Financial Literacy

According to the National Auto Dealers Association, wholesale prices on used cars fell by 3.8% in February, the largest monthly drop in 22 years. So if you’re considering purchasing a used car, now may be a good time to get a discounted price. Prices fell in 16 categories of vehicles, the topmost three being: large luxury cars, subcompact cars, and large utility vehicles.

In addition, automaker’s incentives have been increasing to maintain their sales volume on new vehicles. This implies that sales demand is slowing and they are being forced to ratchet up incentives to keep moving their inventory.

As you may suspect, it may be a bad time to lease a car with a reasonable payment. Lease rates are based upon the expected value of the car at the end of the lease term. If used car prices are dropping, then sooner or later, car companies will be forced to raise the payments on their leases. Of course, if you do your homework, you can periodically find inexpensive lease terms for: slow-selling car models, getting rid of the remaining inventory of last year’s model when the new-year model is released, sometimes the end of month deadline, etc.

Many in their early twenties dream of a European vacation. To pay for this, you can either do some homework and be flexible or put it on a credit card and still be paying for it long after you’ve forgotten most of it. Fortunately, it has never been easier to find low-cost flights and accommodations.

A study of a year’s worth of flight-price data showed that the cheapest flight plan is to: fly out on a Wednesday and return on a Tuesday. Then begin scanning prices 6 months out and book before 50 days away from traveling. Target your travel in early summer or late summer, avoiding the expensive travel peak season of July and August. Many websites and apps give you alerts for cheap deals: Kayak.com, ScottsCheapFlights.com, Momondo.com, and many others.

Once in Europe, there are many discount airlines to jump between cities like RyanAir, or go by train with a Eurail pass, or ride sharing with BlaBlacar.com

For accommodations, of course there are hostels and AirBnB. But there are cheaper ways with CouchSurfing.org, RoomoRama.com, or camp in someone’s backyard through CampInMyGarden.com.

There are so many options to save money on European travel; these links offered above are just a start on what is available. Whatever you do, please do not follow the bad money managers to financial ruin by:

• Spending your student loan money needed for tuition and books
• Charge it all on a credit card and spend +10 years trying to pay it off

When Teamster’s Local 707 (truck drivers in NY) bankrupt pension was taken over by the U.S. Pension Benefit Guarantee Corporation, the 4,000 current retirees had their pension payments cut by an average of 67%. These retirees are in their 60s and 70s, and now find themselves: declaring bankruptcy, skipping meals, delaying doctor appointments and needed medicine. One of them picks up returnable cans by the road for what he calls his new retirement fund – a bag of recyclable cans and bottles.

Consider the pension arithmetic for this union: how can a group of people work for a maximum of 30 years, and expect to receive nearly the same amount of income, plus cost-of-living-increases, for an additional 30 years? No fervent political promises can afford arithmetic that doesn’t add up. This is the reason that pension plans have disappeared over the last 30 years.

There are a few pension plans going bankrupt all the time, and many can be underfunded for a long time but still be sound with steady returns and additional funding. However, according to the federal Pension Guaranty Corporation, there is large wave of over 200 pension plans across the country currently headed toward insolvency; possibly affecting two million people. The Government Accountability Office reported that if there were a large number of corporate pension insolvencies that they had to take over, these imperiled pensions would be forced to cut their payments by 94%. Plus, municipal and state pension plans are the next pensions moving toward a fiscal cliff.

It is never too late to take immediate action to shore up your own retirement, outside the control of other people, governments, and companies who cannot make good on their promises. Teamster’s Local 707 retirees are learning that promises, without sustainable financial backing, aren’t worth anything. Some of these Teamsters are moving in with family or going back to work, but all are financially struggling with the pension crisis that is becoming more widespread.

