Have you blindly overlooked these 4 downside risks of your 401k?

Read any article about 401k's (or any other government sponsored plan) and probably the main focus of the article will be how great the tax benenfits are for the individual. While not having to pay taxes on a pool of money is good, what is often overlooked is the access you give up on those funds (not to mention the complex rules you must follow should you ever need that money). Overlooked often are the downsides of giving up access on these funds can actually make someone poorer not richer (even with a company match!) at retirement. Below are 4 risks people face when locking money away in a qualified plan like a 401k:

1. Lost of capital means more finance charges. I've met many people who have two car payments, student loans, credit card debt, and a mortgage yet they are putting away as much as they can into their employer sponsered qualified 401k plan. People often overlook that if 35% of your income is going towards finance charges, it is very difficult to become financially independent when you are only saving 10% of your income. The other problem is this also results in more costs when unforeseen circumstances arrive. A recent survey stated that 71% of Americans would be financial trouble if their paycheck was delayed by just one week.

2. Hidden fees are also overlooked in 401k's. A recent expose on Bloomberg television stated that many midsize 401k plans they reviewed had fees in excess of 3.5 to 4%. The best run plans still had total fees in the 1.5% range. To give you an idea what this difference means for a 35 year old with $100,000 growing at 5% at age 65 with a 1.5% fee is the difference of $551,601 (no fees) versus $333,359 (with 1.5% fee) or nearly 40% less in retirement (it's more than half if you have fees around 2.5%!)

3. Something only recently realized are the risk inherent in most 401k's since most options are stock market related and typically have no type of insurance program to guarantee against a lost of money. If the market lost 50% or more like it did between 2008-2009 may not be a big deal if you are 35, but imagine it happened a year or two before your scheduled retirement date. This is something of a big concern right now to my parents generation. What's worse is hearing stories of these same folks about how they sacrificed for all these years only to have to sacrifice even longer. If you hear enough of these stories you too will grow tired of the cliche "you're in it for the long haul." What if the "long-haul" is longer than you left on this Earth?

4. The gorilla in the room that we never hear about as a future risk is "Taxes!" Most 401k plans rely on a tax postponement. This means you don't avoid taxes you simply are delaying paying taxes. Typically when people are younger they have a lot of deductions (kids, home interest, etc.) and typically are in the lowest tax brackets they'll be in their lifetime. When people are older the kids are gone, the home is paid for, and they have very few if any deductions. So most people then defer taxes while they are in a low tax bracket only to have to pay taxes when they are in a higher tax bracket on that same pool of money. This single risk can have a huge impact and I'd admit may turnout to be a bigger risk than the 3 above risks combined.

If you would like a copy of a special report on how you can help avoid or eliminate the above risks please please email me at:
Josh@jsmithfin.com

Joshua Smith
J. Smith Financial
Josh@jsmithfin.com

Have any questions/comments or topics you would like covered? Please feel free to email at the email address above.

What having a CLUE with your money can mean for you?

What having a CLUE with your money can mean for you?

Control means never having to “ask permission” to access your own money. This means not having to be of a certain age, experience a certain hardship, or face pages upon pages of rules and regulations to access your own money like you do with government qualified retirement programs like IRA’s/401k’s. It means not tying up your funds in home equity so that in a time of need, you do not have to prove your income (again) and get permission to borrow (and pay interest again) on the extra money you’ve already paid on your home. Why follow others’ rules? Why not control your money and set your own rules?

Liquidity & Use of your money will allow you to take advantage of opportunities that come along and reduce the cost of items you already need. My wife and I recently purchased her car from an individual for less than they were offered from another couple simply because we were able to write a check in full and did not have to rely on a bank or finance company. Liquidity means when an unexpected bill or expense pops up, you do not have to rely on high-interest credit cards to make ends meet. Use means we can reduce the costs on things we already need, like paying an annual premium on car insurance versus paying monthly or every 6-months.

Enjoyment means being able to enjoy your hard-earned money without feeling guilty. It means taking advantage of vacations when a good deal comes around. Love your home more by doing the home upgrades you want to do without feeling guilty. Enjoy life more without constant worries about money because you have Control, Liquidity, and Use of your money.

