Happy New Year!

Although the new year is just another date on the calendar, it does give us an opportunity to reflect on the past twelve months and how we might make the coming days better.  Many parts of our financial lives do reset with the beginning of the year, so I would like to offer some recommendations for improvement.

1)  Keep better records - This isn't just for the detailed personalities out there.  There is a lot of insight and power that can only come from accurate recordkeeping.  There are even simple solutions like Mint.com that will do most of the work for you.

2)  Accept the past and start fresh - Although real estate troubles or job changes might have changed your financial situation, you can reboot and develop a new financial plan for your current realities.

3)  Reduce clutter - This might include closing some unused accounts or consolidating some old investments.  Less clutter in the practical areas of our lives allows us to focus more on the things that matter most.

4)  Live life more efficiently - There are lots of small things that can be done here.  Reducing unnecessary shopping trips, replacing inefficient light bulbs or appliances and programming your thermastat are just a few.

5)  Insure the important things in life - You should not take insurable risks that could cause harm to your family in the event of an accident or disaster.

6)  Establish an estate plan - This can include a will, health care directives, and a trust.  The first step is to think about it.

7)  Think about your investments - This is an area that can be very costly when ignored for a long period of time.  Each investment involves risks and these should be carefully reconsidered periodically.

8)  Reduce unnecessary debts - There are good debts and bad debts.  Debts should be reviewed, prioritized and paid down in a smart way.  For example - pay down the debt with the highest interest rate first.

9)  Do some math - You might not enjoy numbers, but some basic arithmetic can help your financial security.  Basic assessments of income and outflows and projected future savings balances have to be done periodically to have a sense of realistic goals.

10)  Share what you have learned - Family and friends can benefit greatly from the financial lessons that you have learned through your experience.  Be a good example of healthy habits that will be observed by others.

I could list many more, but this should provide some ideas for many of you.  If this is seems overwhelming, contact a fiscally-minded friend, family member or financial professional.  They would be happy to help!

Should You Save for Your Childrens' College?

Many parents of young children consider putting aside money for their children's college education a top priority.  As a parent of young children myself, I feel like the current and future education of my children is of critical importance.  That being said, everything has a cost and paying for your children's college is something that you need to be able to afford.  A popular online columnist, Emily Lambert, recently wrote about reasons that you might not want to save for college.  As a financial planner, I consistently discuss the cost of a college education with my clients and how to view this expense like an investment instead of an obligation.  I'm continually surprised when I meet parents who are willing to put up to six figures into private school tuition without any sort of idea about what this "investment" might lead to.

I recently attended a presentation by nationally-known parenting experts, Richard and Linda Eyre about entitlement.  They shared the maxim that "ownership is the antidote of entitlement and also the prerequisite of responsibility."  I feel like we should help our children own their education and future career.  As a result, they are much less likely to feel entitled and more likely to suceed.  Part of this ownership might require them to invest in their college education through savings, scholarships or part-time work during college.  Parents have many responsibilities in rearing their children.  These responsiblities often require financial outlays, but I encourage parents to evaluate their spending regarding their children in order to make sure it is leading to ownership instead of entitlement.

Government Debt and the Stock Market

The headlines the past few weeks have been dominated by political wrangling about raising the government debt limit and the related volatility in the stock market. As a financial professional, I do follow the headlines, but I also try to formulate relevant lessons that I can apply to my own or my clients' situations.

Although there was hope that the discussions between Congress and the President would lead to some significant improvements in the fiscal outlook for America, the resulting bill basically arranged financing for spending that has already occurred. Although big changes still could be coming, the lack of significant improvements in some economies is one thing that has contributed to decreases in various stock markets the past couple weeks.

I think that more people are coming to the realization that the government can't solve our problems. In America, we are our own government and the problems at that level are often a reflection of what is going on in individual homes and families. The solution is ourselves. We should individually evaluate our household finances, our debt situation, our savings and our education to make improvements. Just as America needs a new plan for government revenues and expenditures, we can each make an individual financial plan to improve our lives. It can start with small changes and eventually we'll see improvements at a higher level. Let's return to what made America great and get to work!

