by Miata on February 14th, 2014
Be Careful With IRA Rollovers
Research plays a huge role in your art. Whether you’re exploring the motivation for a character you’re about to play, scouring the net for new textures and ideas for a painting, or digging into the history of any revolution for your next book, research is at the base of most artistic pursuits.
It’s the same with your financial decisions.
I mention this because while doing research, I noticed that FINRA, the board who overseas most financial professionals, was going to focus more on retirement plan rollovers. It seems they’re worried that too many people might be making poor decisions in this area.
So, to help you with your research, I thought today we’d discuss what a “rollover” is, how it should work, and what FINRA might be worried about.
What is a “rollover”?
If you worked in the United States and have a retirement plan, such as a 401k, 403b or 457 plan, a “rollover” is the law that allows you to move the money inside this plan to an IRA without paying taxes immediately. Instead, you’ll still avoid taxes until you take the money out of the shelter.
Why would someone do a rollover?
A rollover allows you to be more flexible with your money. Instead of only relying on your old employer’s plan options for investments, you can now pick from a wide variety of instruments that you choose on your own, or with the help of an advisor.
In most cases, moving your money to an IRA allows you more freedom. Much like most artists avoid being confined, your money has the opportunity to perform better when you widen the boundaries. While most 401k plans only have several mutual funds, you may invest an IRA in anything from CDs to exchange traded funds, to individual stocks or bonds….not to mention those same mutual funds you had available in your 401k plan.
Why would someone decide NOT to perform a rollover?
There are very few reasons NOT to roll your money over to an IRA. First, if you worked for a company whose stock has soared and you held some in your 401k, a rollover IRA might be a horrible idea (check with an accountant on better strategies). Also, if you’ve left the service of your company between 55 and 59 1/2 years old, a 401k plan gives you more flexibility. Otherwise, an IRA is usually the best tool to use.
Should I Talk To An Advisor About an IRA Rollover?
Here’s the part where FINRA is worried. Some advisors have been making unsuitable recommendations for IRA rollovers. Here are a few:
- They recommend an annuity inside your IRA. Annuities do have some attractive, but expensive options that can guarantee your money. However, annuities themselves are tax sheltered investments. So, a tax-sheltered annuity inside of an IRA tax shelter makes little sense. Because annuities often pay huge commissions to the agent, some unscrupulous agents are happy to sell you one. When to use an annuity in an IRA: you want to invest in the financial markets but also want some guarantees your money will be around. When NOT to use an annuity: An agent or advisor tells you that it’s just a grouping of mutual funds. You can buy these funds FAR cheaper outside of an annuity.
- They advise you to buy stocks that they’ll manage in a “discretionary” account. This practice is going away quickly, but some advisors like to trade stocks often to earn commissions. This practice is called “churning” and should be avoided. When to use a “discretionary” account: you have a TON of money and want to invest some with a manager who you feel has a good track record. When NOT to use a “discretionary” account: every time except the one listed above.
- They want to sell you a series of mutual funds with front or back end fees. These funds are called “load” funds, and garner a big commission for the advisor (if it’s a front end fee it can be as high as 8%!). When to use load funds: You have a trusted advisor and want to make sure he gets paid. When not to use load funds: If you have little relationship with an advisor and want to avoid high up-front or internal costs in your investments.
There are other ways FINRA worries that advisors might not have your best interest at heart when advising you to roll over money to an IRA, but these are the biggies. If you feel like you’re being pressured by an advisor, seek a second opinion. If you aren’t sure if the recommendations an advisor is making are suitable, do what you’d do in your art: jump online and research. You’ll feel stronger as you learn more about how your money works.
by Miata on January 31st, 2014
Are You Winning Awards In Your Life?
The Oscars nominations were announced two weeks ago. As always, I was surprised by some picks (Emma Thompson and Forest Whitaker being ignored were big shocks to me) and had lots of fun reading the choices to discover which of the films I’ve seen and which ones I still have to hurry up and watch!
The Oscar announcements started me thinking…over the course of the last year, I’ve given you financial tips and tools to help you focus on your craft. So now, it’s award season….
What award would you deserve to win this year?
While some people roll their eyes at award season, it’s a great reminder that our time here is finite. It seems like just yesterday we were watching the Oscars, 2013 version, and we’re already checking boxes to guess who’ll win in 2014.
