You may be aware that the Senate recently passed bill s. 3217, known as the Restoring American Financial Stability Act bill (“RAFSA”), in a vote of 59-39 and renamed it H.R. 4173, the Wall Street Reform and Consumer Protection Act. Broadly speaking, this 1,500 page bill seeks to overhaul the financial markets in order to avert the next financial meltdown.
Do you really think this bloated behemoth of a bill is going to do that?
Where were the lawmakers before the mortgage meltdown? Before the fall of Lehman Brothers? Before Merrill Lynch was bought by Bank of America? Before Madoff?
The answer is: asleep at the wheel, completely ignoring their responsibility as elected officials to take steps to avoid problems, BIG problems, before they boiled over into a terrible mess.
This isn’t a political party finger pointing exercise. The whole political system that seeks to protect citizens flat out failed us all. Why? Because status quo, business as usual reigns.
So in order to lock that barn door tightly as the parade of horses frolic and gallop freely in the pasture, the federal legislature now addresses the tremendous problems that permeate the financial markets by passing this obese monstrosity of a bill to once again fleece the American public into believing that they are doing something to make your financial markets safer. “That’ll never happen again!” is the refrain from Capitol Hill while the Senators seek to attach 300 (!) various pet amendments to the bill. Among the amendments attached to this blimp of a piece of legislature are such that seek to regulate certain transactions involving material mined in the Congo, to allow lead-paint removal by uncertified contractors, and to condemn Myanmar for human rights violations. And they question why the American public is fed up with our political system?
Granted, there is some good that will come out of this bill when it is signed into law. One amendment to the bill, proposed by our very own Dianne Feinstein, seeks to prevent social security numbers from getting into convicts’ hands when they handle paperwork in data entry positions while incarcerated. Another part of the legislation seeks to force banks to divest of their swap trading desks and hedge fund activities. But even these measures beg the question: Why have our politicians allowed this until now?!
In addition to this Johnny-come-lately approach to staving off the next financial crisis, our national debt stands at nearly $13 Trillion at this time and it simply is not being addressed by our elected officials. (See www.usdebtclock.org as well as www.treas.gov). Not only did they do nothing to stop the financial crises that have gripped our nation but they continue to do nothing about this insane amount of money that we owe to the rest of the world, including $895.2 Billion to China and $784.9 Billion to Japan as of March 2010 (see http://www.treas.gov/tic/mfh.txt).
So what the heck does this have to do with you and your finances?
The crystal clear message is not to wait for government largesse to be there for you in your time of need. Not only is there a raging debate over the future of Social Security and unfunded entitlement programs such as Medicare, but the government can’t stop the frauds it says it can as exemplified by the SEC snoozing while Madoff continued to rip folks off to the tune of billions of dollars. Legislators were asleep at the wheel while the mortgage crisis unraveled and financial markets crumbled. There is no viable plan to reduce the country’s annual deficit much less the overwhelming debt our country faces.
Instead, the only way to avoid being subject to letdown in your time of need is to take your financial matters into your own hands.
Some of you may be saying to yourself that you already have. You have your investment brokerage account that contains your well thought out stock and bond portfolio, you have your house and investment property which thankfully has not tanked (much)in San Francisco, and you have your pension and/or Social Security credited to your bank account each month while having little or no debt. For those that have your financial house in order, good job.
One frequent oversight for this seemingly ‘made’ group is lack of an incapacity and estate plan. Without one, all you have worked for may evaporate at the time you are least able to personally deal with it. There are strategies that exist for you to ensure that your wishes are upheld while you are incapacitated or dead, to minimize taxes in the process, and to cement your legacy in the way that you wish. If you have not taken the steps to implement these strategies, your ‘back end’ is seriously exposed.
For those with nice sums in their IRAs or other tax-deferred accounts, with the national debt as large as it is, do you think that income taxes will be higher or lower in the future than they are now? If you, like so many others, think that they will be higher, there are steps you can take now to minimize your future income tax exposure. Keeping your funds tied up in tax-deferred accounts will not reduce your taxes, but rather just push them out into the future when you have no control over what the tax rates will be. To avoid a potentially serious future income tax bite you can reposition your assets now, before any tax increases take effect.
For those of you who are not in financial nirvana, the first step is to climb out of debt. I believe some debt is OK when used strategically such as to purchase a house because you need a place to live or to buy a car which is needed to go to work and earn a living. It’s advisable to keep spending under control to minimize unnecessary debt so it doesn’t consume you.
When your debt is low so that your income is funding your living expenses and there is actually ‘extra’ left over each month, the next step is to take it and build up a rainy day account. Put some aside each month automatically via auto deposit to pay for those unexpected needs such as car repairs or new appliances when the old O’Keefe and Merritt breaks down. A rule of thumb is to aim for 3 to 6 months of living expenses set aside in a readily available liquid account such as a savings or money market account. Don’t insist on a high interest rate on those funds – you just want it to be there when you need it.
But there are even bigger expenses to consider.
What happens if you have taken out a large home loan and become disabled to the point that you cannot go to work and earn your living? Other than losing your job due to downsizing or being fired, disability looms as a big reason why folks are unable to pay their loans back. It is advisable to have adequate disability insurance which you may be able to obtain through your employer. If that coverage does not cover enough of your living expenses, seek out a personal policy that once you obtain, you have as long as you pay your premiums when due. Then, you don’t need to worry about whether your current employer will continue to offer a disability benefit or if your future employer even offers one.