A reverse mortgage is a unique loan only for senior citizens age 62 or older. Instead of receiving a bank loan to purchase something, with a reverse mortgage, the bank pays the homeowner and when they pass away, the bank takes possession of your former home and sells it to pay off the loan. Although these are complicated contracts, and each bank does it differently, the basics of the reverse mortgage closing are:

• You have effectively sold your home to the bank, although you keep the right of possession.
• You are either paid monthly or receive a line of credit that you can draw down.
• It is a loan. And as in every loan, interest is earned by the party that gets richer (the bank) and interest is paid by the party that gets poorer (you).
• To be clear, this loan allows you to spend the equity that you’ve built up in your home.

Is there ever a scenario where a reverse mortgage makes sense? Yes, but they are very rare. First, let’s examine the general living path of people aged 70-85 years old.

• On a limited income, many people can no longer afford normal and expected home maintenance: new roof, painting inside and outside, new flooring, replacing windows, and remodeling.
• By their mid-70s, many people are physically unable to maintain a home. Yard work and house work may have to be performed by family members, or they need the financial means and ability to purchase and manage support services.
• By their early 80s, many people are grateful to move into an independent-living or assisted-living facility where housing duties are taken care of by someone else, even cooking if you want. As people face additional medical challenges, they move up into higher levels of care facilities.

Not everyone, but most people fall along these life-path scenarios. A reverse mortgage would be highly inappropriate for anyone along this normal course. What about those few who have the physical and mental capability to live on their own, in their home, until the end? Since a reverse mortgage is a loan, is this loan a good fit for their cash flow needs? Has their lifetime been financially mapped out with retirement account withdrawals? Perhaps a home-equity loan is better; it will certainly have a lower rate and fees than any reverse mortgage. Perhaps downsizing to a smaller home will free up your current home equity so maybe no loan is needed at all.

A Metlife study found that 2/3rds of people seeking reverse mortgages are trying to shore up their precarious financial situation. A director at US Mortgage says the majority of their reverse mortgage clients are trying to dig their way out of substantial debt. 10% of reverse mortgage recipients are at risk of default and being kicked out of their home because they failed to pay home insurance or property taxes. To me, these people have been making poor financial decisions and are continuing that with yet another poor financial decision. The statistics bear this out – many spend all of the reverse mortgage money within a few years and are financially worse off than before they took out the reverse mortgage.

To arrive at any financial conclusion for your particular circumstances, a thorough financial review of all of your assets and income must be performed. Since no one can predict how life will play out, financially map out several likely scenarios. Maybe a reverse mortgage may fit into your financial plan, but in my opinion, that is unlikely to be your best solution as a source of funds.

40% of Americans receive an income tax refund. When this group receives their refund, there is a corresponding jump in consumer spending that retailers expect. You may even hear tax-refund commercials from car dealers and appliance stores trying to get their share of this money.

No one should need reminding that receiving an income tax refund means you gave an interest-free loan to the government for over a year. It is better to adjust your paycheck withholding or reduce your estimated payments to get closer to zero income tax refund. But some people are unable to manage their money, let alone save, so an annual check in the form of a tax refund is their mechanism to get access to a chunk of money. This is poor method to manage your money. People that I know who do this rarely spend their refund in a productive manner. Learn to manage your money, gain the discipline for regular saving, and control your money instead of lending it to the government for free every year.

The National Retail Federation survey for 2017 found that the average expected refund is a little over $2,000. Where are they planning to spend this year’s tax refund?

• 48% Savings
• 36% Pay Down Debt
• 21% Everyday expenses
• 11% Vacation
• 9% Major Purchase (car, TV, furniture, etc.)
• 8% Splurge Purchase (spa, apparel, dining out)
• 4% Other

Thankfully, the first two categories, accounting for over 80% of respondents, were doing something with their money to get ahead financially – saving it or paying down debt. Where is your income tax refund going?

I have a former investment partner who makes a lot of money; my guess is over $3 million a year. Last week she was telling me about minimizing taxes and she covered a few tactics that I’d like to share.

