Fireproof Your Money

How confident are you in your ability to meet your financial goals? If you’re like the majority of Americans, your confidence level is probably not very high. Find out why our financial confidence seems to be going down even though the economy, as a whole, is improving, and what you can do to become more confident and capable of achieving your financial goals.

• Before there was Mr. Ed or Rocket the Raccoon, there was Dr. Dolittle, a doctor that could talk to a number of different animals. One of which was especially interesting, the pushmi-pullyu, an animal that had a head on each end. The pushmi-pullyu was always confused about which way to go or what to do, which is how many people feel about their finances.
• There was a study put out by FINRA that shows that financial capability, financial stability and overall confidence is going down, even while the economy has been improving.
• Financial capability is our ability to reach our financial goals, whatever those may be for your stage of life. Stability is your ability to respond to unexpected changes in your life without getting derailed from your goals.
• Lack of confidence means we are more reactive than proactive. Pilots train emergency scenarios specifically to build their confidence. Stress testing your financial plan and thinking about the “what if?” scenarios is a way to plan ahead and increase your confidence in your ability to handle those situations.
• Acting creates capability and stability, and that all circles back to create more confidence.
• The FINRA study found that 53% of people surveyed and 63% of millennials said that thinking about money gave them anxiety. It also found that 44% of people and 55% of millennials said that discussing finances was stressful. That’s the quandary of the pushmi-pullyu, where we are operating against ourselves.
• 71% of people said that they had a high level of financial knowledge but only 34% had basic financial literacy skills. This is the major delusion that most Americans have and the trend seems to be accelerating.
• Write down your goals and then write your confidence level that you will be able to achieve those goals. Once you’ve done that, write down why you feel confident or not. Once you have that, consider talking to somebody to get some perspective about how confident you should be.
• One thing to keep in mind is if you are anxious about talking about money, that’s a very good sign that putting yourself through the rigors of actually doing it, is your best course of action.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

The Great Wealth Transfer is coming and what you do with your share of the $68.4 trillion that will be passed on to the next generation could determine your financial future. Find out what it  means to your retirement if you learn how to stretch your money while you still can.

• Stretch when you can or conversely, stretch before you can’t. Stretching applies to more than just exercise, it helps build wealth too.
• There is something called the Great Wealth Transfer going on, where 45 million households will leave $68.4 trillion to the next generation over the next 25 years. Your share of this money may be the foundation for your own financial future.
• The generations after the Baby Boomers have had to deal with a number of factors that other generations haven’t had to experience. The average graduate in 2018 came out with $35,000 in student debt and a 10-year $400 monthly payment.
• Many of those people admitted to wishing they chose a less expensive education.
• When you inherit a retirement account from someone other than your spouse, you have an opportunity on your hands. The first choice is to take the money out, but your second choice is to make the money stretch a little further.
• If you take the money out, you are going to pay any income taxes that are due, but since it was someone else’s retirement account, you will not pay any penalty no matter how old you are.
• Stretching the money out is the option of opportunity. Under the tax code, when you inherit a retirement account, there is a minimum amount you have to take out each year called the Required Minimum Distribution (RMD). The RMD is based on your minimum life expectancy.
• Let’s say you inherit a $50,000 regular IRA, the kind on which you have to pay taxes when you take money out. There are two variables you have to take into account: the age in which you inherit it and the rate of return you could earn if you leave the money in the account. If the rate of return is 6% and you only withdraw the tax-code minimum, you would be able to withdraw over $237,000 over the course of your life expectancy.
• The choice you face is either $50,000 now or $237,000 over time, but there is some legislation coming down the pipe that may change the math.
• The SECURE act that is moving through Congress essentially enhances your ability to stretch the money out and would require you to withdraw all the inherited money over a 10-year period.
• It will ultimately depend on all the things you can do with that money. Every time you look at a financial situation, you have to look at your own personal situation. You may have a health crisis or debts to pay down that would make taking the money up front make more sense.
• The big opportunity right now is to build your financial plan without assuming you’re going to inherit money because you can’t plan for it. You should also do a beneficiary designation and decide who gets to do the stretch when you die.
• Imagine your legacy and your parent’s or grandparent’s legacy if it’s not optimized when they die.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

How do you know the correct amount of life insurance coverage you should get? There’s an easy way to answer that question but most people have no idea where to start. There is a simple template to make sure your life insurance is adequate to take care of your family’s needs after you’re gone.

