Cash Reserve

What is a cash reserve?

A cash reserve is a pool of funds (and sometimes credit) that you hold in a readily available form to meet emergency and other highly urgent, short-term needs. Sometimes, it is referred to as an emergency or contingency fund.

Caution: Terminology is important here because contingencies often are not emergencies. Purchasing an expensive item that suddenly goes on sale or buying stock when its price suddenly drops might lead one to tap a so-called contingency fund, but these are certainly not emergencies.

The definition used here of a cash reserve is money set aside solely to cover critical, unexpected needs, such as a sudden loss of income. Consequently, it is not a fund for meeting anticipated expenses, large or small, such as real estate taxes, tuition, or a spontaneous vacation. Instead, a cash reserve protects you, your family, and your loved ones against unexpected financial crises.

Example(s): The manufacturer of a new computer you've been thinking about buying has just announced a substantial rebate on machines purchased within the next two months. While this might be an excellent opportunity to purchase the item at a reduced cost, it is not an emergency and therefore does not justify tapping your cash reserve. Maintaining sufficient savings elsewhere eliminates the temptation to tap emergency-designated funds for nonemergency needs.

Why is a cash reserve necessary?

A sound financial plan should ensure that you are protected when financial emergencies arise. In times of crisis, you do not want to shake pennies out of a piggy bank. Also, having a cash reserve may help prevent being forced to take on additional debt precisely when another financial challenge is the last thing you need. Consequently, the first step in the financial planning process should be to establish a cash reserve.

Determining how large a cash reserve should be

The amount of your cash reserve should be based on your own personal situation. While basic guidelines do exist, you should adjust them to reflect your unique circumstances. Some factors you should consider when determining a cash reserve goal include job security, the condition of your real estate, and the health of you and your dependents. Naturally, such factors change with time, so an annual review and adjustments are important elements of the planning process.

Three to six months of routine living expenses compose a typical cash reserve, but there are exceptions

Your should generally follow the 3-6 months rule: that is, your cash reserve should equal 3 to 6 months of ordinary living expenses. Occasionally, low job security or high income volatility might suggest having a reserve of up to 12 months of expenses. The actual number of months selected should reflect these and other significant risk factors, such as the adequacy of insurance coverage and the condition of any property you own.

Using credit provides a higher-risk secondary funds source

Credit available to you can be a secondary source of funds in a time of crisis. However, because borrowed money must be paid back (often at very high interest rates), using lenders as the primary source of your cash reserve can create more long-term financial problems than it solves. Credit as part of a cash reserve functions best when it's part of a multi-tier cash reserve structure that includes multiple financial resources.

Taking stock of what you have

List the locations and amounts of your money that you can withdraw on an immediate (or nearly immediate) basis without incurring a loss. Typical sources include savings accounts, money market accounts, Treasury securities, and cash value life insurance. Be careful to exclude accounts set up to meet everyday needs or special objectives, such as education, vacations, or a new car. You can also include untapped credit resources, provided you count them separately from cash resources.

Are you missing the goal? If so, by how much?

This is almost as easy as subtracting what you have from what you need. If you elect to consider credit resources part of your cash reserve, the procedure is slightly more complex, since part of the total amount must be held as cash (noncredit) assets.

Example(s): Hal and Jane determine that their cash reserve should equal five months of living expenses, or $25,000 ($5,000 per month). Because their current cash reserve is only $15,000 in a non-tax sheltered money market account, they need to save or reallocate an additional 10,000 to meet their goal. The $15,000 amount is sufficient to cover at least three months of expenses. Therefore, they can cover the $10,000 difference partly or entirely with available credit.

Achieving your cash reserve goal

Your initial thought is probably that cutting spending and saving aggressively are the only options for establishing or increasing a cash reserve. However, you may already have assets that you could make part of your cash reserve. These could include savings bonds coming due, the cash value of a life insurance policy you plan to convert, or even an antique you no longer care about that you might sell. The discussion that follows explains methods that you can use to build your reserve fund to the desired level rapidly.

Identifying, converting, and reallocating current assets to build your cash reserve

You may be able to reposition current assets. Current or liquid assets are those that are cash or convertible to cash within a year. You can designate those already in cash form to be part of your cash reserve. Those not in cash form can be converted to cash when appropriate and added to your cash reserve.

Examples of current assets include:

  • Certificates of deposit and savings bonds that will mature in 12 months (avoid paying an early redemption penalty by waiting until they mature)
  • An antique, a painting, or a piece of jewelry
  • Stock shares
  • A valuable collection (stamps, antique dolls, rare books, etc.)
  • Current savings for nonemergency contingencies, part of which might be reallocated to your cash reserve

Evaluate the approaches to systematic saving currently available to you

If you have not established a cash reserve or if the one you have falls short of your goal, there are several paths you can take to eliminate the shortfall. Automatic savings (e.g., using payroll deduction at work) is one of the best approaches. Systematic savings that are budgeted as a regular household expense can also help. Curtailing discretionary spending is still another wise choice. Exploring the pros and cons of your alternatives will help you create a savings plan that is best for your own situation.

Develop a cash reserve savings plan to achieve your goal as rapidly as is reasonably possible

Having reviewed the available savings options, select one or a combination of approaches to achieve your cash reserve goal. Because an adequate cash reserve serves as your protection against financial chaos, you should be as aggressive as reasonably possible in achieving your goal. Combining both spending reduction and savings can help you quickly reach your goal.