Salary Selection

She told me that she only earns $51,000 in taxable salary. She said, “Politicians say they want to tax the rich but they physically cannot do it. How can they tax the rich like me when the most they can attack is just $51,000?” I asked how she chose that amount and she replied, “You determine all of your personal expenses that cannot be deducted for any business or investment purpose. Add those up for an annual basis to select your annual amount. Another component in selecting a salary amount is to find out how much you are allowed to put into various qualified retirement plans. Then include this amount in your salary because only earned income can be placed into qualified retirement accounts.”

Entity Selection

“Your business income must flow into the correct corporate structures to maximize the tax benefits. By keeping and spending your money in the business, you can also build your corporate credit, put money into the best retirement structure, a Solo 401(k), and all the while protect your assets by holding them in the most appropriate layers of legal entities.”

Investment Selection

“Your investments should include the top-3 most tax-advantaged investments: direct gas & oil, direct real estate, and direct aviation. They offer the best depreciation schedules to reduce your taxable income. Of course, only invest if you’re well-educated on these asset classes and perform strict due diligence on them.”

I don’t think these are common tax-planning strategies for many business owners, let alone employees. However, business owners may want to investigate these methods to increase their after-tax cash flow to increase the amount of money available for spending and investing.

Anyone can be swindled and there are plenty of opportunities of attack these days. Fortunately, there are many sources to educate yourself to guard against these criminals. There are several organizations releasing warnings to the public about current scams on innocent people: the U.S. Federal Trade Commission, the FBI, the IRS, and private organizations like Consumer Reports and AARP, to name a few.

These scammers contact their victims through three main avenues:

1. Telephone scams where people pretend to be your grandchildren in trouble, a fake IRS agent who demands immediate payment with an iTunes gift card, and bogus charities soliciting your money for a recent tragedy.
2. Knocking on your front door to provide a shoddy service or product you don’t want, or soliciting donations for a fake charity. Scammers demand money up front for work and never return. Some are trying to case your home to rob it later with a false story of asking you personal details for a survey or demonstrating a product inside your home. One scam to case your home is to say, “There have been several robberies in the area lately, our company is offering a free security assessment by going through your home for vulnerable areas.” Meanwhile, the two fake security staff walk around with you as one of them distracts you while the other one searches for valuables to steal on the spot.
3. Online hackers employ fake e-mails, websites with viruses and malware, and identity theft. I’m acquainted with a business woman whose computer was recently compromised by a virus through a fake e-mail download that appeared to be official. This particular virus is nicknamed ransomware, or cryptolocker, and it locked up her computer and the hackers wouldn’t release her data to her unless she paid $2,000 in untraceable bitcoin. Since she hadn’t backed up her computer in a very long time, and needed the data to operate her business, she was bitterly forced to pay the criminals.

Last month my computer was hacked out of Russia and within minutes they controlled two of my e-mail accounts, a financial account (luckily with no money), and were nearly successful in resetting my cellphone. Fortunately, I was able to get control of most everything back within 3 days and didn’t lose any money. I was unable to ever recover one the e-mail accounts. But I was baited by a fake URL link, and even though I know better, they acted like someone that I trusted and so they slipped past my natural defenses.

So be alert, keep up with the latest scams, reject unsolicited offers that knock on your door, keep your computer protected, and beware that con artists are the most charming and personable people that you’ll ever come across.

If you were unexpectedly in the hospital for an extended stay, what is the name of the person who will handle your finances? Who would go through your mail/email to pay bills and work with your employer and insurance company for any medical or disability benefits? If you were unconscious in the hospital, who have you already legally authorized to make medical decisions on your behalf? Or, like most people, have you put off thinking about this much, let alone done anything about it?