Do you have control of your finances?

As I talk to family, friends and prospective clients, I often hear about financial challenges. Most people have financial challenges. If not, they would almost always like to be in a better place when it comes to their financial well-being. I try to remind people that the challenges aren't always the problem. The problem is often the fact that people don't have a clear picture of their financial situation. Many people aren't even aware of what parts of their financial lives they are in control of. I'd like to review a few areas and offer some suggestions.

A good starting point is a net worth statement and a income statement. In plain English, a net worth statement is a listing off all positive and negative account balances in order to come up with the net positive or negative "net worth." An income statement is a listing of all income and expenses over a chosen period of time. Once you have pulled together a basic summary of where you are, you can start to look at what you can control to improve your financial situation.

Bank Accounts - Are you paying unnecessary fees or missing out on earning interest? Do you have adequate savings?

Investments - Are you taking inappropriate risks considering your stage in life? Do you know what you are investing in and why you are doing it? Are your investments diversified? Have you had a professional assessment of your investments?

Real Estate - Do you have the lowest rate available on your mortgage? Is your mortgage balance appropriate? Are you maintaining your home and only spending money on it in "smart" ways?

Credit Cards - Do you pay more interest and fees than is necessary? Do you even need to use credit cards to begin with? Can you reduce the balances that are incurring interest?

Other Loans - Borrowing money for purchases should be well thought out and should not be a frequent behavior.

Salary - Are you living up to your potential at work? Have you evaluated your career path and what type of spending that supports over the long run?

Monthly Expenses - Which of these are necessities and which of these are luxuries? Can you really afford all the luxuries?

Taxes - Do you take advantage of all available deductions? Do you consider the tax impact of your large financial decisions?

The Bottom Line - Are you living within your means? Is more coming in than is going out?

Gaining control of your finances takes work, just like keeping your body healthy, keeping your marriage strong and teaching your children correct principles. Like all of these things, increased financial control will expand your options in life and lead to greater peace of mind. We are all faced with challenges we can't control, but we also have the ability to take charge and chart the path we want to follow in life.

The Complexity of the Tax Code

As the tax season is now upon us, I thought I would address the complexity of our current tax code and offer some of my ideas about simplification. I attended a tax presentation at my local chapter of the Financial Planning Association where the presenter, a CPA, questioned the entire value and purpose of our tax code in its current form. Once certain provisions of the Health Care Act are enacted in 2013 (if they are enacted), we will effectively have three concurrent systems of taxation, an ordinary income tax calculation, an alternative minimum tax calculation and a tax surcharge calculation. Although our government does need to collect revenue to serve certain functions, the method and complexity of the taxation of individuals, trusts, estates, partnerships and corporations has gotten somewhat out of control.

A lot of discussion has been going on recently in America (see this article) about our Federal debt, deficit and method of taxation. I am in favor of dramatically simplifying the current taxation system and using some type of a "flat" tax. Although certain favored deductions would be eliminated, this could be done gradually or with some type of a standardized exemption. The new estate tax provisions are a fairly good example of this, although they are only effective for the next two years at this point. A large $5,000,000 exemption is available to all individuals and a lower 35% tax rate is imposed beyond that exemption. Although simplifying the tax code like this would dramatically reduce the need for various tax and legal professionals, the resources that are currently focused on our tax system could be put to use in much more productive and valuable endeavors. America is known for adaptability and ingenuity when it comes to our economy. I think we should reduce the complexity of our tax system and let all Americans decide how to better use their time and money.

The True Principles of Investing

There are numerous sources of investment information in the world, many claiming to have something that will provide an above average return or provide access to exclusive, profitable information. Although I'm open to new sources of investment information, I often view these sources somewhat skeptically until I understand the source of the information and how tried and tested it is.