If you are still in your wage earning years and have not yet built up your nest egg, life insurance is the way to leave something behind for the ones you love to provide for what you would have if you were still around. Broadly, there are 2 types of life insurance, term and permanent, and they both have their merits. Although nothing can ease the pain of loss of a loved one, if you are gone you will not be able to provide for your family and life insurance pays out to your loved ones to at least help with the financial loss.
Our politicians enact measures too late to address the problems wrought and put things in place with significant questions as to whether the new measures will do any good. Our country is in a mind-boggling amount of debt. You would be well-suited to take your financial matters into your own hands in a comprehensive manner instead of leaving them in the hands of Uncle Sam.
Christopher L. Arnold is a Certified Financial Planner® Professional, Chartered Financial Consultant®, and Chartered Advisor for Senior Living® as well as an Insurance Broker licensed in California, license# 0C73573. His offices are in San Francisco and Chris can be reached via email at Chris@ProperlyCovered.com or (415) 333-9700.
As a professional in the financial services industry I am often asked questions concerning financial planning. I am pleased to be able to share my views in the Westside Observer writing about financial matters. In each article I will discuss one of the many topics concerning personal and business finance.
In this inaugural column, let’s examine a question that many of you could find yourself asking: “Should you seek a financial advisor to help you meet your financial goals?” If yes, what should you look for?
To determine whether a financial advisor would be a good fit for you, start with the following question: Do I feel comfortable managing my own money or am I overwhelmed by it? Then, ask yourself: Have you taken the steps to determine what your disposable income is? Do you know what your marginal tax bracket is? Are you doing what your parents did to manage their money? If your answers to the questions are no/yes, no, no, and yes, you should strongly consider seeking the assistance of a qualified financial advisor.
If you determine you can do it yourself, there is no lack of tools readily available to you. You can get company research reports and stock quotes as well as mutual fund and bond information online. When you are ready to buy, there are several online brokerage companies you can use to build your mid to long-term portfolio.
San Francisco has many physical bank and credit union branch locations if you are more comfortable with a physical place to go to manage your cash type of assets. It is rare to find a bank or credit union that does not offer access and use of your accounts online. This makes it easy to manage your cash flow and credit as well as pay bills electronically. An added bonus is that you save 44¢ each time you don’t mail an envelope. Banks and credit unions also serve the need for short-term asset management while providing bill payment services along with cash flow and credit management.
You will also want to sync up your finances by making sure that your long-term assets are in line with your short-term assets. In addition, it’s wise to regularly review other pieces of your financial situation such as your debt and asset protection strategies as well as your asset distribution plan. Of course, do this in as tax-efficient manner as possible.
Taxes do matter! That’s why I included the questions about disposable income and tax bracket. The old adage goes, “It’s not what you make, it’s what you keep.” It is important that your approach takes into account the effect of taxes and how to minimize your tax liability.
I asked earlier if you were managing your assets in the same manner as your parents. Our parents were in their 30’s, 40’s and 50’s in a different time. When they were young, the main breadwinner was usually Dad and he frequently stayed at his job for life; receiving a pension when he retired. Our parents were more inclined to stay where they bought their house rather than frequently move. Of course that mortgage had to be paid off and credit wasused sparsely.
Today’s financial reality is much different. Women are fully incorporated into the workplace and in many places it frequently takes two incomes to make ends meet. Pensions are rare so it is now more incumbent on employees to build their own portfolios to meet their individual goals. Today’s working population picks up and moves more frequently from place to place than the generation before us did. Credit use has now mushroomed to the point that the term ‘credit crunch’ has become a regular phrase in our vocabulary.
If your parents fit all or some of the traditional profile I sketched above and the reality for you today is different than what theirs was, do you think it makes sense to manage your assets the same way that they did? The answer is probably not. Today’s world requires an approach consistent with today’s realities, not yesteryear’s. Even if you can handle most of what is required of you to competently take care of your finances, there still may be good reason for you to engage a financial advisor to accomplish the things that you are not addressing as well as you could.
So if you think an advisor may be able to help you manage your financial affairs, what should you look for? There are many criteria to consider as you vet potential financial advisors including experience, education, and ethics. All these criteria are important and experience and education is easy enough to factually determine. In light of the recent scandals involving financial advisors, the ethics issue has become a big one. How do you determine the ethical foundation of the advisor you are considering?
One way you could get some insight about your prospective advisor is to see what designations they hold and the thresholds cleared to earn the right to call themselves one. For example, the Certified Financial Planner®, Chartered Financial Consultant TM, and Chartered Advisor for Senior Living TM designations all require substantive experience, education, and ethical standing in order to use them.
The stakes are high. The way you approach your finances can result in a big difference in the end. You owe it to yourself to ask the frank questions laid out above and answer them as honestly as possible. You owe it to yourself to find an advisor that passes muster. If you don’t, what you have worked so hard for can be a fraction of what you could have had by using better financial management.
Christopher Arnold is an independent financial advisor based in San Francisco and can be reached at (415) 333-9700. His office does not provide tax or legal advice nor should anything in this article be deemed as such. The publishers do not represent the opinions expressed within, and each person must make informed choices about their financial well-being.