Net Worth is Like GPS for Your Retirement

Ray’s Take: When you have your annual physical, your physician looks at a number of your vital indicators; so does your financial planner. Net worth is the value of all assets, minus the total of all liabilities. In other words, net worth is what you own minus what you owe.

And, often, income is not an indicator of net worth. It’s possible for someone with an average income to have a substantial net worth if they’re careful about debt and save money regularly. It’s also possible for someone with a very high income to spend every penny they make and then some, resulting in a negative net worth.

A regular accounting of your net worth is like GPS for your retirement. It tells you where you are now and gives you an idea of the course corrections you need to take to get to your destination.

If your net worth is not consistent with your hopes for the future, take steps to raise it. As a general rule, if the numbers come up low, spending is the culprit. You generally have more control over the outflow than the inflow. Cutting back on discretionary spending is the first step toward turning your situation around. Paying off debts is the next. Taking steps to eliminate credit cards debt, canceling memberships to things you don’t use and being more mindful of where your dollars are going are great ways to raise your net worth without having to resort to a second job.

If your net worth is high, keep building on your momentum. You can include more asset classes and further diversify. The money you’ve saved may enable you to change your lifestyle, provide the funds to travel during retirement or engage in hobbies that you couldn’t afford or didn’t have time to indulge in during your working years.

One last thing, don’t kid yourself that your assets (home, cars, etc.) are wealth. In my world, assets pay me interest, dividends and capital gains. I’m still waiting for the first check from my home.

Dana’s Take: Navigating life can be a tricky business. From deciding where to live to where to send our kids to school, we’re bombarded with decisions we know will have far-reaching impacts not only on ourselves but also on our children. Having a clear-eyed view of what we want to accomplish makes for an easier journey.

So many things in life are outside our ability to control, so taking the time to handle the things we can control gives us a much more peaceful feeling.

There’s no better feeling in life than the feeling you’re in charge. Be it your trip to the beach or your destiny.

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How Many Funds Make a Good Mix?

Ray’s Take: When it comes to building a portfolio for retirement, your goal shouldn’t be to load up with as many different types of investments as you can in the hopes that you’ll outsmart any fluctuations in the market. Diversification, like all things, has its limits.

Instead, you should work to build a well-diversified group of funds that can help you harness the power of the capital markets in a way that’s consistent with your financial needs, risk tolerance and goals. The idea is to put together a portfolio that can generate the returns needed to achieve your financial goals but won’t be so volatile that you’ll be tempted to make mistakes – from fear or greed – when the market goes through its inevitable swings. If you think you can just nimbly time your entry and exits to the capital markets, prepare to be humbled. If your adviser claims to be able to do it, you should consider finding another adviser.

There are many strategies for creating a great portfolio, but each portfolio shares some basic features. Before choosing your funds, you need to have a good idea of your goals and how much risk you can tolerate. Only then can you determine your appropriate asset allocation, which is the mix of investment assets that make up your portfolio.

When it comes to the number of funds to own in your portfolio, which can range from few to many, less is usually more, as with many things in life. If you start throwing more and more funds into the mix, you run the risk of turning your portfolio into a confusing mix of overlapping holdings. And this strategy can impact each fund in your portfolio, reducing the chances of success in reaching your goal.

Your focus should be on the diversity within your portfolio rather than the number of funds. You can own dozens of funds and still not be well-diversified. Conversely, you can own one fund that is well-diversified if that fund covers the entire stock market spectrum.

A good financial planner can assist you with makes the best decisions for your own portfolio.

Dana’s Take: According to Aristotle, temperance, or balance, is a virtue. Balance and restraint are two keys to long-term financial success. Unfortunately, our culture has changed since the 1930s from one of restraint and caution to one of instant gratification and impulsivity. While we are encouraged by the media to “just do it,” better advice might be your grandparents’ “look before you leap.”

Our grandparents’ over-cautiousness led them to live frugally and save ample amounts for their non-working years. Perhaps today’s younger generation will prefer to leave behind the overspending and consumer habits of the last few decades and pursue a simpler life with less energy spent on acquiring possessions and more spent on living.

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Early Retirement – Can You Do It?

Ray’s Take: Many people dream of making an early exit from the work routine, but making that dream a reality has some challenges. By retiring at, say, age 55 instead of 65, you have 10 fewer years of saving and investing for building a nest egg that has to support you through an extra 10 years of retirement. That double-whammy of fewer working years to save and more retirement years to spend is what makes early retirement tough to pull off.

Where will your funds come from to cover expenses? Will you be making withdrawals from deferred retirement accounts? Many have an early withdrawal penalty of 10 percent if you begin drawing from them before age 59 1/2. If you want to make the early retirement dream happen, you’ll have to plan well so that you have funds you can use that aren’t affected by those penalties until you reach the age at which those penalties aren’t a worry. Withdrawing early and incurring the penalties will reduce the amount of funds you have available to pay for your extended retirement.