What did you do with that twelve months?
Read the rest of this entry »
by Miata on January 17th, 2014
My husband and I were watching the new David O. Russell film American Hustle this last weekend. In one scene two of the characters are listening to a Duke Ellington piece that starts off with a dramatic flourish. Christian Bale’s character laments that nobody makes music like that anymore.
In art, there’s power in a first impression. Writers are taught to begin in the middle of the drama, not at the beginning, for maximum effect.
You can do that with your money, too.
By starting off 2014 with a financial “bang!” you can focus on your craft, your family, ways to earn a side income…whatever. You’ll have more money, more time, and less painful drama. (Although I love drama on the big screen, I DON’T love it in my personal life.)
Let me teach you three great ways to start 2014 like you’re in the middle of the action, with your income, your budget and your savings:
- One Big Income tip: Put the ball in someone else’s court.Think of three opportunities to make money that involve others, and send them an email or make a quick phone call to get the ball rolling. Why? You’ll be amazed at what happens when you take action and move the ball to someone else.To quote my high school science teacher, “Objects in motion tend to stay in motion.” By making that first call or sending that first email, you’re setting up a chain of events that didn’t exist moments earlier.
Consider the game of tennis. When you hit the ball over to the other side successfully, you don’t have to worry about it until (and IF) the other player hits it back to you. In fact, you can’t score points when you have to hit the ball…only lose points. It’s when the other person has the ball that you score in tennis. It’s the same in life with your income. You can’t make anything happen with your income if you don’t force others to consider a proposal.
Big Idea #1 for 2014: Reach Out To Others With Ideas That Involve You
- One Huge Budget tip: Begin tracking your expenses in 2014…and review it regularly.If you’re old enough to drive a car, you know how valuable the dashboard is when you’re trying to go anywhere. It’s the same for your goals…you need to create and pay attention to your dashboard to successfully navigate 2014.You’re going to need to know where your money is going to find ways to save…but who has time for a budget? Not me. So, I use tools like Quicken, Mint.com, or even a spreadsheet, to track how I spend money (even some big banks and credit card companies now offer tools to help you track your money).
Set up weekly times to review your expenses. If you budget with a partner or spouse, review everything together. Good budgets are about everyone in the family knowing how money is spent and living the next week toward your goals, not against them.
Big Idea #2 for 2014: Find tools to make income and expense tracking easy and then monitor them against your goals so you’ll rock at saving money.
- One Tremendous Savings Tip: Save money without thinking about it. According to the US Bureau of Labor Statistics, personal productivity has increased over 23% in the last ten years. That means the average person is accomplishing nearly a quarter more work today than in 2003.While that’s amazing, it also uncovers a truth that you already know: you’re overworked and short on time. At the end of a long, stressful day, who wants to think about saving? Yet, if you don’t save, you’ll never be able to own your future.
So, the key is to save without thinking about it.
Inquire if your bank will allow you to direct deposit money into a separate account for emergencies and holidays. You’ll be better off if you don’t have to touch the credit cards when your dishwasher breaks down or you need a vacation.
Set up an automatic deposit into a mutual fund. Most fund families will allow as little as $100 per month into a fund. If it’s automatic, you won’t have to think about writing a monthly check.
Sign up for a Roth IRA or 401k plan. If your workplace has a 401k or similar plan, by all means, use this for retirement because it’ll give you tax deferred money. Outside of work, check into a Roth IRA. Money grows tax free in a Roth, so although you’ll pay taxes now, you’ll always have this money (and the growth) without tax repercussions later. (There are some specific rules to Roth IRA contributions and withdrawals. Here’s the IRS web page to give you the details.
Big Idea #3: You’ll save TONS of money in 2014 if you make it automatic.
There they are! My three big ideas to help you light a fire under 2014.
Happy New Year, Abundance Bound family – let’s make this a great one!
by Miata on December 13th, 2013
When I first begin a new relationship with someone ready to begin building their financial house, I find one scenario repeats itself over and over: most have experienced some severe money problems that don’t seem to let up.
It’s like a nightmare where a tornado goes through town, followed by a hurricane, and then the overdue tax bill (that you didn’t know you owed!) arrives.
