Investments Require Time to Blossom!

Everyone is familiar with the saying April showers produces May flowers! In addition, as a gardener, one understands the concept of planting seeds and expecting flowers to bloom. If a person desires a beautiful garden, there are several steps that need to be taken to ensure maximum results. For starters, the gardener must cultivate the land before seeds could ever be placed in the fertile soil. Once the seeds have been sown, the ground must be saturated occasionally to protect the seeds sown. Over the course of time, buds will begin to sprout and in due season, a full garden has blossomed.

Establishing a financial net worth requires the same dedication and commitment one would display when creating a garden. A person must devise a plan to ensure they receive maximum results financially. After developing the plan, or cultivating the soil, the initial investment must be made that will help an individual achieve their stated goals and/or objectives. But one cannot stop at the initial investment. Establishing a net worth requires attention. One may be required to add more money, make slight adjustments, or systematically rebalance or reallocate what is already invested.

But what is most essential between a garden and investments is they both require time to blossom. One cannot plant a seed today and expect a full, vibrant garden tomorrow. If you interrupt the process by agitating the seed sown, it cannot properly develop and produce the desired result. It is critical that while the seed requires attention, its primary need is time to bloom.

Building a net worth requires the same time and attention. Any investments made, whether in business, in the stock market or even real estate, require time to bloom. There may be occasions where the investment needs attention, but that does not negate the fact that over time your investment has the opportunity to grow.

So as you watch the flowers blossom all around you in anticipation of the summer time, remember the cold weather when nothing grew. Your investment will always experience periods in which there is little, no or even negative activity. But then comes the April showers. Most businesses will make adjustments over time to work towards profitability for their future. These seeds of promise are like the April showers. And with April showers, come May flowers! Paying attention to your investments and getting the proper advice and guidance will have you achieve your financial goals over time.

So don’t fret, what you sow, you will also reap. Begin working on your financial garden today and watch it grow and blossom over time into exactly what you desired. I love it when a plan comes together!!!

Mature…

Think with me for a moment.  Do you know of any senior citizens at the age of 70 or older?  Do they still eat food?  Do they still require a place to live?  Do they still require clothes, daily maintenance, etc.?  I know these questions may sound silly but here is the reality.  Most people do not presume they will be alive at the age of 70 or older.  It seems that society does not believe in long life.  Therefore, we are conditioned to live in the now, not to prepare for the future. 

Addressing the needs of our growing senior population is something every individual must take personally.  In reality, I have said and will continue to say as a professional, “Tell me the date you plan to die, and I will tell you the amount of money you need to maintain your standard of living.”  Providing for the senior population is draining our social security system which is currently designed as a pay-as-you go plan.  Therefore, all working individuals buy into our system which provides for the retired, disabled, unemployed and survivors of the deceased.  In addition, every employed individual also pays for Medicare.  Having said that, we are in the early stages of the baby boomer generation beginning to collect on funds they set aside for this moment in time.

However, the system is already bankrupt.  The country is already in financial turmoil, yet we have an obligation to provide for those who paid into the system in good faith.  There are two problems with this issue.  It seems that as one gets older, they begin to realize when it’s almost too late, they have never accumulated enough financial resources to provide for a steady, comfortable standard of living that they’ve grown accustomed to throughout the years.  The perception that social security will be enough when a senior retires is quickly erased as one prepares for that date.  The second challenge is that at the point of retirement and beyond, a senior’s health naturally begins to deteriorate.  So in addition to poor or deteriorating health, a senior citizen is no longer working and is now relying upon a fixed income for the remainder of their life.  The challenge is that a retiree no longer has the luxury of time to save.  They are in the twilight stages of their life but that twilight season cannot be measured.  In reality, a person can be in retirement for an average of 25-30 years.