• Can you have a negative net value for your life? That depends on how and who’s doing the calculation.
• There is a template that Wayne created that allows you to figure out how valuable you are called “Can You Spare a DIME?”
• The D is debts. When you pass away, your debts need to be repaid or your loved ones get saddled with them after you’re gone.
• The I is Income Shortfall. How much income is your family going to need when you’re gone?
• The M is Missed Goals and Opportunities. Will your spouse be able to afford to save for retirement or will your child have to fund their own education because you’re gone?
• The E is Extra Expenses. Funeral costs, childcare and counselling will all come into play here.
• Once you determine these numbers, you can use them as a template to know how much life insurance you should be buying. Nobody likes life insurance but the check your family receives after you die is probably the most welcome check they will ever get.
• Most people don’t have enough life insurance. 59% of adults report that they have some form of life insurance but a lot of that comes from workplace-provided insurance which can drastically fall short in the amount of coverage your family will need.
• The best way to view workplace-provided life insurance is that it’s supplemental at best.
• The people who do have life insurance, around 1 in 5 admit that they probably don’t have enough life insurance.
• It’s often the stay-at-home spouse that gets neglected in the DIME calculation and ends up under-insured. Most people, when crunching the numbers, only think about debts and income shortfall but that doesn’t take into account the needs of a stay-at-home spouse.
• The first thing to do is figure out the value of your DIME calculation. Once you’ve got some rough figures, consider getting a fiduciary financial advisor who has your interests first.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

You want your money to work as hard for you as you work to earn it. The way to do that is to understand what Einstein referred to as the “eighth wonder of the world.” Wayne and Lisa talk about the incredible power of compound interest, and how it can make or break your financial plans.

• “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” -Albert Einstein
• We don’t want the value of our money to be static. When we invest it, we are looking for a return. The change of the value of that money happens at an increasing rate due to compounding, where your money earns money and the return also earns a return.
• Simple interest is when you have a $1,000 investment that pays 10% per year for the next 20 years. That means that your investment earns $100 per year, so at the end of the 20 years, you would have $3,000. With compound interest, you would have $6,727 instead.
• Another way to think about it would be, would you rather have a million dollars today or one penny doubled over the next 30 days? Most people will go for the million dollars, but the other option adds up to over $10 million by the end of the 30-day period.
• A very small increase in the compounding interest rate can add up to a very large amount of money. The effect is magnified by the compounding over time.
• How you choose your investments also has financial implications. Generally, you’re going to want to choose the highest returning investments. This will also affect how you are going to spend, both now and in retirement. Cost of living is also affected, through inflation and purchasing power.
• Investing conservatively can be great for minimizing risk, but it comes with a separate risk, namely not earning enough compound interest to compete with inflation.
• Your debt is also affected by compound interest. Take your credit card statements, for example, where you can see a small amount of debt turn into a gigantic financial obligation because of compounding.
• Small differences in rates can have a big impact on your ability to achieve your goals within a given timeframe.
• The earlier you start investing, the more time you have to take advantage of the benefits of compounding interest. A good way to think about it is in terms of how hard you work versus how hard your money works.
• You can choose to take a lower risk, but you will get a lower return. If you want to get to a certain goal, that means you will need to plan for a longer timeline to get there. There are always trade-offs with the three R’s: Risk, Reward, and Ready Access. The question for you, is it going to be worth it?
• Look at your debts and your investments. Pick one investment, and think about how you can get a higher return. Then pick one debt, and think about how you can reduce the rate.
• When planning your future, consider how compounding is going to affect your living, and make sure you run the numbers.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

What do detonating atomic bombs and financial planning have in common? Both require that we test our assumptions and run the numbers before making big decisions. That’s the topic of the show today: find out how Monte Carlo simulations can help you figure out if your current investments will help you reach your financial goals.When it comes to knocking down buildings, we use a lot of complex math called Monte Carlo testing to make the implosion predictable and controlled. The same principles apply to our financial planning.

