checking to an investment account on a regular basis so that the money is working more efficiently.

All-Cash Budget – This is a rudimentary, but effective method for managing expenses. There are several ways to implement this strategy, but the “envelope-method” is perhaps best known. The basic idea is that you remove credit cards from your wallet and pay cash for everything. At the beginning of each month, money is withdrawn from your checking account and placed in envelopes, each one labeled with an expense category. When all the envelopes are empty, you have to wait until next month to make your next purchase. This system is great for anyone who wants to keep track of expenses without a lot of recordkeeping. It also appeals to those who want to create some discipline with respect to spending.

I use a variation of the envelope method in my personal life. In order to keep things simple, I ditch the envelopes and have all of my fixed costs (mortgage, utilities, insurance) taken directly and automatically from my checking account. After taxes, giving, and saving, everything else is considered discretionary. To pay for these expenses, I withdraw one lump sum of cash at the beginning of the month and that’s all I get. There is something very powerful and emotional about paying with the green stuff. I’m fairly confident that I spend less using cash than I would with a credit card.

Whatever method you use for managing cash flow and accomplishing your long-term financial goals, it is important that it works for you and your family. If you are at the point in life where you have experienced a measure of success and are ready to create a detailed plan to make work optional, give us a call. We can help you take that next step with confidence.

According to my insurance company, about 85% of stolen cars are eventually found, albeit in various conditions.  My insurance company said they would reimburse me for the value of my vehicle if it was not recovered within ten days.  Apparently, most cars are found rather quickly, but I was hoping for a check.  The idea of having to drive stolen merchandise did not sit well with me.

With check in hand, I am beginning to shop for a new vehicle.  Like most things in life, the final decision comes down to making compromises.  This may surprise some readers, but I actually enjoy shopping for cars, houses, and other big ticket items.  I have traveled this road often enough to know the wide range of emotions I am likely to experience and I am intrigued by the “game”.  My initial thoughts usually drift toward the dreamy or material side of the purchase.  I can easily envision driving a luxury car and I rationalize to myself, “I deserve this because I work hard and save diligently.”

As the shopping process continues, however, I eventually return to my practical side and begin asking myself these questions, “Will this make my life better?  Does this purchase represent my values?  What is the opportunity cost?  How will this purchase impact my long-term financial goals?”  It is so easy to rationalize just about anything in order to get what I want, but these reflections help to add some perspective to my dreams.  Don’t get me wrong—I don’t think there is anything wrong with wanting a nicer house or car (or whatever) as long as one is willing to set a goal and work toward achieving it.  The problem lies in allowing our short-term wants to supersede our values and long-term goals.

Here are a few rules that help to keep me grounded when purchasing a car:

1. Pay cash.  This is the most important rule (and the hardest for most people).  Paying cash reduces my risk and helps me clarify my needs and wants (including those expensive add-on options).
2. New vs Used.  Consider purchasing a late model vehicle that is still under warranty instead of new off the lot.  Buying used has always been a clear decision for me, but the car market has changed since the last recession.  For example, the value of some used cars has remained high while manufacturers have been discounting new cars to keep sales strong.  Suffice it to say that this rule needs to be examined on a case-by-case basis.
3. Buy a reliable vehicle.  Do the research and make sure you are buying a model with good reliability ratings.  Historically, some brands have much better track records.  Our family got 200,000 miles and 14 years out of our last vehicle.
4. Think about resale.  No matter whether you decide to buy new or used, I prefer to buy a model that is not due for a major body style change in the near future.  Sites such as www.edmunds.com can help guide you in this regard.
5. Pay the least.  A car is a commodity; work hard to find the lowest price on the car you want.  When purchasing a new vehicle, research the dealer invoice and any incentives offered to the buyer and/or the dealer.  Typically, manufacturers provide dealers with something called a “hold-back”.  This is invisible to the consumer, but can sometimes be as high as 3% of the invoice.  Visit www.truecar.com to get an idea of what others are paying for the car you want.
6. Get the most.  In the majority of cases, you will receive a higher price for your old car if you sell it yourself.  Visit www.craigslist.org to post your vehicle.  Yes, it is somewhat of a hassle, but it could save you thousands of dollars.

Often when we meet younger prospective clients and begin talking about financial planning, one of the questions they want to know is, “When can I retire?” The Dutch company, ING, does a great job of connecting with this common question by using the phrase, “What’s your number?”, in their commercials. We have discovered that while most people want to know their “number”, few actually make a clean break from full-time work to full-time retirement once they hit it. The transition is usually a process.

