Principles of Personal Finance
By Bob Moeller
WEAC Member Benefits
June 2004
Financial
Planning Seminars
Achieving
Financial Independence
Once a year, at the beginning of summer break, I find
it useful to repeat the principles of personal finance. They change
a little as the economy changes, but if you remember the basics and
apply them, they will make you financially successful.
- Interest rates are near record lows. That means you want to review
your mortgage terms to see if refinancing might be of value. If you
have a fairly low-balance, high-rate mortgage that you have not refinanced
because of closing costs or because you expect to pay it off in just
a few years, consider taking a home equity loan on the property and
paying off your high-cost first mortgage with it. As this is written,
you can get a home equity loan with a three-year, fixed rate for less
than 4% and closing costs of just a couple hundred dollars.
- You should not be carrying forward any high-cost debt such as credit
card debt. I regularly meet with members who have fairly high balances
in their savings accounts earning 1% and are at the same time paying
9% or more on credit card balances. Think about that.
- I recommend you go to the library and make a copy of the May 2004
Consumer Reports Magazine (page 34) article on what to look out for
regarding high fees in everything from “sneaky bank charges”
to “fee-packed variable annuities.” Read this article
every six months to remind yourself of how important fees are in your
financial decisions.
- Speaking of fees, the life insurance industry is full of investment
products that have outrageous fees. Again, my advice is do not invest
money in life insurance company products.
- Sometime this summer take a look at your total investment allocation
and make sure it is reasonably balanced between stable investments,
such as shorter duration bond funds, CDs, and other fixed-interest
investments and a well-balanced stock fund portfolio. Try to limit
investments to no-load mutual funds and use index funds or exchange-traded
funds with low fees.
- I am often asked to evaluate if someone can afford to retire and
find the person doesn’t have a clear idea on how much they actually
spend. Without spending undue time on it, set up a system for a year
that gives you an idea of how much you have spent and roughly how
you spent it. This is not a budget, but rather an after-the-fact recording
of expenses.
- Look at your “taxable income” line on your income tax
return. If it is over $56,800 (married) or $28,400 (single), assume
you have some income that is being taxed at 25% federal and 5%+ state
for a total of 30%. That means anything you or your spouse put away
in a TSA, 401k, or 457 deferred comp plan will only reduce your take-home
pay by 70% of what you are putting away. Plan on increasing your tax-deferred
investment when school starts and talk to your spouse about increasing
his or her 401k contributions.
- Remember you can also take advantage of a Roth IRA, using after-tax
money you may already have in savings accounts, etc. You will never
pay income taxes on the growth or income you get from a Roth IRA,
so you have no reason not to utilize one every year. Your limit for
2004 is $3,000 if you’re under 50, $3,500 if you’re 50
or over. Again, use no-load mutual funds or attractive fixed-interest
products for your investment. Especially start investing in a Roth
IRA if you are in a lower tax bracket (see #7).
- Discuss estate planning with your spouse and your parents. If you
need will forms for married, single, or divorced; Wisconsin Basic
Power of Attorney for Finances and Property; Wisconsin Power of Attorney
for Health Care; or Wisconsin Living Will forms, contact me and I
will send you forms along with directions. Do you remember reading
about that woman in Florida who was in a coma, while her husband and
parents were disagreeing about what to do? If you have a durable power
of attorney health form, that will not happen to you.
- What is the dollar and percentage difference between where you
are on the salary schedule and where you would be if you got the most
advanced degree on the schedule? Remember that not only will you make
more money while working if you get the advanced degree, but you can
assume that you will get about one-half of the difference extra every
year during retirement. Not only that, but, historically, retirement
payments have doubled every 13 years. It may be a smart business investment
to get the higher degree.
- Discuss all of the above with your spouse. It is important you
both know the family financial situation.
- Consider making a summer financial planning appointment. I provide
member appointments throughout the summer. As this paper goes to print,
there are appointments available in July and August. To schedule an
appointment, call Diana Buchholz
at 608-276-7711 or 800-362-8034, extension 253.
I hope to see you in a seminar next year and/or meet with you personally
to discuss your financial questions. Enjoy your summer!
Posted June 2, 2004