The truth is that it can sometimes be that bad in real life. Recently, I worked with an individual who had lost his job, then his car, and finally his home. A second had been the victim of an auto accident that kept her out of work for weeks, and then she had her wallet stolen.
It all seems so random.
Yet at the same time, it’s predictable.
A wise person once said that life isn’t about what happens to you; it’s about how you handle life’s challenges.
The meaning is powerful: We can choose how we respond to the adversity life throws our way. Instead of just letting bad things happen to us, we can use this knowledge to our advantage.
“What do you mean?” I’m sure you’re asking yourself. “That woman in your earlier story couldn’t help it that her wallet was stolen!” Absolutely true. She couldn’t help it that bad events happened to her.
However, she could build her plan ahead of time with the understanding that challenges, (sometimes quite painful ones) will always be a part of life’s adventure.
Most people spend their time thinking only about what they’ll accomplish if everything happens perfectly. But how often does that happen? I know in my own life, it’s never followed whatever script I laid out for myself ahead of time. Life has a way of throwing curveballs.
So here’s the question: If you were to plan with the expectation of some seemingly “random bad events,” what would you do?
1) How would you plan your work schedule if you knew life’s difficulties could happen all at once? You’d learn to appreciate the value of your time and ask for raises whenever possible. If you’re in a dead end job, you’ll realize that life is short and now (not tomorrow!) is the time to begin looking for your next great opportunity.
2) How would you plan your savings? You’d build a cash reserve. Sure, maybe your auto insurance will cover the accident, but will it also cover all the costs of not having reliable transportation while yours is being repaired? Also, will it cover the threat of “the next bad thing” happening? By having an emergency fund in place, you’ll deftly handle any second threat to your financial picture once the first one has arrived.
3) On that note, what would change about your insurances? Are your insurances up-to-date? Do you have reliable coverage? What would it take for you to purchase some?
Perhaps you already have reliable answers to each of these three questions. If not, now’s the perfect time to begin working toward a plan to cover that glaring Achilles heel. It’s never easy when bad things happen, but it will always be far less painful if we’re prepared with that second line of defenses, instead of closing our eyes and hoping life is always perfect.
by Miata on November 15th, 2013
How to Choose Life Insurance
While your art may be about freedom and creative expression, our lives are full of responsibilities and commitments. That’s what makes life insurance so important: if we can’t fulfill our responsibilities, do we want to leave a pile of unpaid bills and unfinished goals to our heirs?
I was making this argument to a friend recently, who replied, “What do I care, I’m dead!”
While that’s true, is that the legacy you want to leave? I like to think most of us hope for more.
Choosing insurance isn’t easy, but it also isn’t simply “an art.” There is some science we can apply to life insurance decisions to find out whether we should purchase some or not, and then—if we should purchase insurance—determine just how much we need to buy.
Miata’s 5 Steps to Good Life Insurance Decisions
1) List what you’d like to have happen when you pass away.
- Are there bills that need to be paid?
- Are there survivors you’d like to care for, such as children?
- Is there a specific bequest to a charity or artistic group that you’d like to make?
2) Add together what these bequests will cost.
- Amount of your debt
- Total needed to support others
- Sum you’d like to leave for charities or groups
Finding the sum of your debts will be easy. Deciding how much you’ll need for survivors is a little harder, but still can be done. How? Use calculators on sites such as Yahoo! Finance to figure out how big a barrel of money you’d need today to accomplish whatever goals you might still need to fund (college for children or retirement for a spouse are two goals I often hear).
3) Compare the amount of money you have with your need.
If you have enough money in assets, you don’t need life insurance at all to meet these challenges! If you have a shortage, then life insurance is the most cost effective way to meet these challenges.
4) Decide which type of life insurance is best for your goal.
This is the hardest step.
Finding the right insurance isn’t difficult because there are many types, but because there are so many biased people in the market pla
ce. Some marketers only sell certain types of insurance (or they receive a much bigger commission to only sell one type) so they focus on this arena, calling all others bad. On the other side, there’s an equally vocal response from advocates who automatically see the insurance salesman’s profit motive as “bad” and without analysis immediately point to “best” as the most inexpensive type today (regardless of overall cost down the road).