What should be done?  How do we handle our baby boomer generation with dignity and respect?  How do we make certain their standard of living can be maintained, even if they are plagued with multiple health challenges?  Planning for a senior citizen’s long term needs is critical and should be a family commitment.  In the next few weeks, we will discuss long term care and insurance to cover the activities of daily living.  We will also discuss the emotional transition that occurs when a person’s value has been wrapped up in their contribution to society through employment and now they are lost or without purpose.  Finally, we will discuss the impact of a person facing their mortality because now people surrounding them;  family members, peers, etc. are dying of natural causes.  In this discussion, I invite your feedback and will address these issue and more…

Examples of Insurance Needs

A single mother of three small children earning an annual income of approximately $35000 may find it difficult to pay the bills from month to month.  Life insurance is not at the top of her agenda because the thought of her not being able to raise her children cannot even be comprehended.  A married couple who are focused on accumulating wealth together, find themselves able to vacation regularly, design their house the way they envision it, and purchase luxury items whenever they desire.  They know life insurance is available through their employers, but the need for individual policies has never really been explained to them.  Finally, a senior citizen who has seen death firsthand because their friends are dying from natural causes instead of accidents, understands all too well that funeral expenses and final expenses overall can effectively drain someone’s net worth.

Each of the above case scenarios identified require some form of life insurance.  However, what type is best can only be defined by the financial position of the individual family.   For example, if money is ever an issue, term insurance becomes the only option.  You want to protect your life and replace your financial contribution to the household should you die prematurely.  Therefore a single parent with three small children should purchase insurance that will replace their income until the youngest child reaches the age of majority at minimum.

If you are the couple with a more secure financial foundation, looking at permanent insurance makes sense.  With the value of time on your hands, compound interest can accumulate providing you with another asset.  Several options would be Variable Universal Life or Universal Life insurance.  A cash value builds up and can be used during your lifetime in addition to leaving a death benefit.  The other benefit is that you are no longer bound to your employer if you become uninsurable due to health ailments because you have a stand alone policy. 

Finally, as you reach the twilight of your life, you see firsthand the effects of families who did not have life insurance in place when a loved one died.  You know the pain and suffering they experienced with the loss alone.  Now they must figure out how they were going to bury their loved one because they had limited resources?, how will they bury them with dignity  A small, permanent whole life policy guarantees that provided you pay the premium, they will pay the policy.

The point is that there is always a case to be made regarding our need for life insurance.  The question one should ask is if the life insurance is for you or your family?  Based on your answer, the type of insurance can be clearly defined.

The Value of Insurance

When we began the conversation about what to do with your annual refund tax return, I mentioned the possibility of paying for an insurance policy using the annual premium mode.  So what is insurance and which policy is most appropriate for me?  Here is a crash course.  There are two types of life insurance;  term and permanent.  By definition term insurance is insurance that covers the insured (you) for a specified period such as one, five or ten years.  Longer term options are available as well as options to renew.  The premiums are paid throughout the life of the policy but at expiration you are faced with a higher premium as you grow older.

Additional information you need to know about term insurance is that it’s the least expensive option when considering the financial impact.  Therefore, if you are on an extremely tight budget, term insurance may be the only insurance you can afford.   I like to compare it to auto insurance.  Hopefully you will never need it but just in case, it’s there.  Because you should have a life insurance policy outside of your current employer, if money is an issue, the best option would be to acquire a term policy, especially if you have small children under the age of majority.  Another reason why one would acquire term insurance is because they have major debt such as a outstanding mortgage or a leveraged business.

If cost is not an issue or you are at the beginning stages of investing, I would encourage you to consider permanent insurance.  A serious misconception is that insurance is not necessary as one matures in age.  I beg to differ.  If you are successful in accumulating a substantial net worth, you may be subject to estate tax liability and final income tax liability. Permanent insurance will assist you in passing on an inheritance to the next generation.  When utilizing permanent insurance, you can also use it as a retirement supplement.   Let me explain.  First, whole life policies are the most expensive policies available but you will never worry about not getting paid.  If you pay when you’re alive, the insurer will pay.  If you have an understanding of the securities industry, you make consider a variable or universal life policy where you are depending upon the success of the stock market and willing to take risk in knowing your death benefit is not guaranteed or fluctuating interest rates. 