If you would like to learn more how you can have a CLUE with your money, please email me and I will send you a special report.

My email is: josh.smith@gmail.com

This special report will show how being honest with yourself and behaving like a bank, you can reduce or eliminate the interest you are paying banks/finance companies and at the same time, save for the future.

Here’s to having CLUE!

-Joshua Smith

Financing and Savings: Focus on Volume of Interest Not Rate of Interest/Return

Financing and Savings: Focus on Volume of Interest Not Rate of Interest/Return

I hear it all the time on the television, in the coffee shop, and even when out at dinner. What is it I hear? “I just got a great interest rate on my new car, boat, credit card, home etc.” What most people either do not know or do not understand is that it is the volume of interest that is a wealth destroyer and not necessarily the interest rate.

So for instance say you had a $20,000 car you just purchased and got a great rate of 4.9% over 5 years. Your first payment would be $376.51 of that $81.67 would be interest (21.69%) and $294.84 would be principal (78.30%). Over the term of 5-years (assuming it was not traded in early) $2,590 (or 11.30%) would have been paid in interest.

It is said that the average person spends an average 35% of every after-tax dollar on financing for purchases that were already made and saves less than 5%. So if we are to get ahead in life what rate of return would we need to equal the amount of every dollar we willing sent to a bank or financial institution (700%!!)? What if someone, like myself, could help you change this equation?

When it comes to savings the same thing applies. If we can change the 35% and 5% equation to say 20% and 20% things get a lot better. Would you rather have an account that was at the mercy of the market with a balance of $25,000 earning $2,000 in interest a year (8%) or would you rather a have a safe place with a larger balance of $100,000 (because you saved 4 times as much) earning $4,500 a year (4.5%).

When you focus on volume of interest many things come into perspective.

If you would like help to see how you can focus on volume, not interest rate, and see how you might be able to improve your own equation please feel free to email me at: josh.smith@gmail.com

Show Me the Money! Where’s the Beef? Never Trust a Skinny Cook!

Show Me the Money! Where’s the Beef? Never Trust a Skinny Cook!

What are these pop culture sayings telling us? They are telling us to always ask for proof. This is never more of importance than when it comes to your hard earned savings.

Earlier in the week I had a conversation with a younger fellow in a conversation. He worked for a big financial institution and was trying to pitch me on these great new investments he had that were averaging 9% per year (he obviously did not know me very well or what I did). I won’t get in the specifics; however I asked for how long had they averaged 9% per year? Was that a 9% simple interest calculation or compounding interest calculation? What were the fees, and was the 9% before or after fees? What was my minimum return contractually in the event things did not go as planned or I needed the money before my 60th birthday? Finally, could he show me an actual statement from someone (maybe his personal statement since it was such a great deal!)?

Needless to say he was not too happy. I felt bad that maybe I had been harsh. But sometimes we don’t know what we don’t know, or we think we know something that we really don’t. The moral of this is to always ask questions like: Show me proof (i.e. “Where’s the Beef?”). Show me the Money, and how can this company give me this rate of return? Finally, ask the person giving advice can you see their stuff, where have they put their money (i.e. “Never Trust a Skinny Cook”)?

Today’s Money and Taxes

Look in your savings, checking account, or wallet right now. The money in there is worth more today than it ever will be in the future. The reason is something called inflation, and recently it is getting a lot of press. Going back 30 Years to 1981, the average rate of inflation has been 3.31% per year. This means if you had $1,000 in 1981; it only has the spending power of $364.29 today as it did in 1981.

The next topic is taxes. Today there are record deficits and large unfunded liabilities by both state and federal governments. Our population is aging, and our workforce reduced. Politicians have two choices either they can cut benefits or raise tax revenues. So this begs the question, which direction do you think taxes are headed?

So why does traditional thinking say take as many pre-tax dollars today and defer them for use as far in the future as possible? Think about it, we are taking our most valuable money (today’s dollars); deferring taxes in what most likely will be our lowest tax bracket. So one day in the future we will have less buying power and our money will be taxed the most.

How long do you want to do this?

Would you like an alternative?

If you would like an alternative please email me @: josh.smith@gmail.com

The “1” Question you need to ask and consider before you put your money anywhere?