While I won’t be able to thoroughly cover all the types, let’s give you a good head-start on the process:
Term insurance is best for short-term needs. The cost of term is based on your current age, so the cost rises as you grow older. If you think you’re going to need it past age 65, term insurance rates skyrocket quickly. Buy term if you’re sure not to need insurance after you’re 65.
Whole life coverage takes away the threat of insurance running out before you do. However, because the internal policy costs are also high on older people for this type of insurance, you’re going to pay through the nose while you’re young to subsidize a low cost when you’re older (think of it as prepaying). While whole life insurance has a savings component, don’t be fooled into thinking of this as a savings account: the rates of return on these policies can easily be beaten by outside investments over time.
Universal life insurance uses internal term insurance costs while allowing you to vary the amount of money you contribute to the policy. Here’s what you pay: the term cost of insurance plus extra to make sure you don’t have to pay as much later. You can also lower the insurance death benefit over time, which can reduce the overall cost of the policy. This type is more cost effective than whole life but because it’s guaranteed to last until you die, is still significantly more expensive than term insurance. Universal policies lapse far more often than whole life policies because the owners usually don’t understand the complex relationship between funding the policy and increasing rates of insurance cost inside the plan.
Miata’s quick low down: If you need insurance for a short time that ends before you’re 65, choose term. If you need longer term covera
ge, decide how important guaranteed coverage is to you. If you don’t mind flexibility and a little complexity, research universal life policies. If you want so
mething guaranteed to last forever and don’t mind paying for it, whole life is for you.
5) Research only the type of insurance you need. Why do you want to be confused researching three different types of insurance when you only need one? Use online shopping tools to make the process of comparing several different insurance companies easier. Here are a few things to watch out for when shopping:
- Don’t just compare prices. Sometimes a clever agent can make a policy less expensive by removing what are called “riders” on a policy. These “riders” are additional coverages. Compare apples to apples before looking at the price tag.
- Check out the insurance company. Ask about the company’s rating. You don’t buy insurance to pay less….you buy it to be there when you need it, right
- Ask about discounts. Some companies offer discounted policies if you’re super healthy, live an active lifestyle, or for other considerations.
Choosing insurance can be an unnerving task if you’re talking to an insurance agent. Instead of focusing on whatever product a salesman is offering, use this five step process to decide which type is best for you AND THEN involve agents, if necessary. You’re more likely to enjoy the experience and come out of it with the right type of coverage.
by Miata on November 1st, 2013
Leave Your Emergency Fund Alone!
An artist friend named Linda (we’ll call her that to protect the guilty) has a problem. She’s incredibly talented and creates giant, sweeping paintings that, on average, each sell for more than $2,500.
That’s the good news.
The bad news? She never knows when she’s going to sell the next one AND she’s a “frequent abuser” of her emergency fund.
Linda said to me over coffee recently, “I’m hoping I sell a painting soon. Robert and I decided last night to vacation in Aruba and I have to buy the tickets.”
“That sounds fun,” I responded. “But what if you don’t sell one ahead of time?”
Linda sighed, and said a phrase I’ve heard many times before, “I guess we’ll dip into the emergency fund.”
Emergency Funds: How Much?
First, congratulations to Linda for even having an emergency fund. According to Pitney Bowes in a 2012 study, the average family in America only has around 5,923 in savings. Because of her volatile career/passion, Linda has considerably more. Experts agree that you should examine your income sources to determine how much money to place in your emergency account. If you have a steady pay check and little chance of an emergency, three months of expenses may be sufficient. For Linda, she keeps closer to nine months.
It makes sense: Because as artists we don’t know when we’ll book a job or sell one of our pieces, if we aren’t regularly supplementing our income with a day job, we need to know where our meals are coming from for an extended period of time.
Linda’s Problem: How To Use Your Fund
I asked Linda, “What happens if you spend the money on your trip and then you still don’t sell a painting?”
She waved her hand. “I don’t know. We’ll figure it out.”
Sadly, many artists don’t “figure it out.” The reason people have to give up on dreams is because they run out of funds. If Linda isn’t able to sell a painting, she may have to close her studio, find other work, and limit her time painting….in this case, all for an expensive vacation.