Structuring and maintaining a cash reserve

The most important attribute of a cash reserve is its availability in time of sudden need. However, this does not necessarily require you to keep the entire sum in a low-interest savings account. There are several excellent alternatives, each with its own unique advantages. For those with a larger cash reserve, a multi-tier structure of sources based on timeliness of access is often desirable. Because income and personal circumstances are subject to change, periodic review of the cash reserve total and its structure is advisable.

Stash the cash: deciding where and in what form to keep a cash reserve

A federally insured savings account is considered one of the safest places to put money being reserved for emergencies, but when interest rates are in the basement, there may be better alternatives. Money market deposit accounts at a bank and various types of term deposits, such as certificates of deposit (CDs), typically offer higher interest rates with little, if any, increased risk. Term deposits are effectively a loan to the institution and not intended for withdrawal prior to the expiration or maturity date. Financial institutions generally assess a substantial penalty for early withdrawal. Laddering maturity dates provides a means of minimizing the impact of this disadvantage.

Money market mutual funds are another good choice. However, you need to understand that a money market mutual fund, whether from a bank or fund company, is not federally insured. With a money market fund, it's possible to lose money, although most money market funds will go to great lengths to avoid "breaking the buck"--that is, allowing a share's value to fall below $1, thus costing investors at least part of their principal. Be sure to obtain and read a fund's prospectus (available from the fund) so you can carefully consider its investment objectives, risks, expenses, and fees before investing.

Caution: An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Ladder maturities of term deposits for better accessibility and lower interest rate risk

Laddering refers to staggering the maturity dates of fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date). Certificates of deposit (CDs) and U.S. Treasury securities (T bills) are examples of savings vehicles you might consider as a second tier of your cash reserve. If so, spreading the maturity dates of such vehicles over a short time period (e.g., two to five months) assures their availability to meet sudden financial needs that may extend beyond a few months. Laddering enables you to seek a higher level of interest while preserving some accessibility and flexibility to adjust to changing financial circumstances.

Build a multi-tier cash reserve when using term deposits or credit lines

If your cash reserve includes more than two or three months of living expenses, you can consider dividing it into two or three tiers. You then have the option of using a different form of savings or credit for each tier. This method allows you to consider savings vehicles that offer higher interest rates, although such money will not be available immediately without penalty. If you choose to include credit as part of a multi-tier account structure for your cash reserve, always use it as the final tier, because payback requirements and related interest charges make it the least desirable form of emergency protection. The following table illustrates this point:

Review and adjust your cash reserve annually to reflect your changing circumstances

If anything is certain, it is that the personal and financial circumstances of you, your family, and your loved ones are very likely to change within the span of a year or two. A new child comes along, an aging parent becomes more dependent, a larger home or new car brings increased expenses, or maturing offspring leave the nest. Because your cash reserve is your first line of protection in a financial crisis, it is important to review it annually. If the amount and structure of your reserve no longer matches current needs, you should make the appropriate adjustments. An overly large reserve can mean that opportunities for better returns are being overlooked. In contrast, an undersized reserve increases the risk for financial chaos and stress in a time of sudden need.

~August 2017, #A0641

Financial Planning Issues for New Parents

Financial Planning Issues for New Parents

What is it?

As you prepare for life with your new child, it's time to prepare a new financial plan for your family or make any necessary changes to your existing plan. You'll want to consider how your baby will affect your budget, make sure you have adequate insurance, protect your child's future with a well‐thought‐out estate plan, and determine how having a child will affect your income taxes.

Budgeting for baby

Develop a new spending plan

The birth of a child is an opportunity for you to set up a new budget or review an existing one. You'll have to consider the impact that your child will have on your living expenses as well as account for any shift in income that might occur if you decide to quit your job. You'll also need to save more money to ensure that your family has money to meet its future needs.

Expenses that typically increase when you have a baby

  •  Your grocery bill: Diapers and formula (you may use some even if you're breast‐feeding) are very expensive. Later, when your baby turns to solid food, you'll have to figure in the cost of baby food.
  • Your housing costs: If you don't already live in a house or large apartment, you may find yourself moving once your baby gets old enough to take up a lot of space with toys and equipment.
  • Your transportation costs: If you have a small car or a two‐seat convertible, you may find it difficult to fit in a car seat, and you may need to buy a new car. Or, if you have an old car, you may want to buy something more reliable now that you have to worry about your baby's safety.
  • Your clothing and household expenses: You'll find yourself spending less on yourself and more on your child now that your budget has to stretch. You'll spend a lot initially to buy essentials for your child and then spend a bit more each month than you're used to for items your child needs.
  • Medical expenses: You'll probably pay a co‐payment for each of these trips unless your health insurance plan covers 100 percent of well‐baby care. Your health insurance premium will likely dramatically increase as well, unless you already had family coverage for you and your spouse.
  • Cost of child care: Whether you look for full‐time day care or hire an occasional baby‐sitter, you need to plan for the impact this will have on your budget.

Initial expenses

The initial outlay for your baby can be quite high. You'll have to equip your home with baby furniture, a stroller, a high chair, an infant seat, a car seat, bedding, and clothing, among other items. You could spend well over $1,000 equipping your home with just the basics, and many new parents spend a lot more.