There are three common scenarios that keep people from achieving their original retirement goal: (1) The allure of a certain lifestyle becomes more appealing than early retirement, (2) All goes according to plan, but once the magic number has been achieved, the client is enjoying work so much that they are not ready to stop, (3) All goes according to plan, but the client is too driven to stop (can’t stand the opportunity cost of not working).

This past weekend, I was fortunate to spend some time with my parents and we ended up having a very interesting discussion about retirement. I have always considered retirement (or the freedom not to work) to be the ultimate financial accomplishment. My picture of retired life includes more travel, more flexibility, and less responsibility. My parents, on the other hand, based on what they and their peers experience talked about needing a new type of mental toughness in retirement. Without the fixed schedule that work provides, you need to make yourself get out of the house on a regular basis and you need to motivate yourself to be productive. The importance of scheduling activities and social engagements becomes even more important in retirement. This conversation put my personal retirement dreams in a different light and I was reminded of the fact that most things in life are best enjoyed in moderation. A retirement without purpose is nothing to look forward to. It is important to have outlets, whether it is volunteer opportunities, hobbies, continuing education, or your morning coffee group.

Don’t get me wrong! Achieving financial independence early in life is still a major goal, but I have a different perspective. I have plenty of interests to keep me busy in retirement so that is not the problem. However, without a daily schedule and the constraints that work provides, it may be more difficult than I imagine to remain disciplined and feel engaged. I truly enjoy the challenge and sense of value that work provides. Perhaps true independence is more about structuring work around your life versus the other way around. The term “retirement” is being defined differently today than it was 30 years ago.

What does it mean to you?

It has been several months since we were last out on the lake, but this amazing spring weather brought back the memories.  Rowing is one of those sports that looks a lot easier than it actually is in practice.  Rowing at a competitive level takes concentration, coordination, and teamwork (not to mention strength, endurance, and a lot of time in the water).

On the surface, managing one’s personal financial life seems relatively straightforward as well –make money, save money, invest prudently–not too complicated.  In practice, however, our financial lives can become much more complex.  If you are reading this, you have probably achieved some measure of success in your career.  That’s great, but has that success translated into financial independence?  Are you financially fit?  Are you managing your resources at a competitive level?  If not, perhaps all you need is a good coach to help you develop a sound plan to keep you on track so that you can achieve your important long-term goals.

Listen to counsel and accept discipline, that you may be wise the rest of your days.

Proverbs 19:20

If you were enjoying Spring Break last week, you may not have noticed the following news items: S&P 500 passes 1,400 (first time since May 2008), NASDAQ closes above 3,000 (first time since November 2000), DJIA pushes through 13,000 (only 7% below an all-time high). For investors, life seems good again–hold that thought.

Remember the “fear gauge” that was so popular during the bear market of 2008-09? Traders refer to it by its ticker symbol, VIX. It is a measure of implied volatility and is often used to assess investor expectations for stock market volatility over the near term. In other words, when the VIX is high (most recently in November 2011), investors are usually scared. Last week, the VIX hit a post-financial-crisis low, meaning that fear is in scarce supply. Isn’t it amazing how quickly we can feel safe or frightened when it comes to our finances? Certainly, the underlying fundamentals of our economy are not so capricious.

A prudent investor realizes that neither the good times nor the bad times are continuous. The economy is cyclical and its future direction can not be predicted with certainty. Most people fall into the trap of making investment decisions near the apex or trough of these economic cycles. They allow their own emotion and the “madness of the crowd” to convince themselves that a major reaction is necessary. It’s human nature (fight or flight). While this inherent trait can be helpful in some situations (facing the school bully on the playground), it can be disastrous when it comes to our personal finances.

For example, those who were lured into the Florida real estate market in 2006 with the promise of easy money are probably not too happy today. The same is true for those who sold significant stock holdings in late 2008 and early 2009 because (at the time) it seemed obvious that our country and economy were doomed. Unfortunately, the examples don’t have to be so dramatic or unusual to cause real damage. The family who uses a recent increase of income and a five percent down payment to justify the big house are also headed toward potential disaster. The margin for error is slight.

The stock market doesn’t always make sense in the short run, but we believe that corporate earnings will drive stock prices higher over the long run. There will be bumps along the road and we know that; in fact, we expect it. The next downturn might occur this year. It might not. Either way, I am prepared because my projections are conservative and economic downturns have already been factored into my Financial Plan. If you don’t have a Plan, you need to create one. If you want help, give us a call. Managing risk is not as exciting as seeking return, but it is crucial to your success.