Your emergency fund is your life net. For many people, they’ve never saved this much money in their life, so they look at it as a way to purchase items they’ve wanted or buy experiences that they could never afford without it. Using your emergency fund this way, though, is a trap.
To avoid using your emergency fund for everyday expenses, separate it from your everyday budget money. Build up a different account. If possible, try to save money toward it every pay check, or in Linda’s case, contribute a portion of the commission from every painting.
In fact, if you have a spender personality, go one better: save your emergency fund at a completely different bank.
A funny story: One client picked an institution across town from her home (about a forty minute drive) and limited her online, check writing and debit card access. Why? She said that if it was really an emergency, she wouldn’t mind the long drive to retrieve funds. If it wasn’t important, she’d have forty minutes to talk herself out of sabotaging her long term goals.
She never touched the fund.
The Real Point of An Emergency Fund
Emergency funds are all about security.
If Linda decides to use her emergency savings for Aruba, imagine that trip; she may spend the entire time wondering, “What if I don’t sell another painting?” Because she shortened her ability to survive, taking money from her emergency fund may give Linda exactly the opposite of the stress free vacation she desires.
For some of my clients, misusing their emergency fund makes them jittery, nervous, and afraid.
If you don’t yet have an emergency fund, you might be thinking, “I’m used to flying without a net!” You know inside, however, that you have to spend far too much energy and time thinking about today and not enough time planning your future. Most people without savings have difficulty with long term successful planning because they’re too busy looking for their next meal. How many opportunities have come around and you were so busy paying yesterday’s bills that you didn’t even notice?
That’s why it’s so important to build your emergency fund and establish your debt plan, providing the stable foundation of your financial life.
Hopefully Linda doesn’t use her emergency fund for Aruba (I’ll try and let you know what she decides…). However, her story is great in one respect; it reminds us to leave our emergency fund for emergencies.
by Miata on October 4th, 2013
Your Budget and You: Changing Buying Habits
Even though I’m an actor myself, when I watch a film, play or television show, it still fascinates me how the best performers draw me in. For those two hours or so, I believe they’re the character instead of the same person I saw three months earlier playing someone completely different. They make it look effortless. Of course, because of the years many of us spend studying our craft, we know how difficult it is to make something look effortless. Martha Stewart with an apple pie, Meryl Streep as Julia Child, Drew Brees throwing a football…whatever your art, to make it appear easy takes herculean effort.
I have good news: While tightening your budget takes work, you can make it look effortless without having to become the best of the best.
Savings isn’t hard to understand. It’s the result of a very clear formula:
Money in (your art and jobs) – Money out (spending) = Money Saved
It really is that simple. There are only two ways to save more money…
- Earn more and maintain your spending level
- Earn the same and spend less
Of these two, working more isn’t effortless: it looks (and can be) difficult. You could take on another job, ask the boss for a raise, charge more for your services, or increase the output of your product. Do any of these look effortless? Not so much.
However, the second option on the list hits the spot. You can effortlessly save more money by spending less on things you don’t really need.
Changing Your Habits
To change your spending, you’ll need to help your brain change some associations. Many people have been conditioned to associate the word “fun” with “spending money.”
Don’t believe me? Head to the mall! You’ll see people wandering the floors, clearly not shopping from a list, but just looking at store displays. In our society, retail stores have generously helped us define shopping as “fun.” If we walk into a mall without a plan, we’re helping retailers, who are experts at creating desire where there was none previously. They use colors, smells, display visuals and specials to coax dollars from our wallets. If we walk into a store to “just look around,” we’re going to, in most cases, walk out with something.
Changing Your Associations
A friend of mine wanted to lose a few pounds. She loved her neighborhood mall and decided she would head there first thing in the mornings and walk the perimeter. She later confessed that while she was losing some weight walking, she was also spending more money than ever.
It turned out that there were several paved walking and biking trails in her community. My friend chose to switch her walks from the mall to the outdoors. She was away from the storefront sales and in nature. Not only did she avoid temptation but she was breathing cleaner air, feeling more relaxed and still getting all the benefits of her exercise regime.
If you want to eat at restaurants less, create a meal plan. If you want to watch less television, disconnect your cable. Like my friend, if you want to spend less, stay out of retail shops!