Although things are changing in the world every day, there are some principles of investing that are as close to truth as it gets in the financial world. First of all, markets work. Various types of investments provide an expected return based on the risk of the investment and markets price these securities commensurate to the risk and expected return.

Second, and related to the first principle, is that investors are rewarded in proportion to the risk they take. This may not seem true in the short run, but over longer periods of time, this is almost always the case.

Third, diversification is a critical investment tool. It allows investors to capture risks that generate expected return but reduce risks that do not. The common phrase for diversification is "Don't put all your eggs in one basket."

Fourth, the appropriate risk or asset allocation is unique to each investor. The various rules of thumb do not apply to every investor. A customized approach considering the risk the investor can tolerate is best.

Finally, costs are variable and should be considered. Although two similar investments may provide similar returns, two investors could end up with vastly different sums of money because of the costs related to accessing these two similar investments. As consumers, we should be aware of the various costs of investing and comfortable with their appropriateness to our situation.

I seek for true principles in any area of my life that help me make more informed, reliable decisions. The investing world has been analyzed and researched for many years in order to uncover what things work when it comes to capital markets. I welcome feedback and discussion as I continue to seek and implement the true principles of investing in my profession.

Financial Lessons Learned

With another tax season behind us and some hopeful economic signs appearing on the horizon, I've taken an opportunity to reflect a bit on the past couple years. There are some lessons that have been learned or relearned by myself and many of you out there. If you haven't learned any lessons then this post might give you some more financial insight.

1. "Good Times" can't last forever. Although we are blessed as Americans to have a unique form of government that has fostered much success and prosperity throughout our history, we are still subject to the economic ups and downs of a free market economy. If anything, we are subject to these even more than some more socialist or heavily regulated economies.

2. Freedom isn't free. Somewhat related to my previous point, we have to pay a price for the "ups" in our economic cycles with the "downs" that inevitably follow. More government involvement in our economic lives my flatten these cycle out a bit, but the price of more government is less freedom.

3. There is a cost to everything. The recent downturn has brought out a sort of panic reaction which says we need to pull ourselves out of this downturn--quickly and at any cost. The cost of some of the recent government legislation is very significant. It might not be immediately apparent, but we are burdening our future generations with more taxes without giving them a say in the decision. There are also costs to the substandard moral behavior which brought on much of this crisis. The cost has been severe and not just to those who acted unethically.

4. Economic cycles are beneficial. Although this recent recession has caused much financial pain in many people's lives, changes are often made which will pay future dividends. Companies have improved processes and removed excess costs. Families have reevaluated purchasing decisions and paid down debt. Governments have been forced to provide services more efficiently or in a more need-based manner. Many of these changes will strengthen our country to allow for future growth cycles.

5. Despite the financial challenges, we should be grateful. We are blessed with families, friendships, freedoms and opportunities that many people in the world could never imagine. Let's not forget those things because of some short-term disappointments and surprises.

Emotional Buying

I recently attending a church fundraising auction which was an enormous success. Considering that $$ and purchases were involved, the evening gave me some food for thought about how people buy things. The auctioneer was very talented and humorous and made the evening enjoyable for everyone. His performance, along with the fact that the bidding got a bit competitive all led to the success of the evening. The upbeat emotions of the evening led people to have fun and spend money. I have been involved in several charity auctions and this is often the case.

So how does this relate to our everyday and not so routine purchasing decisions? We often head into a store to buy something and come out with something else or more than we intended to buy. Our mood and the presentation of the store affect our purchasing behavior. This might be common sense to most, but it is often forgotten, especially when larger purchases are involved.

As a financial planner and as a rational consumer, I try to have a plan in place before I am in a situation to spend money. This doesn't always work and isn't always necessary with small, insignificant purchases, but is recommended behavior for the big decisions in life. Next time you are choosing a home, car or large appliance, keep this in mind. I would also recommend a plan or a referral in choosing important services providers, like doctors, dentists, financial advisors and the like.

