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The Basic Financial Plan

Basic Plan

A frequent question that people ask their one financial friend all the time is, “What should I expect when…” and the next bit is usually the part about getting a new job, or paying for a house, or what a good interest rate looks like for a car. Sometimes these questions are about saving for retirement, what a realistic return is for their 401(k), and how they should prepare to retire. Occasionally the question is “why is it important that…” or “Do I really need…” of course the answer is usually yes.

“Yes if you save younger it’ll make it so you can retire easier”, “Yes, Life Insurance is beneficial for most people who have dependents or debt like a mortgage”. The fact that you’re asking, is a sign you have a general idea of what you should be doing.

I figured I’d try to compile a bunch of basic principles that will get any individual to retirement in a relatively save and aware way. The purpose here is to help you set your expectations of what you need to do and understand in order to have enough money to one day be able to say, “You know what? I don’t need a job anymore, and I can live the rest of my life off of my own money.”

 

There are three basic parts of our financial life: Saving, Investing, and Diversifying.

First: Saving

Everyone hears a ton about saving, so I’m not going to hash why you should save any more. Just a few stats. The average person that should retire, (I.e. is 65+ years of age), only has about $80,000 according to Dr. Craig Israeleson of UVU. The Motley Fool recently found numbers could be potentially as high as $148,000 for those between 65 and 75.

Why does that matter to you as a 20-30 year-old? Here’s why, those people that can’t retire, they are holding your jobs. Once they retire, everyone down the line can start moving up.

The amount you save will directly relate to how much money you have for retirement. Many experts recommend saving 10% of your income, Dr. Craig Israelson, who performs research and analysis on portfolio theory, and investment returns suggested in a lecture at UVU that many millennials should adopt a rate of 15% of savings for retirement. Once you graduate and get that first job, immediately start saving 15% of every dollar you earn for retirement, and according to the experts, you’ll be very much secure for retirement.

Second: Investing

Being a Millionaire has nothing to do with income, but everything to do with Net Worth. Think about how time affects the value of money. Its been exhaustively said, so you can just google it, but the difference between the same $5,000 invested at the age of 25 and invested at 50 when you’re 65 is dramatic and exponential.

Consider a Crockpot. Have you ever gone to church on a beautiful Sunday morning, come back in the afternoon, and decided, “I want a nice roast and potatoes for dinner” then set the crock pot at 5pm for dinner at 6?

If you have, you should seriously reconsider your dining experiences. Waiting until “Later” to save if you’re not in school, is the same as setting the crock pot a-cookin’ after church, instead of the morning of, so it can simmer and soak in goodness all day.

Investing: I’m sold, but WHERE?

This is where everyone says, “Jacob, you’ve sold me on this. Where do I put my money?”

Betterment is an amazing place to invest your money. Acorns isn’t half bad either. Wealthfront is a newer online investment site that utilizes algorithms, often called a robo-advisor(LINK TO 7 TYPES OF INVESTMENT ADVISORS), and your risk to make your money grow too, and its free for portfolios smaller than $15,000. It’s also not hard to go directly through a major company like Schwab, Fidelity, or VanGuard.

Part of your portfolio (your money for retirement), will be in your 401(k) at work. You’d better be matching that sucker to 100% of the matching contribution, because if not, that’s free money you’re missing out on. Make sure the limit of up to $5,500 a year beyond your 401(k) is going into an IRA with whatever advisor you’re using, because that can create some tax savings. Then, any above that can go into either a personal brokerage account through your investing institution or other more complex retirement accounts you can work with a professional on. (The secret is to get started).

Third: Diversify

Here is where I’m going to teach you some amazing truths about investing. If you’re invested in 10 different things and they are all going up by exactly 6% a year. There is some serious issues. That means all of your investments are perfectly correlated, which means if they drop one year by 40% (cough 2008) then they are all dropping. A good portfolio has uncorrelated assets. Meaning that at least part of the time, when one is going up, another will be going down. Some parts of the global economy will be having rough weeks or days or years, while others have awesome times, then 5 years down the road it’ll switch. Because the market is unpredictable, meaning that it’s impossible to know exactly what will happen, a diversified portfolio that has a little bit of money in all types of markets is proven to generally outperform any one specific investment type.

Three Analogies: Baseball, Salsa, and Cereal

Imagine that stocks are like baseball players. If one stock bats at .365 and another bats at .127 but only hits home runs, you want a little bit on both players! According to portfolio theory, the more batters you have, the higher your average becomes, while reducing variance. Stocks bat at about .700 and bonds bat at about .960. Enough to be in the hall of fame for any baseball player in the history of ever.

So, what does this mean? It means you should put money in stocks, put some in bonds, put some in Mutual Funds that use active aggressive algorithms and research to try to find opportune moments to buy and sell stocks to make you money, use some passive ETFS that just automatically balance 50 or 100 stocks in a particular category like large healthcare companies, or medium growth companies that pay dividends.