The next time you decide to buy something spur-of-the-moment, wait. Instead, walk out of the store and sleep on it. If you still want it a day or two later, build it into your budget and make a trip to purchase the item on your terms. By building this muscle, you’ll counter a psychologically proven fact that shows we respond chemically in a positive way to making purchases. Before long, delaying gratification will be second nature, and as a result, your savings account will grow.
by Miata on September 6th, 2013
How to Create an Investment Portfolio
Remember when you started the journey toward becoming an actor, singer, writer, painter, or whatever type of artist you may be? You probably didn’t know much about many of the technical aspects of your craft.
Well, it’s similar with investing.
The first question I’m often asked when someone is ready to begin his or her investing journey is, “Where do I start?” That’s always a difficult question to answer because it could mean a number of things:
- How do I pick investments?
- How do I open an account to hold my investments?
- How do I decide when to buy and sell investments?
Today, we’ll cover all three of these questions broadly and in future blog posts I’ll tackle each one in more detail.
How Do I Pick Investments?
Picking the right investment is completely dependent on your goals. Here’s why: once you know how much your goals cost, you can eliminate the 95% of investments that don’t apply to you!
Worried about learning everything about investing? Don’t worry! If you start with your goals and work backward, you’ll only have to learn a little and can still invest like a savvy saver.
Is your goal far away? I’d define “far away” as 10 years or longer. If it is, you probably should start with mutual funds or exchange traded funds, which primarily invest in stocks, real estate, or a combination. These two investment classes historically have beaten inflation by the widest margin. At least in the beginning, it’s probably best to stay away from individual stocks or pieces of real estate. While you might be excited about learning, it’s safer to use a more diversified approach, especially when you’re just getting started.
Is your goal closer than 10 years? Focus on less volatile investments like money markets and CDs. While these won’t give you the huge returns that stocks or real estate can provide, you also won’t risk huge losses, either. Often I’d place bonds in this category, but at this particular time, bonds are in a downward cycle and even FINRA, the financial industry regulatory authority, recommends using caution when buying bonds.
How Do I Open An Account to Hold My Investments?
They say that people freeze when they’re given too many choices to consider, so I’ll try to avoid the fact that you have a ton of options here. Instead, I’ll boil this maze down to a couple of good choices:
- If you aren’t comfortable purchasing investments on your own, you can open up an account with a brokerage house or full service advisory firm. These type of firms will charge you a wide range of fees and you’ll pay higher expenses than if you don’t work with an advisor. In exchange for these fees the advisor will help you choose investments, can open the account, and advise you on which type of account works best for your goals.
Interview several advisors before choosing one and make sure you check the advisor’s FINRA BrokerCheck record to see if she’s been reported for any violations in the past.
- If you are comfortable working alone, check out an online brokerage account through a major firm. While there are many choices (Fidelity, TDAmeritrade, E*Trade, Scottrade, Charles Schwab are a few), they all work similarly. You’ll pay lower costs and can manage your account from any computer. You won’t get individual help, but using online research sites such as Morningstar, you can research funds yourself to get an idea of the best investments for your account.
Which type of account should you open? Again, that depends on your goals. An individual account will give you the ability to add and remove funds whenever you need them. A better choice if you’re saving for retirement would be a Traditional IRA or maybe a Roth IRA. Check with your tax professional to see which is right for you.
How Do I Decide When To Buy and Sell Investments?
Contrary to those talking heads on financial news networks yelling, “Sell! Buy! Sell!” your job is much easier. Statistics have shown that investors sabotage their own results by second guessing their strategy or buying and selling investments often. Instead, try this approach:
- Choose investments that are appropriate for your goal
- Decide on set times to evaluate your funds (every six months is adequate)
- Ignore the financial markets between your evaluation points
When you evaluate your funds, don’t base your decisions on whether an investment has made or lost money. Instead, evaluate your fund against its peers. Is the fund keeping pace? Have there been changes in the way the fund is managed? Finally, and probably most important, ask yourself this: has my goal changed and is this still the right type of investment for my goal. As long range goals get closer, it’s a good idea to begin lowering the risk level of your investments.
That’s it. Picking investments, opening an account, and evaluating whether to buy or sell are much easier decisions to make when you follow a plan based on your goals. Once you discover how easy it is to begin investing, you’ll probably find yourself asking, “Why didn’t I start sooner?”