• The history of Monte Carlo testing came from the Manhattan Project. You can’t set off a nuke to test every assumption, so they used complex math to simulate different outcomes. You can do the same thing to test inflation, salary rates, longevity, or social security inflation rates.
• You want to assess the probability of success given the parameters, and move them around to hopefully find the best results. Since we have a lot of computing power available to us these days, we can test thousands of scenarios where the variables can be randomized based on historical performance.
• This kind of testing can predict whether you will be able to retire at 65 or that your money will last for your lifetime. You can then decide if that is enough of a confidence level for you to proceed or to take actions to increase the probability.
• Many clients feel a tremendous amount of relief when they are shown the results of this kind of testing. Either they get the relief of knowing they can be confident they will make it work, or they have a plan to improve their odds.
• You can adjust all those variables to help achieve the retirement and investment goals you’re aiming for.
• Sometimes it’s about getting the “what ifs?” out of your head and putting everything down on paper, so you can go through the testing process and move forward based on the results.
• One example is secondary education for your children. You can put variables like tuition increases and completion time into the system and see if you’re on track to be able to pay for your kid’s college education.
• Sometimes people will say “this time is different,” but chances are the situation you’re looking at has probably happened in some way already. All the issues that we are confronting have happened in some way in the past.
• You have to accept that there is uncertainty in life. There are things we can’t control and we all make regrettable choices, you have to accept that as part of the process. Just don’t let uncertainty paralyze you from making a choice and moving forward.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

The IRS is always going to want its cut and if you don’t keep good records of your investments, you may end up paying Uncle Sam way more than you have to. Find out what your basis is and how it can impact your investments and retirement.

• Wayne got a call from a client who was panicking due to a particularly scary letter from the IRS. They recalculated their taxes owed and determined that the client owed an additional $9,000.
• Wayne got a call from a client who was panicking due to a particularly scary letter from the IRS. They recalculated their taxes owed and determined that the client owed an additional $9,000.
• When you sell investments, you get a copy of your 1099 and so does the IRS. The trouble is all the IRS sees on their copy is what you sold the investment for. That’s only half the story, and this is where the concept of basis comes in.
• Your basis determines how much tax you owe when you sell something. You only owe tax on the difference between what you sold it for and how much you paid for it.
• The general rule is: if you pay tax on the money you used to buy an investment, you don’t have to pay tax on those dollars ever again.
• The converse to that rule is that if you didn’t pay taxes on investment dollars, then someday you will have to pay taxes on those dollars.
• There is always a triggering event, although the IRS doesn’t refer to it that way. For example, if you have a retirement account, taking money out of the account is a triggering event.
• For non-retirement accounts, the triggering event is when you sell the investments within the account.
• With common accounts like IRA’s and 401(k)’s you don’t typically pay any income taxes on the money you invest. The triggering event is when you take money out of that account, and at that point it becomes taxable income. There are also complications when you take the money out early.
• Let’s say you have an investment account. You get paid, having paid taxes on your income already, and then you put after tax income into your investment account. You buy a stock for $100 and it grows to $1000.
• In that situation, the $100 is your basis. When you sell that investment, the IRS only sees the $1000 and assumes that’s all income unless you tell them otherwise. You have to keep records and let the IRS know at that point.
• Real estate is treated the same way, but gifts and inheritance are not. If you are gifted a $100 stock from Grandma that is now worth a $1000, her $100 basis carries over to you. With inheritance, if the investment is not in a retirement account your basis resets to the value of the investment on the day that she died.
• Another exception is a Roth IRA since you don’t get a tax deduction when the money goes in but when you take it out, you don’t pay any taxes on whatever growth you had.
• Basis is money you paid taxes on, so outside of a retirement account, your basis is whatever you paid for the initial investment. It also includes any additional deposits you make to that investment that are after tax.
• The best way to protect yourself is to keep good records. Consider the tax implications of any investment transaction because it can affect your social security or your eligibility for deductions.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

Nobody likes paying more than they have to, especially when it comes to accessing your own money. Well, that’s what happens when you take money out your retirement account prematurely. Find out why the IRS ATM fee can take a big bite out your potential retirement funds and what you should be doing instead.