The Economics of the Holidays

Most people are probably aware that more money is spent around Christmas time than any other time of the year. One estimate by Joel Waldfogel of the Wharton business school at the University of Pennsylvania concluded that $66 billion was spent by Americans on gifts in 2007. It is also estimated that 135 million Americans participated in Black Friday (the day after Thanksgiving and first day of the traditional Christmas shopping season) in 2007.

Considering the dollars spent and the enormous number of people involved, there are some significant economic lessons that can be learned. I love the holiday season, but like many things, I try to take a practical, analytical view at times and see what I can learn about human behavior.

1) Much of the holiday spending is unnecessary, or at least unappreciated. I don't recommend that everyone think selfishly, but Waldfogel also estimates that $12 billion of the $66 billion spent each year is inefficient spending, or money that the recipient wouldn't have spent on themselves. Gift giving is a wonderful tradition, but gift cards, cash or more educated purchasing can result in a more economically effective Christmas.

2) Consider giving to those who are truly needy instead of excessively giving to those who aren't needy at all. The percentage of GDP produced at Christmas time has actually decreased over time, so maybe we are improving our behavior a bit here.

3) Think about the long term value of Christmas gifts or decorations. Many products are designed for the "wow" factor, but are expensive or underutilized over a longer time period. Artificial vs. real Christmas trees and regular vs. LED Christmas lights have various costs and benefits that should be considered.

4) Certain gifts and traditions are not critical to a good Christmas. The most meaningful things are time together with family and friends and traditions that promote giving, peace and harmony amongst people.

Despite my tendency to focus on the economic side life, I love the positive, uneconomic parts of the holiday season. Like many significant events in life, Christmas provides an opportunity to think about the costs and benefits of various financial decisions and how they fit into a sensible long-term financial plan.

The Costs of Investing

Much has been said recently about a new sense of frugality in our economy. Down markets and higher levels of unemployment have a nasty way of forcing people to be more frugal. Whether this frugality continues is yet to be determined, but one thing is certain--consumers are more price conscious in today's environment.

So what is the price of investing? When I say price, I'm referring to the transactional or management cost of investments. The risk associated with stocks and bonds and the potential cost due to realized losses is another topic and a separate discussion. There can also be tax costs associated with investments which I won't address in this post.

The do-it-yourself investor will need to set up an online trading account and will typically pay a trading commission of $8-20 each time they buy or sell a stock. There might also be an annual maintenance fee. Mutual fund trades can have transaction fees, or might be "no-load," which means there isn't an initial cost to purchase the shares of the fund. Mutual funds also have ongoing management and trading costs, which can be quite significant. These costs are disclosed, but not easily obtainable or comparable for the individual investor. Mutual funds can also have front end (purchase) or back end (sales) charges.

The investor working with a professional financial advisor will typically pay on a transaction or ongoing management basis. Some advisors will also consult on an hourly basis. The transaction cost is often a commission or front end charge that is passed on to the advisor. Mutual fund management fees are also shared with advisors at times and surrender charges cost the investor for selling out of an investment before a specified period of time has passed. An ongoing management fee is typically charged based on the value of an investment portfolio.

The myriad of costs, fees, loads and commissions are often complex, confusing, and at times, unnecessary. They tend to enrich the advisor at the cost of the client or investor. Although any professional investment advisor needs to be compensated to make a living, I recommend three things to keep in mind with regard to investment costs.

1) Costs should be fully and completely disclosed. Financial advisors are more likely to hide their fees if they are unnecessary or unreasonable.

2) Costs should not be charged at multiple layers, if possible. Investing can be done in an efficient, institutional manner where costs aren't charged at many layers without any corresponding benefit.

3) The financial advisor's compensation should be fully aligned with the client's best interest. An advisor shouldn't be paid solely for a "sale" without any ongoing accountability for client success and service. Commission-based salespeople are motivated to convince you that their solution is the best because that is how they are paid.

Investing significant financial assets in an appropriate manner can be critical to a prosperous and flexible financial future, but careful attention should be given to the price of investing before moving forward with an approach.