However, when you're shopping for the baby you're expecting, try to separate emotion from need. Of course, you want your baby to have the best, but you don't really need the best in most cases. Your baby won't look any cuter in an expensive crib, and many parents can tell stories about the top‐of‐the-line stroller they purchased and then found was too heavy to push easily. The best way to proceed is to ask other parents for recommendations, then shop around. Usually, you don't have to sacrifice quality and safety to save money. If you start shopping far enough ahead, you can find good deals in discount stores, department stores, and superstores. You can also look for items in thrift stores, consignment shops, and yard sales, although finding clean secondhand items in good condition can be a challenge. Ask friends and relatives, too, if you can borrow baby items that they're not currently using. If your friends are throwing you a shower, ask for items you need.

Tip: Don't buy more than you initially need for your baby, because you may find that what you thought you needed, you really don't. In addition, your friends and relatives may shower you with gifts once the baby is born, and you won't need to buy as much as you thought you would. In particular, don't go overboard buying clothes until you can gauge how rapidly your baby will grow. One thing you definitely should buy is a car seat. Many hospitals won't let you leave without having one, although they may loan you one temporarily.

Costs of day care

The cost of day care will depend on where you live, how many children you have in day care, how old your children are, and what type of child care you choose.

Saving for education

It's wise to begin saving for your child's education as early as possible. There are several ways to do this. You can begin by depositing a certain amount every month into a savings or money market account, contribute to a college savings account, purchase Series EE bonds (may be called Patriot bonds), or take advantage of a wide variety of other investment vehicles.

Saving for emergencies

If you don't have an emergency fund, now is the time to set one up. If your child gets sick, your car breaks down, you need to move unexpectedly, or you lose your job, you can dip into your emergency account. An emergency account should normally contain an amount that equals three to six months' worth of living expenses.

Estate planning issues

Estate planning is a subject many parents would like to avoid. After all, you're celebrating new life, and it's sad to think that you may not be around to raise your child. However, it's crucial to the welfare of your child that you leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you don't currently have a will, now is the time for you (and your partner, if any) to draw one up. If you do have a will, you'll need to review it. You'll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child's interests after your death. You should also review your beneficiary designations.

Wills

Each parent should have a will to ensure smooth distribution of his or her estate. After your child is born, you should review your will (or draw up a will if you don't already have one) to make sure that your assets are distributed as you would like, to nominate a guardian for your child, and to choose an executor for your estate.

Tip: You may want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything‐‐your philosophy on life, the family history, or some advice that you'd like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping.

Example(s): When her daughter Sara was born, Emily wrote a letter to her that described the night Sara was born and Emily's hopes and dreams for Sara's future. When Emily was killed in a car accident the year Sara turned 16, Sara read the letter and found out that her mother was proud of her and really wanted her to attend college. So Sara worked hard the next two years of school so that she could get into the local university.

Nominating a guardian

Choosing a guardian for your child is very important. If you die without naming a guardian for your child,

it will be up to the court to do it for you, and the person whom the judge names may not be the person you would have chosen to look out for your child. When choosing a guardian, look for someone who will look out for the best interests of your child, preferably someone who has the time and energy to meet the demands of raising a child. Make sure that you ask a potential guardian whether he or she would like to serve as your child's guardian. Often someone you think is the perfect choice really doesn't want the responsibility. For this reason, you should also nominate a contingent guardian.

Periodically rethink your choice of guardian. As your children grow older, you can ask them whom they would like to live with in the event you die. Although this can be a scary subject for children, it's important to raise the issue with them. In addition, once your children are old enough, tell them whom their guardian will be in the event you die.

Setting up a trust

Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your children spent, and it can ensure that your child's money is protected. A trust can help the guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.

Insurance issues

Before your child is born, review your insurance coverage to make sure that you and your family are adequately protected. If you or your spouse is going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you'll need to buy more coverage.

Life insurance

Having a child will increase your need for life insurance coverage. Many experts recommend that you have life insurance equal to five times your annual salary.

Health insurance

The best time to check your maternity coverage is before you become pregnant. Make sure that you understand your deductibles, your co‐payments (if any), and whether your policy covers testing, emergency care, and all the costs of delivery (including anesthesia, if necessary). Find out about claims-handling procedures, how long you will be able to stay in the hospital once you've been admitted for delivery, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth, but check your insurance policy anyway to make sure. If both you and your partner are covered by or eligible for coverage under an employer‐sponsored policy, you may need to decide which policy offers the best (or most cost‐effective) family coverage.

Disability insurance

Before you had a child, you may not have worried about becoming disabled. Now that you're planning to have a child, you may be thinking about what would happen if you suffered an injury or illness and couldn't work for days, months, or even years. If you're married, you may be able to rely on your spouse for income, but could your spouse really support all of you?

Example(s): Bob worked as an accountant, a relatively nonhazardous occupation. However, on Christmas Eve, he broke both wrists when he slipped and fell on a patch of ice. Since his injury was not work‐related, he wasn't eligible to receive workers' compensation insurance. In addition, he wasn't covered by an individual or group disability policy. His wife was working full‐time as a seamstress but wasn't able to support Bob and their children on her salary alone. Within a few weeks, they were financially destitute.

To protect your family in case your income is cut off due to disability, consider purchasing disability insurance if you don't already have it. You may have a group disability policy through your employer or you may want to purchase an individual disability insurance policy. A disability policy won't replace your total income, but it will likely replace 50 to 70 percent of your earnings.

