Financial Literacy

There are some easy steps for a loan to end a personal relationship:

• Lend money to someone who will never be able to afford to pay you back
• Make sure nothing is written down and signed
• Be unclear on all of the loans terms and payback
• Make sure there is no collateral for the loan
• Lend the money in cash so even the existence of a loan cannot be proven
• Do not use a formal promissory note template to cover all the loan terms
• Ignore IRS rules on interest and 1099-Int forms and get penalized during an audit

Any of these steps will lead to disappointment, strain, and most likely, the end of the relationship.

When a family member or friend asks me for a loan, I either give them the money as a gift or decline altogether. Of course, it must be an amount to give that is affordable to me. This is my personal rule that I follow after having tried every other way about loaning money to friends and family. In order to explain, I’ll just make a few generalizations from my personal experience that I’ve learned over the years.

1. I am never repaid so why even pretend it’s a loan in the first place?
2. If they had income or credit, they wouldn’t be asking me for a loan.
3. If they had the time to get money from a professional lender, they would have done so.
4. If the requests for loans are never ending, that will become clear and you can start saying, “No.”
5. If you know the money will be used to continue someone’s downward spiral, you can always say, “No.”

Every person and situation is different, so you have to use your best judgment for the circumstances. But I stick with my rule of either gifting the money or declining altogether.

As medical deductibles have soared under Obamacare, many companies are moving in with technology for low-cost medical services including prescription discounts. For example, there are apps where you can video chat with a doctor and get a prescription for $35 to $55. Some non-urgent medical problems this may be appropriate for could include: cold, flu, rash, bite, sports injury, minor infection, or just to ask if you should visit a doctor for this condition.

Smartphone app examples are Doctor-on-Demand, RingaDoc, or Live Doctor Visit Now, other online versions include MDiPass.com or HealthCareMagic.com. There are many competitors so look at some current reviews and pricing to determine which one may be the most beneficial for you and your family.

Some of these providers also offer discounted group rates on prescription drugs. Medical services delivered online or with smartphones are convenient. Instead of taking the morning off of work because your child has a sore throat, you can use an app to get a quick diagnosis and possibly get prescriptions sent to your local drug store. There are doctors that even make house calls like Medicast.com or TravelMD.com.

In addition, concierge doctor services have exploded over the last two years. Doctors fed up with the increasing insurance bureaucracy coming from Washington have chosen instead to change their medical practice to service fewer patients for a higher fee. Some doctors charge between $2,500 to $25,000 per year to be available for a limited number of patients, in addition to charging for visits and procedures. Many top doctors refuse to deal with insurance bureaucracies and this has accelerated over the last three years, you must pay upfront for examinations and treatment. But even with these higher costs for patients, they can still be cheaper than the insurance deductibles that have been increasing for nearly everyone.

I attended an event over the weekend, mostly made up of people in their late 50’s to early 60’s. One frequent topic of discussion was retirement planning. Among this particular gathering, I noticed three distinct groups facing very different prospects in their future.

The first group never saved anything of note and have so much debt that they know they can never stop working. A few are still paying on deferred student loans, have loans on cars, and a mortgage that won’t be paid off for another +20 years. If they were ever unable to work in their future, it would be a great financial struggle and they’d likely have to move in with relatives, if any would allow it.

The second and largest group of potential retirees are counting down the months until they can retire. Their target date is either the earliest that they can receive social security benefits or the date for full social security benefits. This group is in decent financial shape but I didn’t hear of one that had actually mapped out their income and expenses for retirement, they are just going to do it and hope for the best. In one classic example, a woman had retired only two days earlier at age 62 and she still had no idea what her pension payment or discounted social security payment may be, but she said, “I believe I’ll be Ok.” Until it is mapped out, she cannot know for certain. Someone like this is a good candidate for what is called a “failed retirement.” This is when someone retires and leaves the workforce but then returns to work in 1-5 years because they discover that they cannot afford live on their retirement income. But since they are returning to the workforce with a job gap, they are now at a much lower rung with much lower pay, reduced benefits, and sometimes, longer hours. One man retired after financially mapping it out, but then had to go back to work part-time when his wife insisted on moving to a residence in a high-property tax location. His work is physically demanding and he is unsure how long he will be able to continue working. Physical capacity to work is one of the main financial risks of being forced to work late in life.

