Variety, they say, is the spice of life. And one of the best parts of being a financial planner is that no day at the office is the same. You never know what questions you will be asked or what analysis will need to be done. Even when we have clients with very similar financial situations, we often end up with very different financial planning strategies, due to their specific goals, financial histories and emotions around money. This variety makes it fun and rewarding to be a financial panner, as you get to use both sides of your brain. You get to be a part-time mathematician and statistician and a part-time therapist and behavioral coach, all at the same time. That being said, there are a few questions that I seem to get so often that I thought it might be helpful to address them in a general way. With that in mind, here are five of the most common questions I am asked on a regular basis.
How much cash should we have set-aside?
Cash reserves are probably the most important part of any financial plan or investment strategy. It doesn’t matter whether you are an individual, a family, a business, a government, or anything else you can name; those with adequate cash reserves are often successful while those without them often fail. It’s all about being prepared for the unknowable future and being able to ride out the tough times, whenever they happen to come.
In general, we recommend that you have at least six months-worth of spending set aside as your cash reserves, net of taxes and savings. In other words, if you spend $5,000 a month, not including taxes and savings, you should have at least $30,000 sitting in the bank or in short-term CDs. And, if you are in a volatile business such as a start-up company, or in a volatile industry such as technology, or are planning to leave your current job soon without already having secured a new job, having closer to twelve to eighteen months-worth of cash reserves makes even more sense. In general, you will want enough cash set aside so that you would likely be able to find a new job and start getting paid again, before you run out of money.
In addition to the cash reserves discussed above, we also recommend that you have cash set aside for any large expenditures coming up in the next two years or less. So, if you are planning to buy a new car, or take the trip of a lifetime in the next couple of years, these dollars should be set aside in cash as well.
Do I need a will?
For once, I have a straight-forward, no-caveat answer for you. YES!!!! You need a will (and other estate planning documents as well). A will, in conjunction with other estate-planning documents, allows you to direct how your affairs will be settled and how your assets will be distributed when you are gone. Even if you don’t have much in the way of assets, you should still have a well-thought-out, written and legally executed will to ensure that all of your affairs are handled as you desire. This includes end-of-life decisions, assigning custodians to care for your minors, and much more.
Many people don’t realize that if they die without a will, in essence, the state provides one for you. Dying without a written will is called dying “intestate.” When you die intestate, the state has a preordained system and structure in place to distribute your assets and take care of your affairs in a way that has been determined by the state you live in. For those of you who have not proactively written out your own will, you have basically signed up for your state’s will. So, if your estranged sister, or no-account dead-beat brother ends up with all of your assets, you have no one to blame but yourself.
Another thing most people don’t realize is that a will does not avoid probate. A will is actually your written request to the probate court for how you would like your affairs administered. The court does not actually have to honor your will, but as long as you have not done anything reckless or illegal, and nobody is contesting your will, it usually does. As such, having a will allows you to speed up the probate process, but does not avoid it altogether. The only assets that actually avoid probate altogether are assets that are held in Trust, or that have co-owners and/or named beneficiaries attached.
Should we pay off debt or invest?
I often have clients tell me that they have excess cash in the bank, and they are wondering if it is better to pay down their debt or invest these dollars. On a purely statistical level, the answer is pretty straight-forward. If you have debt (i.e., credit cards, student loans, mortgages, etc.), that is costing you more in interest than you are likely to earn on your cash or investments, then you should pay off your debt as quickly as possible. If your debt is costing you less in interest than you are likely to earn, then you should stay in debt and invest your excess cash in the investment opportunities with higher potential returns. Here is an example to help explain.
Let’s say you have a mortgage that is costing you 4% and you have an investment portfolio that is structured to provide you with a 7% rate of return over the long run. The statistics say, in this scenario, that you should pay-down your debt as slowly as possible, invest the savings, and earn the 7% investment returns. Net-net you are earning 3% by doing so. On the other hand, if you have cash in the bank earning 1%, and you either don’t want, or don’t need to invest to reach your goals, and the money is likely to stay in the bank at 1%, then it makes sense to pay down your mortgage. In this case, you’re only earning 1% keeping money in the bank, when you could be earning 4% simply by paying down your mortgage.
Is renting a waste of money?
At least once a month, I hear from someone who feels they are throwing away money as a renter. I am one of the few advisors I know that believes renting, when done correctly, is not at all a waste of money. That being said, in reality many renters do end up wasting their money. It really depends on what type of person you are, which is why I say: ‘when done correctly.’ If you are a dedicated saver and long-term investor, renting can be as good or even better financially than owning a home. A typical example goes something like this:
Let’s say you are a renter and are paying $4,000/month in rent. You are looking for a home and have figured out that to own a house, between your mortgage, property taxes, insurance, and other costs of home ownership, it will cost you $7,000/month to own. If you are a dedicated long-term investor, who systematically and methodically invests the $3,000/month in savings that come from renting (the difference between current rent and possible home-ownership costs), in the long run, renting just might land you in a better place financially than owning a home. And, this does not count any of the other advantages of renting such as: calling the landlord when something breaks, being able to move any time you want to, not having to hold large cash reserves for the inevitable large costs that pop up for home owners, and so on.
All that being said, the good part of home ownership, in addition to appreciation and fixed mortgage payments (versus increasing rental payments), is that it is a forced saving vehicle. Home owners who owe $7,000/month usually pay that amount. However, renters, who pay $4,000/month, very rarely actually invest the savings available to them ($3,000/month in this scenario). So even though statistically it may not always make sense to own a house, it often turns out best for people who do, because it forces them to save instead allowing them to spend frivolously.
When can I retire?
Unfortunately, there are no easy answers here. People often want a quick analysis and a simple yes or no, but that is not how it works. In order to get an adequate answer to this question, you must be ready, willing and able to do serious and ongoing financial planning. You need to gather information on your assets, liabilities, income, and expenses, and figure out your specific goals and time frames. Everyone has a different financial situation and everyone has different goals, so each of us should have our own personalized financial plan when it comes to making retirement decisions. And if you do find someone, or some website or app, willing to give you a yes-or-no answer to this question after a brief conversation, short questionnaire or simple analysis, beware. Deciding when and how to retire is likely the biggest financial decision you will ever make. So take the time and give the topic the attention it deserves.
As you can see, most ‘common’ or ‘simple’ financial questions are anything but, and most require at least some amount of knowledge and even work to adequately answer. We hope, though, that there is enough food for thought here to get you started and on the right path if any of these questions is currently on your list.
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Topel & DiStasi Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Topel & DiStasi Wealth Management, LLC or performance returns of any Topel & DiStasi Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Topel & DiStasi Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.