Imagine this investing like making Salsa. If you invest in the S&P 500, sure, you have some diversity, but you just purchased 500 different types of tomatoes. Of course, you can’t invest in the S&P500 but you can invest in ETFs and mutual funds that invest in it. So, if you invest in some large cap stocks for your tomatoes, then you buy some bonds for your onions, purchase some commodities for your cilantro, and so on and so forth, you’re going to be making a good salsa.

In fact, experts have shown that the recipe (allocation) of your salsa (investments) accounts for 94% of the deliciousness (returns) in them. Meanwhile, the ingredients (actual funds and investments) only account for less than 6% of the taste (return). Using a great recipe for salsa makes better salsa then just getting good ingredients, but having an awful recipe. If you have perfect ingredients, but the wrong recipe? You’re not even making salsa any more.

Many people have told me, “I’m invested in a mutual fund, I’m diversified”, or “I’m invested in an ETF” or “Target-date Fund”. Well, yes, this is diversity, but it’s the 200 types of tomatoes diversity. Think about Cereal boxes. Do you remember those funny boxes that had 8 miniature boxes inside of them? This is how you should think about a mutual fund. Each box of cereal is a specific investment, the Mutual Fund, or ETF, or Target Date Fund, is the whole package. It choose those 8 investments and said, “here’s a good deal”. If you choose a Mutual Fund for 12 different asset classes: Large Stock, Small Stock, Mid stock, non-us stock, emerging markets, real estate, resources, commodities, US bonds, TIPS, non-US bonds, and Cash, you’d have a pretty awesome set of cereals.

You will have created a beautiful portfolio, a fund of funds of funds. That is a recipe for success, that now only needs your savings added.

 

Remember your basic financial plan.

  • Save (now)
  • Invest (all of it above emergency funds and short term purchase plans)
  • Diversify (so 2008 doesn’t get you)
  • Retire (at 45, okay maybe not, but still retire)

You’ll thank yourself later (about the retiring side of it, and the stressful side of it, and the peaceful side of it)

 

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5 Ways to Take Dividends From Your Life Insurance Policy

Everyone at some point gets a Life Insurance policy. Why? Because if you die and you’re a parent, what is going to take care of your kids? If you have a spouse, what will keep your spouse running?

But I’m not here to argue whether you should or shouldn’t have life insurance.

I’m also not hear to deep dive insurance or explain the process of buying insurance.

This is about what you do when they ask you “How would you like to take your dividends?” My what? Aren’t dividends a stock thing? (Some maybe even asked, “What’s a dividend”?) To be brief: Dividends are the little extra bits a company pays to you for owning their stock. Some companies don’t give dividends because they reinvest earnings. Many life insurance policies pay dividends in some form, any policy that either invests in the market directly, or allows you to control the investments in the market will yield dividends.

There are 5 ways you can receive dividend payments. Here’s the simple way to remember: CRAPO

Cash

Reduces your basis and is not taxable. Basis is how much money you’ve put into the investment. If you’ve invested $2000 in a stock, and then sell it for $3000 later. You made $1000 dollars. Your basis is that $2000 you put in. With this option you’re reducing your basis by the amount paid out. This also has no tax consequences immediately.

Reduction of Premiums

This is just reducing your premiums. Premiums are how much you pay for your insurance contract. So, you can use the dividend money to make your expense a little less.

Accumulate Interest

With this option you basically keep the dividends invested. The insurance company keeps this money in the same account, but tracks its earning separately. The reason for this is that it’s taxable in the future. The rest of your invested money is still in that tax advantaged insurance.

Paid-Up Additions

Think of Paid-Up as “Paid-In-Full”. You utilize the dividends to add a tiny little bit of permanent insurance to your policy that you no longer pay premiums for. A lot of life insurances have options where you can convert your entire policy over to a permanent paid-up insurance. Of course, this reduces the amount of coverage, or money you get at death, due to the fact that you’re no longer paying into it.

One Year Term

Term insurance is a lot cheaper than Paid-Up insurance. This is when you use the dividends to buy term insurance that lasts one year then expires. The reason someone may do this is because they decide Paid-Up doesn’t add very much. If you look into the cost of permanent insurance compared to term insurance, you’ll see really quickly that term insurance pay-outs can be huge compared permanent insurance. The other real difference though, is term insurance expires. So, if you don’t pass away during the time, then it expires.

Most people usually go with Paid-Up additions, but depending on your situation you may choose another.

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Why you want a Certified Financial Planner, Why I don’t want to just be a “Financial Advisor”

Confidence comes through cognizance.

Now, everyone has heard the term ‘Financial Advisor’ before. However, did you know that not all terms mean what you think they mean.