Income tax considerations

At tax time, you'll find out that some financial benefits can help defray the cost of raising a child. You'll suddenly be eligible for an extra exemption, and you may be eligible for one or more tax credits.

Exemptions

When you file your income tax return, you may be able to claim an exemption for you, your spouse, and your dependents if your adjusted gross income is below a certain phaseout amount. This means that when you file your income tax return in the year of your child's birth (and ensuing years), you'll be able to claim an extra exemption that will reduce your tax liability.

Tax credits

Having a child might enable you to qualify for one or more tax credits. Credits related to children are the child and dependent care tax credit (if you have qualifying child‐care expenses), the child tax credit, and the earned income credit (if you have income under a certain level, having a child raises the amount of income you can have and still claim the credit).

~June 2017 #A0604

Financial Basics for Millennials

With age comes responsibility, so if you're a young adult in your 20s or 30s, chances are you've been introduced to the realities of adulthood. While you're excited by all the opportunities life has to offer, you're also aware of your emerging financial responsibility. In the financial realm, the millennial generation (young adults born between 1981 and 1997) faces a unique set of challenges, including a competitive job market and significant student loan debt that can make it difficult to obtain financial stability.

Poor money management can lead to debt, stress, and dependency on others. Fortunately, good money management skills can make it easier for you to accomplish your personal goals. Become familiar with the basics of planning now, and your future self will thank you for being responsible.

Millennials face financial challenges that are unique to their generation. One of the first steps in overcoming them is to understand some basic financial concepts.

Figure out your financial goals

Setting goals is an important part of life, particularly when it comes to your finances. Over time, your goals will probably change, which will likely require you to make some adjustments. Start by asking yourself the following questions:

• What are my short-term goals (e.g., new car, vacation)?

• What are my intermediate-term goals (e.g., buying a home)?

• What are my long-term goals (e.g., saving for your child's college education, retirement)?

• How important is it for me to achieve each goal?

• How much will I need to save for each goal?

Once you have a clear picture of your goals, you can establish a budget that will help you target them.

Build a budget

A budget helps you stay on track with your finances. There are several steps you'll need to take to establish a budget. Start by identifying your current monthly income and expenses. This is easier than it sounds: Simply add up all of your sources of income. Do the same thing with your expenses, making sure to include discretionary expenses (e.g., entertainment, travel, hobbies) as well as fixed expenses (e.g., housing, food, utilities, transportation).

Compare the totals. Are you spending more than you earn? This means you'll need to make some adjustments to get back on track. Look at your discretionary expenses to identify where you can scale back your spending. It might take some time and self-discipline to get your budget where it needs to be, but you'll develop healthyfinancial habits along the way.

On the other hand, you may discover that you have extra money that you can put toward savings. Pay yourself first by adding to your retirement account or emergency fund. Building up your savings using extra income can help ensure that you accomplish your financial goals over the long term.

Establish an emergency fund

It's an unpleasant thought, but a financial crisis could strike when you least expect it, so you'll want to be prepared. Protect yourself by setting up a cash reserve so you have funds available in the event you're confronted with an unexpected expense. Otherwise you may need to use money that you have earmarked for another purpose--such as a down payment on a home--or go into debt.

You may be familiar with advice that you should have three to six months' worth of living expenses in your cash reserve. In reality, though, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve.

A good way to accumulate emergency funds is to earmark a percentage of your paycheck each pay period. When you reach your goal, don't stop adding money--the more you have saved, the better off you'll be.

Review your cash reserve either annually or when your financial situation changes. Major milestones like a new baby or homeownership will likely require some adjustments.

Generally, millennials are optimistic about their financial futures in spite of the challenges they face. According to a Pew Research study, 32% of millennials believe they currently have enough money to lead the lives they want, while 53% of millennials expect to have enough in the future.

Be careful with credit cards

Credit cards can be useful in helping you monitor how much you spend, but they can also lead you to spend more than you can afford. Before accepting a credit card offer, evaluate it carefully by doing the following:

• Read the terms and conditions closely

• Know what the interest rate is and how it is calculated

• Understand hidden fees such as late-payment charges and over-limit fees

• Look for rewards and/or incentive programs that will be most beneficial to you

Contact the credit card issuer if you have questions about the language used in an offer. And if you are trying to decide between two or more credit card offers, be sure to evaluate them to determine which will work best for you.

Bear in mind that your credit card use affects your credit score. Avoid overspending by setting a balance that you're able to pay off fully each month. That way, you can safely build credit while being financially responsible. Take into account that missed payments of any sort can cause your credit score to suffer. In turn, this could make it more difficult and expensive to borrow money later.

Deal with your existing debt

At this stage in your life, you're probably dealing with debt and wondering how to manage it. A 2015 Pew Research study revealed that 86% of millennials have debt. (Source: "The Complex Story of American Debt," July 2015) In particular, you might be concerned about how to pay off your student loan debt.

Fortunately, there are many repayment plans that make it easier to pay off student loans. Check to see whether you qualify for income-sensitive repayment options or Income-Based Repayment. Even if you're not eligible, you may be able to refinance or consolidate your loans to make the repayment schedule easier on your budget. Explore all your options to find out what works best for you.

Beware of new borrowing

You're doing your best to pay off your existing debt, but you might find that you need to borrow more (forexample, for graduate school or a car). Think carefully before you borrow. Ask yourself the following questions

before you do:

• Is this purchase necessary?