It is necessary to sit with an expert to determine which insurance policy works best for you.  However, next week I will provide you with several case scenarios and explain which policy makes most sense and why.  Until then…

Health Care Affects the Entire Family

I want you to know that I have prepared my communications with you well in advance to ensure that you will never miss a tip as I have made a 52 week commitment to you.  This week I was supposed to begin the discussion on insurance.  It was my intention to talk about life insurance.  However, I wrote this blog at 2:30 p.m. and felt it necessary to post immediately as my tip for the week.

At 9:30 a.m. when I walked into the office, I received notification that someone who had a diagnosis of a disability over ten years ago cannot protect himself or his family in case of an emergency.  This can potentially affect the family’s ability to build a secure financial foundation.   At approximately 11:45 a.m., I received a call from a friend who suffered an unexpected disability on the job and it will ultimately lead to their inability to work during these tough economic times.  They will be forced to seek employment elsewhere after believing their job was secure.  And if the truth be told, it was.  This is a perfect example of the unexpected, unanticipated becoming a reality.

However, even if those two examples seem major, a financial strategy can still be developed for them if they are willing.  Fortunately, they are.  But at 12:45 p.m. I received a phone call that literally has brought tears to my eyes.  After working with someone for years who was diagnosed with a chronic illness, I was faced with the worst case financial scenario.  A professional is responsible for helping a family lay out a strategy that considers unexpected illnesses.  But it is the family responsibility to follow the instructions otherwise the strategy WILL NOT WORK! 

I am writing this article because there are some areas financially that you must address which are non-negotiable.  While you may not see the value of getting long term care insurance, disability insurance, health insurance, or life insurance, it is designed to protect your family and you.  If you cannot work, disability insurance replaces your income.  Just as you would purchase life insurance to protect your family financially if you died prematurely, or if you would purchase auto insurance to protect your car or home owners insurance to protect property,  YOU ARE THE COMMODITY THAT REQUIRES PROTECTION!  The type of protection must be discussed with someone more knowledgeable than you.

My worst case scenario became a reality because family members did not see the gravity of the illness and its eventual affects.  Their eyes were opened today.  What is disheartening is that it could have all been avoided if only they would have listened.  Now my client will suffer the consequences because others did not understand the significance of following the financial doctor’s orders.  

If you are a caregiver, the person who is suffering, or the child who is affected by the illness of the parent, you have a role to play in ensuring that a sound quality of life can be preserved, in spite of illness, disability or loss.  PLEASE PLAY YOUR POSITION-others are depending on you to be a part of the team!

A Case for Entrepreneurs

Let me take the time out to say “thank you” to every middle class working American and “thank you” to every single individual with no dependents, no house, or no children.  Finally, “thank you”  to every individual who enjoys working for a company in exchange for a steady income.  I believe the majority of our tax system is supported by your labor and tax contributions because you do not take advantage of the incentives available.  For example, you do not save for your retirement, you may be a renter instead of a home owner, you may not have small dependents, and you probably do not itemize your deductions minimizing your tax liability because your deductions are greater.  Most importantly, your very job position is your employer’s deduction, minimizing their overall tax liability.

That’s not to say you need to become an entrepreneur to effectively manage your taxes.  However, you should work with a CPA to determine if your natural talents and/or abilities could be turned into a profitable business.  Establishing a small business creates tax advantages that are not available to standard employees.  Things identified as “reasonable and customary expenses” are often expenses you traditionally incur in your daily living.  If there is an opportunity to turn an existing hobby or passion into a profitable business endeavor, then the benefits can be two-fold.  The first would be a reduction of your tax liability and the second would be an increase in your overall income.  Most people would benefit from an additional $300-$500 monthly in their budgets.