Many people find out the hard way, once it is too late. That once seemingly great place to put their money has now handcuffed them or not available when they need it the most. Even if they thought they would never need that money sometimes life happens. Some of these events include but not limited to:


• Unemployment
• Disability
• Divorce
• Treatment for Medical Illness
• Education Expenses
• Wedding
• House Down Payment
• Business opportunity


The “1” question most people never ask:


How do I access my money and how quickly can I get it in an emergency?


Due to not asking this very question many people are forced to put items and expenses on high interest credit cards or pay unnecessary taxes and penalties at the very moment they can least afford it.


Some factors to consider and ask when placing your money in an account:


• How quickly can I get my money? (Ideally you would want less than a week)


• If I ask for my money, will I get it automatically or will I have to go through an approval process and qualify to get access to my own funds?


• Will I owe a penalty and taxes when gaining access to my savings?


• Will all my money be there when I need it the most or will it be subject to the ups and downs of the stock market?


• Can I use my money for anything I see fit or am I forced to use it only on certain expenses?


Throughout the years I have heard some terrible stories about folks struggling financially. Many times they are struggling financially not because they are not responsible people. They always had good intentions, however due to where they chose to put those savings has caused them many unintended consequences they never thought possible. That is why I think you should always ask this “1” question before putting your money in any account:

How do I access my money and how quickly can I get it in an emergency?

What’s the best place to put my money?

What’s the best place to put my money?

Listen to just about any financial talk show and within the first fifteen minutes they always get to this same question. What I’ve learned over the years instead of answering the question directly it’s better to name the attributes the person would be looking from this financial product. The reason is many people have prejudices over certain financial products simply because of their name and not from any real world experience. People kick many products to the curb too quickly, and give some products a lot more praise than they are worth. The underlying cause, I think, is very few people explain how these products work, and over time if you hear something often enough many people will begin to think it is true without any real proof (think about the earth being flat etc.).

I thought I’d share characteristics of two places you can put your money:

• The first (Account #1) is the most popular place people say to put your money and has drastically changed the way people are forced to view retirement.

• The second (Account #2) is the place I put most of my own personal wealth and I think if more people really looked into would want to put theirs as well.

Account #1:
• Your money grows tax deferred
• Limited contributions per year
• No or limited access to your money (Not even for cars, houses, college, unemployment, or vacations etc.)
• All distributions are fully taxable at an unknown future tax rate
• 10% penalties + 100% taxable withdrawals are incurred if taken prior to age 59-1/2
• Creditor protected in most states
• Put in place by an act of congress a little over 30 years ago
• In 2001-2002 and again between 2008-2009 many people lost over half of their savings
• No guaranteed future value or growth
• Cannot be used as collateral
• Unknown total fees paid

Account #2:
• Your money grows tax deferred
• Unlimited contributions per year
• Complete access to your money at any time (For cars, houses, college, unemployment, or vacations etc.)
• All distributions can be made completely tax-free if structured properly
• No penalties if taken prior to age 59-1/2
• Creditor protected in most states
• Has been around for over 200+ years
• Competitive rate of return that can only go up year to year
• Guaranteed future value and growth
• Can be used as collateral
• No hidden fees paid

Let me know in the comment section which account you would prefer.

The 3 Places you can Spend your Money

The 3 Places you Spend Money

Have you ever thought about every dollar you have ever made and exactly where you spent it? Sometimes big purchases stick out like when I bought my wife’s engagement ring, or the $100 I spent on a pager when I was a senior in high school (I know I am showing my age a little). Throughout a lifetime there is only a single pool of money we will earn and even for the average person that can be multiple millions of dollars. Creating wealth however, depends on the stewardship we have towards this money and where we chose to place it. Below are the 3 places we can put money:

#1 Lifestyle: This is the money we use in our everyday life to buy things like food, clothing, and entertainment. One of the biggest influences on lifestyle expenses is your home (typically the bigger the home the bigger the expenses associated with it). Often when trying to focus on creating more wealth Lifestyle is the only place most folks (and “so-called” experts) concentrate. If you’re like most people working hard 40+ hours a week only to eat beans & rice, and drive a beat up used car is not your idea of Lifestyle then we think very much alike. However, this is exactly how most financial experts help folks try to create wealth. I am not saying lifestyle should not be reviewed to help create wealth, but it should not be the sole source.