Health care is another big item to consider and plan for before deciding to retire early. Medicare doesn’t become available until age 65, and even then doesn’t cover everything. How will you pay for health care prior to age 65? You’ll have to buy health care coverage on your own. That can be a budget wrecker if you’re not prepared. And estimating how much you’ll pay for health care in the future is somewhat of a guessing game.

Think about your life after early retirement before you take that leap, not after. Making it happen is entirely possible, but it will take some serious, disciplined planning. The sooner you create a plan and put it into action, the better the chance your early retirement dream will become a reality.

Dana’s Take: Early retirement and a life of leisure may sound like the stuff of daydreams, but the reality can be a big letdown for people who are used to being busy – and important. Once the newness is gone, an ugly reality can raise its head.

Boredom, a feeling of isolation because your friends and family are still working, and loss of identity due to not having somewhere to be and something to do every day are potential realities.

Creating a social network, finding hobbies you love and being physically active prior to pulling the trigger on early retirement all combine to create a much more positive retirement life.

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Managing Money is a Marathon, Not a Sprint

Ray’s Take: Training to run a marathon and creating a financial plan have a lot in common if you’re going to succeed. An overall plan includes short-term and long-term goals and the ability to stick to the plan through thick and thin. No pain, no gain. Right? And that applies to money as well as running.

It can be a painstaking process to go through and determine exactly how much you spend and where it’s going. Where can you cut those expenses? Dig deep to find those expenses and get them in the picture of your plan. It can sometimes require both a financial planner and a marriage counselor.

Plugging small leaks may seem tedious, but cumulatively can take you a good bit of the distance. They can be an invisible drain on your money if you’re not making sure you’re aware of them. Take the time to talk to your financial planner to discover the management fees for all of your accounts. Know your banking fees too. All these little expenses can add up over time. There should be no sacred cows in the process either. Everything must be on the table.

Once you have all this detailed information at your fingertips, you can create a better and clearer picture of how you’re going to reach your goal. This leads to another aspect of the marathon – the decision to hold fast to the plan in times of market turmoil and the decision to reallocate in an upward trending market because that’s the step to take to remain on track.

There will be times along the way when you have doubts or stumble. There are times when life happens, and you have to adjust the plan. Staying strong and in the race will be worth it in the end. It doesn’t do any good to quit. You aren’t the only one who has struggled.

These can be time-consuming and difficult tasks and decisions. But if you’ve done them and seen the payoff, you understand that doing hard things financially is often good for you and gets you where you want to be.

Dana’s Take: A healthy mind and body lead to clearer thinking and better financial decisions. And the steps of training your body can be applied equally well to creating healthy finances.

Step one: Have a clear mental picture of why you are doing these things and what you hope to achieve from them. Is buying things you don’t need from that specialty store a priority, or is saving for your family’s future a priority? What is important to you?

It can be very motivating to have concrete short- and long-term goals and rituals in place. Get expert advice. Use discipline. Create a plan.

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Finding Your Best Bank – It’s Worth It

Ray’s Take: There’s a perception that all banks are the same and offer the same services and have the same fees. That may have been true at one time, but in today’s world, it pays to investigate a broad range of financial institutions to find the one that has the best products and services geared toward your individual needs.

For many, your bank is the hub of your financial life. It’s where your paycheck is deposited, where bills are paid and where savings are directed to other accounts. It’s also where you work toward some of your most important short-term financial goals like building an emergency fund and saving for a down payment for a car or home.

Look closely at fees vs. interest rates. If you’ve got your emergency fund or your fund for a down payment on a home in a bank that charges more per year in fees than you are making in interest, you’re actually losing money rather than growing it.

Look closely at maintenance fees, out-of-network ATM fees and overdraft fees. Most fees are avoidable these days if you know where to look. How about requirements? Some banks require you to keep a certain balance in your account or make a certain number of transactions each month to avoid paying a fee. That is probably something that will not serve you well over time. Do you prefer to do your banking online or via your phone? A bank with a user-friendly and safe environment for that is a must. Cybersecurity is a growing need in today’s world.

Be sure to include online banks and credit unions in your search to find the best options for yourself. Varying rewards are up for grabs. The world and our financial needs are changing quickly. The bottom line is you’re your money is always working; the question is for whom.

You probably interact with your bank more than any other financial institution. You should put in the time to find one that is the best fit for your plans and rewards you for using them.

Dana’s Take: When it comes to choosing where to do business, we all have different wants and needs.

For some, it’s nice to feel personally valued at a business where people call them by name. For others, that’s not a priority and the more arms-length way of doing business online works best for those folks – no warm fuzzies are necessary.

There’s no right or wrong way to feel comfortable in the way you conduct your business. Your banking needs are unique, so take your time to think about what’s most important to you, then find the bank that offers it.

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