What is stopping you from pursuing your passion?  Are you willing to put in some extra hours to fulfill a dream?  If you can live your life on purpose doing what you love everyday and making an income that is enough to maintain your standard of living, why would you not at least consider it?  The benefits of becoming an entrepreneur are endless.  However, please note it will be challenging and you will be responsible for handling everything.  You will have to pay your estimated taxes, establish your own benefit package, and pay into social security.  But with the right CPA and proper business plan, you can at least explore if this is a viable option.  I certainly believe you should at least consider it-you will never know how successful you can be at something until you at least give it a try. 

Before I end this article, I want to give you one example.  As a motivational speaker, I use my cell phone as my primary way of communication.  I use my laptop as a way to write articles to increase my visibility, and I use several internet services to communicate with event planners.  In my line of business, these are all considered “reasonable and customary” expenses.  They are all acceptable tax deductions for me.  The truth of the matter is that I would have a laptop anyway, I would keep a cell phone anyway and I would use the internet anyway.  What is my point?  Fulfilling my life purpose reduced my tax liability overall.

Emergency, Emergency

Emergency, Emergency

What constitutes an emergency?  The web definition of an emergency is simply stated as an unforeseen crisis that requires immediate action.  A crisis is when a problem is overwhelming or when our supportive system-within ourselves or from others-doesn’t work, we’re thrown off balance.  Given the gravity of the definition, let’s begin to evaluate what you have historically considered emergencies. 

You may find yourself within one of these examples.  Perhaps you heard of the party of the year and you just had to be there.  To get prepared cost about $100 just for attire and accessories.  Maybe, you were enticed to attend the next great spiritual retreat with every national renowned Bishop, Apostle, and singer.  After all, that is not spending frivolously; it’s sowing seeds into your spiritual essence.  Ok, your children need new shoes but must it be the $150 Air Force Ones.  You’re driving a car you can’t afford, taking a vacation you so desperately need.  The excuses to justify these expenses keep you in bondage.  Unfortunately, our justification spans from a desire to have things we are not financially prepared for, experiences we had as children that we want removed from our memory banks and/or a desire to represent ourselves as being in a place of status that we have not yet achieved.

In the beginning of the year, I shared that you had to honestly assess where your money was going.    I also gave you ideas of potential wasteful spending which you could curtail.  Now it’s time to shift those resources into an area that is allocated as savings.  Mind you, I didn’t mention open an account immediately because you may be that person who can only start off with your change at the end of each day.  Therefore, a jar or bank may be your initial option.  If you find that you’ve allocated $25 per month or more, begin by opening an account at a local bank with the objective of putting money in that account each month.  I know the amount seems minimal, but think about it-you have nothing now and everyone must start somewhere.

Make sure you do not have easy access to the funds.  Do not connect it to your ATM card and select a bank across town if you do not have discipline.  Stop paying bills prematurely when it is possible that your check can bounce.  If you bounced two checks a month, you’ve wasted $70.00.  That’s $840 you could have applied towards your savings. 

Now this money will be used for real emergencies.  Real emergencies are examples of unexpected illness that exceeds a prolonged period of time, unexpected death of a family member and you must travel out of state to attend the funeral services, loss of employment unexpectedly, etc.  You will realize that the money is beginning to add up.  After a while, you will find that you have saved an entire paycheck.  That leads to a month’s income and the funds keep growing. 

 When the books indicate you must have three to six months of emergency cash set aside, it means you have identified your mandatory, monthly expenses such as food, shelter, transportation, utilities etc.  These bills must be paid monthly to maintain your standard of living and they are non-negotiable.  This is why you are saving your money.  If you lost your job, you could survive for an extended period of time giving you room to find another job.

Congratulations-you have survived the first month of building a firm, financial foundation.  It wasn’t easy but you made it.  Next month, we will continue to move forward as we make sure you maximize financially for the remainder of the year!