#2 Future Savings: This is the money we are able to save. This could be money in your checking account, savings rainy day fund, life insurance cash values, or a retirement plan. Ultimately this is the measuring stick for wealth for most people. Until the recent financial crisis many people were saving next to nothing for the future. Fortunately the savings rate is up over the last few years; however I think it could go even higher if we all could focus on the third place our money goes (see below).

#3 Transferred Money: This is the money we transfer to other institutions with no real apparent value lifestyle wise or economically. Transfer money includes but it not limited to things such as:

• Interest on debt (such as credit cards, car loans, personal loans, and home loans)

• Taxes (such as federal, state, local, S.S. taxes, Medicaid/Medicare, sales tax, gas tax, property,
and on-on i.e. there are too many taxes to list)

• Insurance expenses (such as health, car, home owners, and term life)

• Fees (401k admin fees, bank fees, late fees, mutual fund fees, etc.)

There is also a concept within transferred money that is called “Opportunity Costs”. The idea is when you transfer money not only did you lose those dollars, but you also lost the interest those dollars could have earned had you avoided the transfer altogether.

For instance if you had a regular savings account you were saving $5,000 per year into and was earning 5% per year (interest rates are historically low now so I have assumed a higher Rate of return for illustrations purposes only). You would earn $250 in interest in year 1 and owe $75 (30% assuming 25% federal and 5% state) in taxes. An opportunity cost says not only did you lose the $75 but you also lost the future interest the $75 could have made (because you could have saved more if you did not have to pay the $75 tax). If this happened every year for 30 years at a modest rate of return of 5% then your account value would be $348,804, however you would need to subtract the taxes paid and opportunity cost of those taxes. The total taxes paid plus their opportunity cost = $94,829. This would leave you with a net account value of $253,975. So in summary this one decision alone costs this individual almost more than they earned in interest. See below:

$150,000 (total investment $5,000 * 30)

$198,804 (gross interest) – $94,829 (Taxes + Opportunity cost on taxes) = $103,975 (Net Interest Earned)

See the survey to the right and click on which you think might be a better option to create more wealth.

Relationships and Finances on Valentine's Day

On this day (Valentine’s Day) that is special to some and dreaded by others I thought I would share the importance of finances in a relationship. I know many couples who are married or in a long-term relationship, however one of the key ingredients to those that are happiest seems to be their similar thoughts about money. The reason I think this is important is the way a couple treats their finances is indicative of the love and mutual respect they have with one another. I am lucky to have found someone to share my life with who also shares these same philosophies.

If there is no respect for finances in a relationship it may be a pretty good indicator of where that relationship is headed. It’s kind of like the old saying goes: “When the money is gone love goes out the window”.

Let me know how you feel using the poll to the right:

Straight Forward Word's from Mark Cuban

Mark Cuban is an outspoken entrepreneur. Unlike most men of his wealth he has an uncanny ability to get his point across and best of all most his statements are not always politically correct. I recently was forwarded the article which is linked below. He hits home on three fronts that I always do my best to confront when talking to others about their money.

#1 Cuban says: No longer does Wall Street want you to consider buying what you know. Today, your investment advisors want you invest in things you have absolutely no fricking clue about and have pretty much absolutely no fricking ability to learn about.

-The reason I stress this is: How can you judge how good or bad something is and matches up with your needs without even knowing how it works?

#2 Cuban says: Remember this. It’s better to make less, or next to nothing than to lose everything. Don’t get greedy. Don't get desperate. The stock market can’t save your financial future, but it can end it.

-The reason I stress this is: Never put any money more at risk than you are willing to lose. Most people are risking their entire financial future playing the slot machine (See #1), when the casino (ie Wall Street) is the one controlling the odds.

#3 Cuban says: Ask them (Your advisor) if they are making the exact same investment with their money.

-While an advisor wouldn't necessarily have the same holdings as they are suggesting, it is a good insight into how/where they are saving their money (if they're saving any money at all for that matter). If you are taking off your financial clothes for an advisor they should be willing to do the same for you.

To read more click below:
http://www.businessinsider.com/wall-streets-new-lie-to-main-street--asset-allocation-2011-1