• Have you comparison-shopped to make sure you're getting the best possible deal?

• How much will this loan or line of credit cost over time?

• Can you afford to add another monthly payment to your budget?

• Will the interest rate change if you miss a payment?

• Are your personal finances in good shape at this time, or should you wait to borrow until you've paid

off pre-existing debt?

Weigh your pre-existing debt against your need to borrow more and determine whether this is a wise decision at this particular point in your life.

Take advantage of technology

Access to technology at a young age is one major advantage that benefits millennials, compared with their parents and grandparents when they were starting out. These days, there's virtually an app or a program for everything, and that includes financial basics. Do your homework and find out which ones could be the most helpful to you. Do you need alerts to remind you to pay bills on time? Do you need help organizing your finances? Are you looking for a program that allows you to examine your bank, credit card, investment, and loan account activities all at once?

Researching different programs can also help with number crunching. Many financial apps offer built-in calculators that simplify tasks that may seem overwhelming, such as breaking down a monthly budget or figuring out a loan repayment plan. Experiment with what you find, and you'll most likely develop skills and insight that you can use as a starting point for future planning.

Although apps are one way to get started, consider working with a financial professional for a more personalized strategy.

April 2017, #A0554

Considering a New Employment Opportunity

 

What is it?

In the past, workers stayed with the same company for years and years, working their way up in the company. However, times have changed. Businesses facing hard economic times restructure, forcing employees to look for new jobs. It's also become common for workers to change jobs several times throughout their careers as they seek higher salaries and new professional opportunities. Whether you're forced to seek a new employment opportunity or are willingly doing so, you'll eventually be faced with an important decision: When you're offered a job, should you take it?

Make sure the offer is firm before you evaluate it

Although it may be useful to explore an employment opportunity, don't waste time dreaming about your new position until you have gone through the interview process, gathered data on the company, and received a firm offer of employment. Only then should you take time to compare the offer you've received against the job you already have or a job offer you've received from another company. You'll have the facts, and you can make a more informed, unemotional decision.

Investigate the company

Where to look for information

Gather some data that can help you evaluate what kind of future you can look forward to with the company you're investigating. It's a good idea to do some research on the company before you have an

interview so you'll know what questions to ask and be able to fairly judge the answers you receive. There are many ways to get background information on a company. Here are a few:

• Check your local public or university library--Many references are available through public or university libraries that can help you obtain information about a company or an occupation. Following are references that can give you general information about the company (including some financial data): Dun & Bradstreet's Million Dollar DirectoryStandard & Poor's Register of CorporationsWard's Business DirectoryThomas' Register of American Manufacturers

• You should also look for information on a business in consumer or trade magazines and/or newspapers. Magazines and newspapers may contain up-to-date information about the company's future, its products and services, and its successes and failures. You may also be able to find out something about the company's key executives and philosophy. Rather than check the magazines individually, check one or more of the following indexes: Business Periodicals IndexReaders' Guide to Periodical LiteratureWall Street Journal Index

• Look for information via the Internet--If you have Internet access, you can use it to find information on a company without leaving your home or office. Many excellent resources exist, including the following: American City Business Journals, www.bizjournals.com --This site will search the archives of many weekly U.S. business journals, looking for the name of the company or organization you are researching. As a result, you may be able to access articles, press releases, and snippets of information about the company. Dun & Bradstreet, www.dnb.com --At the Dun & Bradstreet site, you can find information (including financial) about millions of companies. If you want a detailed report, however, you'll have to pay. You may want to do this once you are seriously considering a job offer.

Tip: Whatever research method you choose, it's often easier to find information about public rather than private companies and well-established companies rather than new ones. To get hard-to-find information, you may want to contact the public relations liaison in the company and ask for general information and/or an annual report. You may also be able to get information by asking individuals who do business with the company or who have worked there in the past or by asking about the company at your local chamber of commerce.

What kind of information to look for

As you research a company or organization, try to find answers to some or all of the following questions:

• How strong is the company financially?

• Will the company be taken over by another in the near future?

• Is the company planning to expand?

• How many employees does the company have?

• How long has the company been in business?

• Is the company privately or publicly held and by whom?

• What successes and failures has the company experienced?

• What is the company's philosophy?

 

• Is the company a part of a growing industry?

Answering these questions can enable you to determine whether the company or organization is a good match for you and help you decide whether the company has a strong track record and an exciting future. Supplement the information you get via your own research by asking questions during your interview to fill in the gaps or to expand your understanding of the company. If possible, try to talk to one or more employees who currently work there to get a handle on the company environment and future.

Assessing the job offer

Salary and bonuses

You probably have some idea of what you want to earn, and the salary offered by the company you are evaluating may or may not match your expectations. Obviously, if the company offers you more than you expect, you have no problem. But what if the company offers you less? First, find out how frequently you can expect a pay review and/or a raise, and try to determine how much the pay increase is likely to be and on what is it based (e.g., merit, cost of living). In general, you should expect the company to increase your salary at least annually. Next, ask about bonuses, commissions, and profit sharing that can add a lot to your income. To fully evaluate the salary you're being offered, try to find out about the average pay for that job in your area. You can do this by talking to others who hold similar jobs, by calling a recruiter (i.e., headhunter), or by doing library or Internet research. The following resources can help you:

• Bureau of Labor Statistics, Office of Compensation and Working Conditions Phone: (202) 606-6225 Internet: www.bls.gov

• Bureau of Labor Statistics, Office of Employment and Unemployment Statistics Phone: (202) 606-6400

• JobStar Salary Info Internet: www.jobstar.org

Many salary surveys are available on the Internet that you can use to research salaries in your profession.

