Are You Wealthy in More Ways Than One?

Wealth is often measured by money in the bank, real estate, cars or other material possessions. The traditional way to measure one's wealth or personal net worth is to add up all the assets, subtract the liabilities and the difference is the net wealth of an individual. Although I do these calculations as a professional, I also like to consider things like time commitments, stress levels and appropriateness of debt, among other things.

Have you ever considered if you are "time affluent" as the online columnist Laura Rowley has observed? Do you have all the time you desire to be with friends and family and enjoy the material possessions that you have acquired or do you find yourself spending all your time acquiring the material possessions?

Do you have unnecessary stress in your life? Is some of this stress related to financial decisions and burdens that may have been unintentionally placed upon yourself or your family? Do you make other poor decisions because of the stress that you are feeling?

Finally, are you comfortable with the amount of debt you have taken on? Have you ever considered the appropriateness of your debt? Even if you can afford the payments is debt always necessary to acquire what you really need in life?

I don't want to sound like a psychologist, since I'm not trained as one, but finance definitely involves more than a net worth statement or debits and credits. In addition to preparing professional financial statements and using institutional money management techniques, I like to assess how balanced people are in their lives and how financial decisions are adding to or detracting from ones total "wealth" in life. I think this is something we can do better with, especially as Americans in an economy that seems to be all about acquiring things.

What's Ahead for Taxes?

As tax time comes around, many people are wondering what the future holds for taxes in the United States. If President Obama gets what he wants, tax rates will go higher for higher-income Americans. His recently proposed budget has the Bush tax cuts going away at the end of 2010 for individuals making $200,000 or more and couples making $250,000 or more (sounds like a marriage penalty to me).

The budget proposes that the top two tax rates would go from 33 to 36 percent and 35 to 39.6 percent. Capital gains taxes are also proposed to go from 15 to 20 percent for this same group of high-income Americans. It is also expected that the estate tax will be reinstated retroactive to January 1st at a 45 percent rate.

No one likes to see tax rates increase, and these changes aren't a sure thing, but we do need some fiscal changes at the Federal level in order to protect the future generations in America. As opposed to playing political games with tax policy, I would prefer that the President and Congress enact fair tax policy for all Americans so we all have "some skin in the game," as opposed to deciding who is rich and who is poor and who should be rewarded or punished for his or her political leanings. I would also appreciate greater consideration of the spending side of the equation. Consistent, increased spending seems to be a given, despite the economic ups and downs that American households face. We would all be on a path to bankruptcy if we increased household spending year after year without considering where the income was coming from.

All this being said, these tax changes can be managed and muted somewhat by staying informed of what's ahead and working with a licensed financial professional, when needed. We should do our best as citizens to influence the policies in Washington and then stay informed to deal with the good or bad consequences of those decisions.

What a Difference a Year Makes!

Although unemployment remains high and the media may continue to focus on the negatives of the past couple years, things have turned around dramatically in the stock markets. For example:

S&P 500 (Large U.S. Companies)

Down 38.49% in 2008

Up 23.45% in 2009

EAFE Index (Large International Companies)

Down 45.09% in 2008

Up 27.75% in 2009

MSCI Emerging Markets Index (International Companies from Developing Nations)

Down 54.48% in 2008

Up 74.50% in 2009

The trend is quite similar for many other stock indices in 2008 and 2009 and the positive returns are even more dramatic from the point the markets bottomed on March 9, 2009.

Pessimists might say that although we have seen positive returns in the markets of late, we still aren't back to the 2007 peak and we don't know where we're going from here. Both of these points are valid, but a more positive view would be that we've made great progress in coming back and the markets (which typically forecast 6-9 months forward in the economy) are forecasting significant economic improvements.

A couple conclusions from this short analysis would be that markets are volatile (2008-09 were an extremely dramatic example) and that investing is a long-term proposition with bumps along the road. This recent period once again confirms the need to have a realistic, diversified investment plan and to stay disciplined through the ups and downs.

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.

Tax Rates - Where are They Headed?

A pretty strong consensus exists that tax rates are going up. The massive deficit spending and entitlement programs of our government make this a near necessity. Different political parties will express different solutions to our current fiscal crisis, but rising taxes is included in many of these. Although most people don't like paying taxes or the prospect of increasing tax rates, awareness can help us plan and be prepared for these impending changes.

Personal Income Taxes - It is unlikely that personal income tax rates will change in 2009 or 2010. The Bush tax cuts will expire at the end of 2010 and the top tax rate at that point will revert back to 39.6% from a 35% rate today. A surtax for high-income individuals has been proposed in various health care proposals, but this should not take effect until 2011. A higher capital gains tax rate and other tax increases would likely also take effect then.

Estate Taxes - The current estate tax is set to expire at the end of 2009, with no estate tax being due in 2010. It is extremely doubtful that Congress would let this revenue source go away. Various proposals are being debated in Congress right now. The current estate tax rate of 45% and the current estate tax exemption amount of $3,500,000 per individual could change, but this should become clearer in the next several weeks.

Business Income Taxes - Business income tax rates have not changed much recently, but Congress has implemented various bonus depreciation deductions and additional loss carryback provisions to try to give businesses tax breaks in recent years. A more comprehensive business tax overhaul is possible in the next couple years, but these changes are unclear at this point.

Taxes are a significant part of all individuals and families' financial situation. Although the tax impact of various financial decisions should not be the primary consideration, awareness of current and future tax rates and deductions is an important part of any financial plan.

Is Growth Returning?

The third quarter GDP (Gross Domestic Product) report was released today and it showed an increase of 3.5 percent. This means that the total value of all goods and services produced in the United States from July to September grew 3.5 percent from the prior quarter. This quarter of growth follows four consecutive quarters of decreases and officially marks the end of the current recession.

Is this all good news? The answer can be "Yes" or "No," depending on how you interpret the news and who you are talking to. It is a good thing to see some growth in the American economy again. We all benefit from growth and progress in our economy and standard of living. One caveat though, is that the American GDP is still 10 percent below where it was at its peak in 2008. The unemployment rate also stands at 9.8 percent, which is the highest it has been since the early 1980s.

Many corporations have shown earnings growth recently, but much of this is due to cost cutting as opposed to revenue growth. Much of the GDP growth was also due to consumers purchasing automobiles, many encouraged by the "Cash for Clunkers" program. Government spending in general has also been higher than normal recently.

An ideal situation is an economy experiencing fairly consistent, sustainable growth with low unemployment. The American economy has experienced this situation in the past and should again in the future, but much government intervention needs to be reduced and rolled back so the U.S. economy can stand on its own. American workers and consumers have the will and the desire to see our economy succeed. Our economy will move forward from a stronger base once a recessionary period is behind us. No one knows how the next few years will play out, but we are seeing more and more positive signs.

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.