Where do I start Saving?

If you have a job, you have an opportunity to implement a savings plan.  It sounds harsh, perhaps-not specific to your circumstances.  But it is a true statement nevertheless.  Let me explain.  Most people will agree that savings has been difficult because every time you begin, an emergency arises.  This is the reality of life.  A tire will become flat, the children need braces, an unexpected bill arrives.  It feels like you take two steps forward and ten steps back, never getting ahead-always feeling as if you are losing ground.  How can you avoid that feeling which often discourages and makes you give up on savings before the month of January is even over?

You can begin by saving in your retirement account.  Many, if not most, companies offer retirement planning on the job.  Even if they don’t have a matching program, they can and will provide information for people who need to save for retirement.  If you think social security is adequate, let me share a little secret-THE SYSTEM IS FLAWED!  According to www.socialsecurity.gov, the average monthly benefit in 2009 is $1153.  If this is what you are depending on for an average retirement period of 12.6 years (retirement at age 65 using average life expectancy of 77.6 years for America), you have a problem.

In reality, we are living even longer and we are not the healthiest.  Therefore, if you can tell me the exact date you plan to die, I can tell you how much money you need-down to the penny based on your projected lifestyle.  Unrealistic, I know.  Therefore, you need money when you are no longer willing or able to work.  You must use your working years effectively to accumulate enough funds to maintain your standard of living.  Suggestion:  begin putting aside money through your employer before you receive your paycheck. It’s much easier to absorb and it reduces your tax liability in the current tax year.  I know, you are saying,  “ I’ve heard that before but what does it really mean?” 

If you make $30,000 annually and you decide to start saving 3% of your money, you’ve made a commitment to save $900 toward your retirement.  The tax incentive comes in because when you file your taxes in the current year, the money you saved toward retirement will not be counted when you are determining how much money you owe in taxes.  So instead of having to report $30,000 in income, you are able to report $29,100.  The $900 can be invested (which we will discuss how later) and taxes will not have to be paid until you withdraw the funds at a much later date.  It’s like taking money out of your left hand and saving it in your right.

However, there is a greater issue at hand.  Congratulations!  You just became a saver.  As a financial planner, I understand that most people have difficulty beginning their savings plan.  You have just crossed a major hurdle and we can move forward with a strategy.

Next week, I will backtrack and discuss at length the need for emergency cash!

New Year, New Beginnings, New Opportunities

Happy New Years!  There are different seasons in your life when you are granted permission to reset the course of your life.  It’s an opportunity to shift directions, make adjustments and assess where the road you are currently traveling on will take you.  As you review your financial positions, I am here to take that journey with you.

Are you satisfied with where you are standing financially?  Does your New Year’s resolution include getting your financial affairs in order?  Are you finally willing to work with someone because you realize you don’t have all of the answers on how to recover from the financial instability of the last decade?

In order to change your financial future, you must first change your financial perspective.  Most people are inclined to take a risk with their lives, their health, and their finances.  You believe nothing will happen to you and time is on your side.  But think about it for a moment.  You just came out of the holiday season in which the residual financial affects still haven’t been realized.  Think about your desire to please your children and the lengths you went through to make it the best Christmas possible.  How did you feel when you knew you could not give them everything they desired?  However, you didn’t stop trying until all options were exhausted.

When you are capable, you will go through any lengths to provide a comfortable quality of life for the ones you love.  What happens when you are not in the position to do that?  The need to incorporate a financial roadmap for your family should be created because of your love for your family.  I don’t know of a man who desires to leave his children penniless.  I can’t imagine a mother wanting her children to be tossed from shelter to shelter should she die prematurely.  

If you desire different results, you must first be willing to try different methods.  Begin by jotting down what life you would love to provide for your spouse, your children and your parents if money were not an issue.   What lengths are you willing to go through to make that happen? 

I will leave you with that thought for now, but come back next week and we will discuss the need for a new plan.