Benefits

Never overlook the value of good employee benefits. Benefits can add thousands of dollars to your base pay, and some benefits (including group health insurance and disability insurance) can be difficult to obtain privately at a reasonable price. Although many companies offer them, the type and quality of benefits vary widely from company to company. Find out what benefits the company offers and how much of the cost the employee must bear.

Future opportunities with the company

You'll want to find out what opportunities exist for you to move up in the company. This includes determining what the company's goals are and the type of employee the company values. Will you get to use skills you already have? Will you need more training and education? Is your philosophy regarding

work in line with the company's? (If not, you may have trouble getting promoted or may end up leaving the company.) In addition, make sure the company has a future at all. If it's a new company, it may be at risk for folding in the near or distant future, so take time to evaluate the company's structure and plans and, if possible, to find out some information about the financial soundness of the organization. If the company is well established, determine if it is in a growth industry and try to find out (possibly by checking annual reports or articles about the company) what plans it has for the future.

Working environment

You may be getting paid well and the company may offer great benefits, but you still may not be happy working there if the working environment does not suit you. To evaluate the working environment, pay attention if you get a chance to tour the company's offices. Do employees seem extremely busy? Do they look happy? Bored? Is the office space cold or inviting? Do people seem relaxed and friendly? Tense? In addition, try to meet the individuals you will be working with closely. Do they seem like people you would be comfortable working with? Do you sense any hostility? Do they say they like their jobs? Finally, consider how much time you must spend at your job. Are the hours suitable? Will you work a lot of overtime? Will you have to punch a clock, or is the scheduling somewhat flexible?

Consider the financial and emotional impact of taking the job

Professional and personal consequences

To evaluate the professional and personal consequences of taking the job, consider the following questions:

• How will taking this job positively or negatively affect your finances? Consider increases or decreases in salary, cost and availability of benefits, and related costs of taking this job, including relocation, spouse potentially losing his or her job, and the cost of transportation.

• How will this job indirectly affect your finances? For instance, will taking this job lead to better opportunities in the future? Does taking this job mean taking on additional financial risk (e.g., if the job doesn't work out or the company downsizes or goes out of business)?

• Will taking this job make you happier? Aside from the financial implications of accepting the job, consider the emotional consequences, both personal and professional. Will you be happier than you are now? Will your family be happy with your choice? Will you work longer hours or have more time to relax? Will you be better respected or be able to expand your professional horizons?

Ramifications of golden handcuffs

Sometimes employers use nonqualified deferred compensation plans as golden handcuffs to make sure that key employees stay with the company for a specified period of time. If you are a highly compensated or key employee and participate in such a plan, you may lose certain benefits if you leave the company prematurely under the terms of the plan. Since your monetary loss may be significant, consider this before changing jobs.

Should you accept the offer?

Despite the time and energy you spend researching and evaluating, the hardest part is yet to come: deciding whether to accept the offer. Begin by assembling the facts, data, and information you have gathered. Think back to the interview, paying close attention to your feelings and intuition about the company and/or the position. Consider not only the salary offered to you but also what future you can expect with the company, and think about whether you believe you would be happy and excited working there. If you're having trouble making a decision, try writing down the pros and cons of accepting the job; it may then become clear whether the positives outweigh the negatives. Sometimes, you may really want the job, but you're unhappy with the salary or the benefits offered to you. If so, it's time for negotiation.

Making the job offer acceptable through negotiation

Some people are afraid to negotiate a job offer because they really want the job and are afraid that the company will rescind the offer or respond badly if they attempt to negotiate. However, if you truly want the job but find the salary, benefits, or hours unacceptable, it's better to face rejection than turn down what otherwise would be a great opportunity. The first step in negotiating is to tell your potential employer what it is that you want. Make it clear that you are immediately willing and able to accept the offer if this aspect of the offer could be changed. Be specific. Name the amount of money it would take or the exact hours you would like to work. However, don't threaten the company, and if you really want the job, don't imply that you'll walk if the offer remains unacceptable. Stay neutral.

What will happen? The company may refuse your request, either because company policy does not allow negotiation or because the company is not willing to move from its original offer. Or, the company may make you a second offer, perhaps offering you more money but not as much as you requested or offering to make up to you in benefits what they can't give you in salary.

In either case, the ball is back in your court. If the offer is still unacceptable, you may have to turn the job down. However, if the offer is better but not exactly what you want, ask for a day or two to think about it.

It's also possible that the company will accept your counteroffer outright, especially if you have unique talents or experience. At this point, there isn't much else to say except, "Thank you, I look forward to working here."

March 2017, #A0529

Trump's Executive Orders on Dodd-Frank and the Fiduciary Rule

 

President Trump’s administration announced an executive order on Friday, February 3, 2017, regarding the partial repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as the Department of Labor’s "Fiduciary Rule" set to take effect in April 2017.

Dodd-Frank was the most comprehensive financial reform since the Great Depression. It was aimed at, among other reasons, curtailing conditions inside major financial institutions that led to their impending collapse, save for government bailouts under the auspices of "too big to fail." While this legislation has some merit, one of the byproducts was a requirement for banks to carry additional cash reserves as insulation to liquidity threats, effectively disincentivizing those institutions from lending out deposits to small and medium-sized businesses dependent on capital to start up or expand. Repeal of Dodd-Frank requires congressional action; however, the current administration appears to be targeting specific provisions for consideration.