It shouldn’t take long to list your accounts or gather your financial files in one place for someone else to step-up and manage. Guess what happens when you fail to do this? Nobody can figure out your financial life, things fall through the cracks, utilities get cut off, your credit rating plummets, insurance coverages lapse leaving you exposed; the list of unfavorable outcomes is very long. Unfortunately, I know people who have gone through this exact scenario and no one was able to help prevent or salvage problems until it was too late (including home foreclosure). If you have a spouse, it is likely that one of you does most of the money management. Could the other spouse easily put together how to manage the money, or is it unorganized and non-obvious? It is of utmost important to write out your record-keeping process, list out all of the steps, and then periodically update it as it changes.

The next task is getting a Medical Power of Attorney; it is an easy process. Go to the 1 or 2 nearest hospitals where you’re likely to end up, ask for their Medical Power of Attorney forms, fill them and submit them back to the hospitals. It is likely a waste of time and money to have an attorney draft this document because hospitals/doctors rarely accept any Medical Power of Attorney that isn’t drafted by their own attorneys. (Many people learn of this too late, for example most financial institutions don’t accept Financial Power of Attorney forms except their own.) It is the same scenario with your bank, ask for their Financial Power of Attorney form and use that one. Do this for any financial institutions that you use. Unless you have a complicated financial life, there may be no need to have an attorney draft additional Power of Attorney documents for you.

Please take some time to complete these two tasks for your benefit and your family’s peace of mind. I recommend that anyone you care about completes them as well.

Do you want average school grades, average restaurant food, average pay, or average anything at all? Of course not. When it comes to your financial life, this is far more important to avoid because the average person is horrific at money management, investing, or anything else money related.

The average person has many failures when it comes to money:

• Never learns how to manage money while growing up
• Never saves money before their 30s
• Takes out far too much in student loans for college
• Has credit card debt he or she cannot pay off
• Buys a car with an expensive loan, or worse, a lease
• Spends far too much on housing, vacations, and bars/restaurants
• Does not save nearly enough for retirement

If the average person is a financial calamity, then you may want to know their average behavior so that you can stay far ahead of them. For example, when the average household has less than $1,000 in savings for emergencies, you do not want to be average. When the average household has a net worth at a certain low level by a certain age, then you want your net worth to be far, far beyond that level.

I just learned two more average statistics today:

1. The average Millennial spends more on coffee per week ($10) than they put toward retirement.
2. The average college graduate defaults on (or doesn’t pay down) their student loans within 7 years.

It is common that you’ll come across many news headlines about average-money statistics. Keep in mind that if you are behaving like them, then you too are heading toward needless financial troubles. Please don’t be average.

In 2013, the Brookings Institute performed an analysis on which influences lead people into poverty or the middle class. The U.S. government spends a trillion dollars a year to help people living in poverty. From the zillions of theories on paths leading to being poor or middle class, they were able to determine 3 factors that made the largest difference, by far.

If these 3 factors are present, anyone has a 75% likelihood of moving into the middle class, nearly a guarantee. However, if you violate all three of these items, your likelihood of falling into poverty is 76%, also nearly a guarantee.

These are the 3 rules they discovered:

1. Graduate from high school.
2. Have a full-time job.
3. Do NOT have children out-of-wedlock or get married before age 21.

So if you want to follow the path of poverty: drop out of high school, have kids with no spouse, and avoid full-time employment. The Brookings Institute found that these 3 rules applied to all ethnic groups and backgrounds. When a culture allows these 3 rules to be routinely violated, then that culture becomes impoverished. As an example, the report mentions that 70% of inner-city black children and 50% of Hispanic children are born outside of marriage. In general, single-parent households are less stable and less likely to provide the educational and financial support needed to graduate high school and launch a successful career. As a result, children growing up in single-parent households are 4 times as likely to become another generation living in poverty. Note: even if the children grow up in a family where parents are serially married, their financial outcome is far better than children living in a household with both parents who are committed to each other but unmarried.

Meanwhile, those in the upper-middle class do these:

1. Graduate from college and may attain advanced degrees
2. Have full-time high-paying professional careers.
3. Get married after age 25 and have children only after they are married

So do what you can to keep your family and friends on track.