Literally anyone can be a Financial Advisor. According to Investopedia,

“Financial advisor” is a generic term with no precise industry definition… What may pass as a financial advisor in some instances may be a product salesperson, such as a stockbroker or a life insurance agent. A true financial advisor should be a well-educated, credentialed, experienced, financial professional who works on behalf of his clients as opposed to serving the interests of a financial institution.

“Go to college;” I’m now a Financial Advisor by the legal definition. “Spend all your tax refunds on Pringles and Custom Baby-Seal Leather Boots;” I’m now a Financial Advisor. “Put that million dollars you inherited into this annuity;” I’m now a Financial Advisor and, depending on the company I work for, possibly $30,000 richer (assuming a 3% commission, some can be as high as 10%!).

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A well diversified Pringle portfolio
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Custom Leather Boots – Good Investment

 

 

 

 

 

 

 

 

Click on this link and print your own certificate of being a certified Financial Advisor from Last Week Tonight’s Financial Advisor Academy signed by John Oliver, the Dean of Financery! That’s how easy it is to say you’re a Financial Advisor.

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Boom – My dog is a Financial Advisor

The reason I want to be a Certified Financial Planner Designee is so that those served will be confident and secure the advice they are given is for their best interest. A CFP designation requires a LOT of work. Here are some of the many requirements

  • A Bachelor’s degree
  • Mastery of 100 topics of financial planning
  • Classes and credit hours in these areas:
    • Insurance Planning
    • Employee Benefits Planning
    • Investment and Securities Planning
    • State and Federal Income Tax Planning
    • Estate Planning
    • Retirement Planning
    • Asset Protection Planning
    • Estate Tax, Gift Tax, and Transfer Tax Planning
    • Financial Counselling
    • Capstone Course
  • Passing a 6 hour test with 170 questions about the application of the 100 areas including:
    • Two case studies
    • Mini-case problem sets
    • Stand-alone questions
    • This test has about a 42% pass rate
  • 3 years of work experience in all areas
    • Establishing and Defining Relationships
    • Gather Client Data and Goals
    • Analysing and Evaluating Financial Status
    • Developing and Presenting Financial Planning Recommendations and Alternatives (yeah. you can’t give one idea, but a cluster of them)
    • Implementing the choice
    • Monitoring the Financial Plan

Oh. And there are is more. There are ongoing requirements to be a CFP Designee.

There is a strict code of ethics involving criminal background checks and compliance to track everything you do. Every two year period requires thirty hours of ongoing continuing education.

Also, you CAN’T have a CFP Certification if you’ve had any of these.

  • Felony conviction for theft, embezzlement or any other financial crime
  • Felony for tax fraud
  • Revocation of any professional license previously (with exceptions)
  • Felony conviction for any degree of murder or rape
  • Felony for a violent crime in the last 5 years.
  • Two or more bankruptcies (with exceptions)

So, except for a violent crime lasting 5 years on your record, anything else is a permanent block from ever being a CFP Designee.

Who would you rather work with on creating your financial action plan?

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CFP Designees provide the best advice

Do you understand why it’s worth looking for a CFP with all of that under their belt, compared to just a “Financial Advisor” (I hope you printed that URL off, because if so, you’re an Advisor now, too!)

My interest in studying financial planning by becoming a CFP Designee is to help individuals feel aware, secure, and prepared for retirement. The peace that comes from knowing you are acting and achieving your own goals financially is  powerful and strong that builds real confidence to act. I’m also motivated to become a CFP Designee because it is something that is universal and needed for everyone; this field is a way to help all individuals and therefore families too, no exceptions. A CFP designation gives strong support to show I can do comprehensive planning, and have dedication to providing value and accuracy.  Attendance at finance conferences, Financial Planning Association meetings, and volunteer work through my school’s student financial counselling centre, the Money Management Resource Centre, are all ways I’m becoming as knowledgeable I can for the benefit of those I will work for. Individuals need help on a vision, and then they can make the wise decision.

I want to help millennial entrepreneurs, newlyweds, dance teachers, college students, and the active high paced people of today to understand how their money works and how to keep their wealth from slipping through their fingers. People are scared of money, or worried about money. If they are cognizant then they can be confident. My goal is to become a reliable counsellor; I will be a planner to help others make educated choices to feel confident and prepared to reach their vision: bear hunting in Europe, having a large family, creating a company from scratch, or planning 40 years in advance for retirement.

– Jacob Johnson is a student of Personal Financial Planning at Utah Valley University, He is a member of the student Financial Planning Association there and enjoys competitive ballroom dance.

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– Thank you Rebekah White for the wonderful craftsmanship and help in editing and reviewing my writing. Thank you for helping me to be confident. Rebekah has a degree in Creative Writing and helps authors and individuals express their thoughts in more effective and clear methods using their own natural voice. * If you’d like contact to her please let me know!