The financial services industry is divided into two primary models: brokerage and advisory. The advisory model nearly always operates in a "fiduciary" capacity to its clients. The practical definition of a fiduciary is that a client’s interest must be put above the advisor’s interest. By contrast, the brokerage model operates from a less stringent "suitability" rule and is typically accompanied by commission sales arrangements. The DOL’s "fiduciary rule" sought to enforce the higher standard of conduct between advisor and client, regardless of title (broker or investment advisor). Enforcement or repeal of the fiduciary rule has little impact on Capital Retirement Plan Services, or its affiliate, Northern Capital Management, as both entities are Registered Investment Advisors operating under, and in compliance with, the provisions of the fiduciary rule.

We will keep you posted as details emerge. Regulations may change, but as a fiduciary advisor we remain committed to providing advice that is in the best interest of our clients.

http://hosted.ap.org/dynamic/stories/U/US_TRUMP_FINANCIAL_REGULATIONS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2017-02-03-11-23-25

 

Rich Cullen

Registered ParaplannerSM

February 2017, #A0481

How to Cut Costs if You're Spending Too Much

 

How do you cut costs if you're spending too much?

No matter how tightly you try to control your spending or how strictly you follow your spending plan, at some point you are likely to wonder how you can cut costs. In order to find out how to cut costs, you first need to find out where and when your spending occurs. Then you can decide whether you need to make major changes or if minor adjustments will do the trick.

Understand your spending habits better

Spending is a behavior, and, just like any other behavioral change, it requires monitoring while you are trying to change it. If you feel that you are spending too much, you'll want to determine when you do your spendingand what items you spend the most money on. One way to get started is to track your spending for a period of time and try to determine if you have a spending pattern. You may find that you are spending more onpayday or when you are feeling frustrated or stressed. By identifying spending patterns, you can use extra caution when you find yourself in those situations.  Next, you'll want to identify the items which you spend the most money on.  For many of us, buying clothing may involve shopping around to find the right price, but looking for a sale for groceries may not even occur to us. There are certain categories in which overspending is more likely to occur. Identify those categories and try to find out how you can reduce your spending on them.

saving steps.jpg

Make major long-term spending changes

If you feel that you want to curtail your costs on a larger scale and make major long-term changes, consider the following suggestions:

  • Before taking out a loan or using a credit card, shop around for the lowest interest rates

  • Consider refinancing existing loans

  • Look into loan consolidation

  • Determine whether it makes sense to downsize into a smaller home

  • Make sure that you are not overinsured (e.g., having collision and comprehensive auto insurance coverage on an older car)

  • Buy a pre-owned vehicle rather than a bran new one/consider eliminating a second vehicle

Minor changes can also make a big difference

Many times, minor changes can make a big difference. You may be surprised how small changes in spending can add up.  The following are just some of the little things you can do to cut expenses:

  • Brown bag your family lunches

  • Limit dining out to special occasions only

  • Try to cut down on utlitliy costs my making small energy-saving improvement to your home (e.g., shut off electroncs when not in use)

  • Be a smart shopper by taking advantage of available sales and discounts

January 2017, #A0460

Trending Topic 2016-11-09

Portfolio Rebalancing

Year-end portfolio rebalancing season is upon us.  This exercise is designed to accomplish two primary objectives. 

  • Realign the portfolio to reflect the asset allocation targets set by the Investment Committee. 

  • Cull weak performing or higher cost funds from the portfolio and replace them with attractive alternatives.

Although rebalancing is not necessarily designed to improve overall performance, the goal is to prevent large variances in overall asset allocation and to reduce risk-adjusted returns. 

Prevent Large Variances:  Our portfolios are diversified.  This has been difficult to maintain over the last several years as certain domestic stock categories have performed better than others.  Note the return differences between Large Growth and Small Growth stock funds.  Maintaining discipline to remain diversified has never been more difficult.  However, history has taught us time and time again, too may eggs in any one basket can prove perilous (think 1999).

*Returns through 11/4/2016 as provided by Morningstar

*Returns through 11/4/2016 as provided by Morningstar

Risk-Adjusted Returns:  Risk can be measured in many ways, however, for purposes of this article it relates to making certain the proper allocation between broad asset classes of stocks, bonds and cash are maintained.  At the asset class level, rebalancing is not necessarily designed to improve raw returns.  However, it is designed to decrease risk.  Through periodic rebalancing, the outsized gains of stocks are “rebalanced” into lower returning bond funds (in all stock accounts outperforming allocations are shifted into lower return stock segments).  This can be a very counterintuitive/emotional decision as it is difficult to sell top performers and purchase lower return-potential investments.   

Rebalance Conclusion:  2016 rebalances are likely to extend into early 2017.  This is due to our desire to avoid or reduce fees on trades.  Some funds have adopted redemption fees to discourage market timing (hot money flowing in and out of funds).  A key consideration in our rebalancing strategy is short-term redemption fees.

Fees Continue to Drop 

In the context of our rebalances and previously announced tax loss harvesting, the Investment Committee is also acting to substantially add to our use of low cost index funds and exchange traded funds (ETFs). 