• The IRS has an ATM fee. There is no physical machine, but when you take money out of your retirement account, that money is taxable. Typically we get some sort of tax deferral on the front end.
• The IRS has an ATM fee. There is no physical machine, but when you take money out of your retirement account, that money is taxable. Typically we get some sort of tax deferral on the front end.
• What most people forget is that you pay a 10% premature distribution fee, also known as the IRS ATM fee.
• If you take money out of a retirement account prior to the age of 59 and a half, it’s considered premature and that causes a penalty.
• If you take $1000 out of your IRA, you’re going to pay some tax. Something like 20%, but you would also pay a 10% fee on top of that, so you’re looking at a cost of $300 just to access your own money.
• Not only that, but that money is out of your retirement account so you’re no longer getting the compounding interest on it. It can make it easy to fall into the cycle of looking at your retirement account as something that you can continue to draw on whenever you have a need.
• There are exceptions, but it depends on your type of retirement plan. There are different types of exceptions for IRA’s and employer sponsored plans. It also depends on the purpose of the money.
• One example is higher education expenses, which are an exception with an IRA but not a 401(k). When retiring from working at the age of 55, that’s an exception with the 401(k) but not the IRA.
• Usually when people are taking money out of a retirement account, it’s for a hardship, but there is no exception for a hardship. Some plans allow you to take a hardship withdrawal but you still have to pay the IRS ATM fee.
• To avoid paying this fee, think twice about whether or not there is a slightly less expensive way to get the money. Also, when you are taking money out of your retirement account, you can have them withhold taxes. Make sure you are withholding enough to pay any taxes as well as the penalty.
• Email [email protected] to get your free copy of the Exemption Chart.
• Develop a cash reserve of at least three months to help you avoid dipping into your retirement accounts when emergencies come up. Always be planning to build your retirement, not withdrawing from it. You don’t want to waste money when there is no do-over.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

Easy money, sleazy money. When a crisis happens, it can be very tempting to just borrow some money from your 401(k) to cover the unexpected expense. But before you dip into your retirement savings, find out why you may want to reconsider that 401(k) loan and what you should know about what you’re getting into.

• Sometimes life feels like it isn’t giving you any options. When that happens, it can be very tempting to take money out of your 401(k), but that’s a pretty bad idea.
• Just because you have a 401(k), that doesn’t mean your particular 401(k) offers loans. Even when they do, you probably shouldn’t.
• The trouble is taking money out of your 401(k) doesn’t seem that bad. You’re borrowing from yourself after all, there is no credit check, it’s guaranteed, and you’re going to get a pretty good interest rate.
• One of the problems with a 401(k) is you have to pay tax on the money twice, and you should always avoid paying unnecessary taxes. The money that you put back in the 401(k) gets taxed, and then when you take it out in the future during retirement you pay taxes again.
• You’re paying yourself interest on that loan, but it’s not going to be as much as you could earn with other investments. Over the loan period of five years, you’re going to lose the growth on your money that you are going to need to support you during your retirement years.
• If you ever lose your job for whatever reason, you have to pay back the loan immediately. If you don’t repay it, it’s taxable, and if you’re not 59 and a half, you get hit with a premature distribution penalty.
• There is also the danger of starting to view your 401(k) as a source of “now” money instead of retirement money, also known as robbing Peter to pay Paul.
• If you are going to take out a 401(k) loan, make sure you can repay the loan before you take it. Are you going to be at that company for the next 5 years?
• Also make sure you have the cash flow and understand what the payments are going to be. Your paycheck will go down for the loan repayment period.
• To get your own 401(k) Loans Fact Chart with the pros and cons of 401(k) loans, email [email protected].
• Develop a cash reserve of at least three months worth of living expenses so you can avoid taking loans in the future. Put expected but irregular items into your budget. For anything that can reasonably happen to you but would be unexpected, get the right insurance.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

You wouldn’t confuse gum with the wrapper that it comes in, but many people do pretty much the exact same thing when it comes to their investments. Wayne and Lisa talk about the metaphor of gums and wrappers for investing, and why you need to understand how they work together to create something that serves your financial goals.