The third group, and the tiniest number, are those that can retire anytime they want. This is because their investments and real estate income is already higher than their current expenses. So they are already financially free, they just have not stopped working. Some enjoy working and others want the health insurance benefits. The people in this group all have a similar trait: from a young age, they focused on learning about investing, including direct investments like small businesses and rental real estate. While social security income makes up the vast majority of most retirees’ income, for this group, social security is a tiny amount of their income and is commonly spent on grand-kids or charity.

When you are approaching age 60, which of the three groups do you want to be heading toward? Which group would you prefer to be in? Exactly, what do you need to start doing today to make certain that you arrive there?

Cornelius Vanderbilt started a steamboat business and went on to create a railroad empire, making him one of the wealthiest Americans in history. One of his sons then increased the family wealth to over $300 billion in today’s-dollar terms. Within four generations, all of that family money was long gone. According to Roy Williams of the Williams Group, “60% of family wealth is spent by the first generation and 90% of the time it is all gone by the time the 3^rd generation passes away.”

Even when a modest-sized inheritance is being passed to the next generation, setting up structures is important to maintain or maximize any financial transfer. There are hard structures, such as life insurance and trusts, and soft structures such as passing along financial education and family values that produced and maintained the wealth. Plus, there are tactics, such as a “stretch-IRA” to keep the funds growing tax-free as long as possible, avoiding the expense and mess of probate court, transparency and collaboration among heirs to avoid lawsuits, and a long list of others depending on your state and particular circumstances.

I have been witness to many estates unnecessarily consumed by taxes, legal squabbles, or even left inaccessible from probate or a lack of paperwork. Some people think “their heirs will do the right thing,” but when there is no Will, it is out of their hands, the probate court decides alone. The next worse estate planning is to only have a Will. Again, a Will is an instruction only for the probate court, the estate-planning goal is to totally avoid probate court. Like any important process, estate planning needs ongoing professional-level management to make certain assets are transferred to the correct people and entities, and that transfer is quick with the least amount of tax liabilities.

The next step in transferring assets is the most difficult because it requires ongoing discipline. And that is: to never spend the principal amount of any inheritance, only part of the after-tax earnings. By spending only part of the after-tax earnings, you are allowing the principal amount of money to grow larger. Which in turn will generate more investment income for you. No matter how modest the amount of money may be, its earnings could allow you to raise your spending for the rest of your life, and to your heirs as well. However, if you ever spend any of the principal amount, it is gone forevermore. Again, I have been witness to many inheritances that were vaporized upon being received by heirs, from $1,800 to very large sums of money. After the inheritance is gone, sooner or later, the only feeling that remains is regret about blowing the money. Do yourself a favor and set any unexpected or inherited money into an investment account where the principal balance is never spent for any reason.

GoBankingRates conducted a survey of over 5,000 people, asking, “How much money do you have in a savings account?” They found that 21% do not have a savings account and another 28% have a savings account but their balance is zero; that is a total of 49% without savings. People contribute to their 401(k), but fail to regularly contribute to normal savings. Only a tiny 14% of respondents had more than $10,000 in savings, a sign of financial stability.

The IRS reports similar results for retirement plans, only 8% of Americans invest retirement money outside of employer 401(k) plans. Since 2008, rising regulation has prompted many companies to drop their 401(k) plans for employees, so that only half of American workers even have access to an employer-sponsored retirement plan. When on their own, the average American does not consistently set aside money for savings, let alone retirement outside of a 401(k).

The graphic is a chart of Financial Assets, excluding retirement accounts. It reveals that even before the 2008 recession that savings have been falling since the 1990’s, even for people with a high income, those earning $75,000 to $100,000. These above-average income earners only have $12,500 in savings, a very small amount for potential emergencies such as job loss, home or car repairs, etc.

An unexpected repair, car replacement, or medical bill that is funded with debt instead of savings will unnecessarily consume your income and net worth. Please do not follow the masses with tiny savings and retirement accounts. A small emergency can start a cascade of financial difficulty for those without a savings cushion.