By way of definition, an index fund (and most ETFs) is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 (S&P 500).  An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.  These funds adhere to specific rules or standards which remain in place no matter the state of the markets.  

"Indexing" is a passive form of fund management that has been successful in outperforming a majority of actively managed mutual funds (in comparable categories and over certain periods).  The primary advantage to such a strategy is the lower management expenses.  Since the fund managers of an index fund are simply replicating the performance of a benchmark index, they do not need the services of research analysts and others that assist in the stock selection process.  Actively managed funds utilize a research team.  In these cases, the extra costs of fund management get reflected in the fund's expense ratio, and get passed on to shareholders through lowered rates of return. 

Over the years active managers have enjoyed advantages over passive baskets of stocks.  In the US market, those advantages have been largely negated over the last several years.  This has led to the increasing use of passive index funds and ETFs in your account.  This trend will continue with the 2016-2017 rebalance, after which the use of passive funds will constitute approximately 70% of domestic stock allocations, depending upon Investment Objective.   

Overall client fees drop as a result of the increased use of passive index funds and ETFs.   

Tax Minefield 

One increased complication in our management of taxed portfolios relates to the use of active managed stock funds.  Many active managers are in damage control.  As investor momentum continues to favor lower cost index funds, those in the active managed camp have been in net-redemptions.  This compels fund managers to sell long-held stock positions to pay off departing shareholders.  When a fund sells stocks that are in a gain position, it creates a “capital gain declaration” for remaining shareholders on which they pay tax.  This has nothing to do with investor returns. 

Rarely in the mutual fund industry has this been a factor, except during extreme downturns such as 2008-2009.  However, today this is increasingly becoming more of a minefield.  In some cases, the results are astonishing.  For example, Morgan Stanley Institutional Mid Cap Growth (MPEGX) is forecasting a 25% distribution, meaning an investor in this fund will pay tax on 25 cents of every dollar invested (we do not own this fund!).  To add to the pain… the fund is DOWN 10.14% for the year (as of 11-07-2016).    

This is not a reason to avoid active managed funds, but it does represent a more pronounced danger than in the past.   

Conclusion 

Thank you for your continued confidence in our services.  We live in a rapidly changing investment environment and the ability to adapt and adjust will be imperative over the coming years.  We will continue to refine our processes in an effort to lower costs, enhance returns and increase tax efficiency.   

We will keep you posted. 

Jim Wilson, Investment Committee Chair

November 2016, #A0399

Year End Tax Planning

Just as in 1999 and 2006, capital losses from the last market downturn have been largely utilized.  Consequently, client tax bills are poised to increase.  At the end of each year we evaluate portfolios in an attempt to mitigate taxes. The two primary strategies include tax loss harvesting and capital gain declaration avoidance. 

Tax Loss Harvesting

In the market decline of 2008-2009, we aggressively moved to capture capital losses.  This is referred to as “tax loss harvesting.”  This action allowed eligible clients to net out gains over the next several years to keep the IRS bill lower.

By definition, tax loss harvesting is the exercise of evaluating taxable portfolios to seek out and temporarily liquidate positions with capital losses.  These losses then become tax deductible.  In addition, you can use up to $3,000 of losses annually to offset other sources of income, such as dividends or wages.  For as long as losses remain, $3,000 can be carried forward each year to offset future gains and income also.

The mechanics of tax loss harvesting involves liquidating a loss position and temporarily or permanently replacing it with a different investment.  We cannot reinvest in the liquidated position for 30 days from the transaction date.

Tax loss harvesting, along with routine rebalances and fund replacements, will create activity in client accounts. While we attempt to mitigate overall costs by minimizing this trading activity, this is one of those years where we have replaced several funds and rebalanced portfolios but still feel compelled to initiate tax loss harvesting.  Our hand is partially being forced by upcoming fund capital gain declarations we seek to minimize or avoid.

Capital Gain Avoidance

This topic and the overall taxation of mutual funds is, a bit convoluted and not easily understood.

Each year, most stock mutual funds “declare” capital gains, which is the amount on which shareholders pay tax.  Experienced investors understand this is an accounting calculation unrelated to investment returns. 

Here is an example:   Assume Fund A purchased Amazon in May 1997 at $16.00 per share, and sold it in 2016 for $847.00 per share.  The realized gain is $831.00 per share gain.  This transaction results in a capital gain declaration for all “record date” shareholders of the fund.  It does not matter if an investor bought shares of Fund A in 1997 or the day before the record date, they both owe tax attributable to the Amazon sale.

Fortunately, most funds provide guidance on gain declarations.

2016 Anticipated Strategic Moves

Each year our Investment Committee weighs the costs versus benefits of implementing tax loss harvesting and capital gain avoidance strategies. 

This year the Committee has determined it is advisable to move forward with a limited tax loss selling program where opportunities exist.  We are also in the process of evaluating the magnitude of anticipated capital gain declarations which will determine the merits of implementing a gain-avoidance strategy. 

Thank you for your continued confidence in our services.  We live in a rapidly changing investment environment and the ability to adapt and adjust will be imperative over the coming years.  Improvements we are making to lower costs and increase tax efficiency (such as the inclusion of exchange traded funds and increased use of index funds) provided us with an increased number of investment tools.  Our ongoing task is to define the practical use of these tools and their thoughtful integration into portfolio management strategies.

We will keep you posted.

Jim Wilson, Investment Committee Chair

Compliance #A0372