• Don’t confuse the gum with the wrapper. Investing is a lot like the gum in its wrapper.
• People often ask Wayne if they should invest in an IRA or a Roth IRA and he always tells them no because those aren’t investments. Investments are the things with three R’s: Risk, Reward, and Ready Access.
• To continue the metaphor, you have to pick the right flavor of gum for your personal situation. It will take a different flavor of gum to put your kid through college in two years than it will to make sure you can retire in twenty years.
• The wrapper is the account the investment gum is packaged in. The wrapper conveys a particular type of tax treatment and how the investments are taxed while they are in the account. There are also ownership concerns as well, you can’t for example have two owners on an individual retirement account.
• The wrapper also sets how much you can put into the investment. It also determines what happens to the account when you die. Much like the opera, everyone dies in the end so you need to plan for that.
• A good example is Apple stock. Apple stock is a security that has the attributes of the three R’s: Risk, Reward, and Ready Access. You can take that investment and put it into a variety of different wrappers, or investment accounts. Just like the investment, the wrapper you choose should match your needs and what you’re trying to achieve.
• Make a list of the accounts/wrappers you currently have, the wrapper type will probably be in the title itself. You can find that info on your paper statement or your online statement.
• For the future, the best step is to take what makes each wrapper unique and then start exploring. When you’re putting together your financial plan with your financial advisor, figure out what types of wrappers you should add. Some investments are best suited for certain types of wrappers so that’s a conversation you should be having with your advisor as well.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.

Diversifying your portfolio may sound like some sort of math wizardry, but it doesn’t have to be that complicated. Wayne and Lisa demystify the concept of diversification and show you how a diversified portfolio can not only generate higher returns over the long term, it can simultaneously reduce your risk.

• Making it big with investments has an irresistible allure for many people but due to the way the big investment banks take companies public it’s very hard for individual investors to win big.
• Even if you could get in on the deal, how would you know which company to pick. According to Fast Company, 75% of venture backed tech companies fail.
• Another study by Statistic Brain shows that 50% of companies fail within 5 years and 70% fail within 10 years.
• Our behavior makes it hard to hold on to an investment long enough to weather the uncertain rough periods. In many ways we are our own worst enemy. It took Amazon 6 years to become profitable after going public, and Twitter 5 years. Would you have been patient enough to make it through those lean years at the beginning?
• Hope is not an investment strategy and every investment has to compromise between the three R’s: risk, reward, and ready access. This leads to the natural conclusion of diversification.
• Diversification is a risk management strategy that works by mixing different types of investments in the same portfolio.
• With diversification it’s historically possible to get higher long term returns and lower volatility but it comes with a couple disadvantages. To get diversified it takes some time and comes with costs and the second thing is the “free lunch” is in no way guaranteed.
• US large company stocks were up 8.5% per year from 2008 to 2017, which is a pretty good return. But if you had a diversified portfolio of large US companies and small US companies, you would have only been up about 7.1% so you would have given up a little over 1%.
• Over the long term, diversification does tend to lower volatility and it can increase returns. One of the biggest advantages of diversifying is that reduces our own dumb tendencies to get out of the market without a plan. It keeps you from getting in your own way.
• Investments move differently in different economic climates relative to each other. We can use historical correlation to build our portfolio.
• We should all desire to avoid investment risk that we don’t get paid to take and diversification reduces our level of unpaid risk. Fear and greed will destroy a diversified portfolio.

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.