Wealth...Uncomplicated

Jeff and Jill Crocodile: Case Study Data

We begin the story of Jeff and Jill Crocodile by gathering information to better understand where this couple is in their financial life.  Among our goals in gathering data is to identify any opportunities or threats as well as better quantify short and long-term goals.  In the Crocodile's case, we have a relatively well off couple that has the resources to become very wealthy as long as they can properly maneuver the financial landscape between now and retirement.

The Basics

First and foremost, let's get to know Jeff and Jill a little better.  He is 30 years old and she is 29.  They have no dependents, own a home, hold undergraduate degrees, and are employed with large firms with combined income of $110,000 annually.  At the end of the year, they expect to have $5,000 available to put to good use.  In short, the Crocodile's are a high potential DINK couple.

Assets and Liabilities

Jeff and Jill have a sizable amount of assets for their relatively young age indicating they are good savers and the absence of consumer debt reinforces this assessment.  Here's the short list of assets and liabilities:

• Checking - $5,000
• Savings - $30,000
• 401k Plan - $30,000, contributing 4% that is matched dollar for dollar
• Primary Residence - $315,000
• 1st Mortgage - $215,000 30-yr fixed at 5.125%

Insurance Coverages

Rather than go down the list, let's just say that the Crocodile's have most of the usual insurance coverages including health, life, auto, and home owners'.  This is typical of most people in their situation, but they do have two significant gaps in coverage - disability and personal liability.  They have no short or long-term disability insurance, and only carry the standard levels of personal liability in their auto and home owners' policies.

Legal Documents

Since Jeff and Jill have no children, they have not seen the need to draft and execute any legal documents like a will, living will, healthcare surrogate, or durable power of attorney for finances.

Saving and Investing

At present, they only contribute to their employers' 401k plans up to the matching amount of 4% and receive a dollar for dollar match.  All other discretionary income is being added to their savings account.  Investment allocations for the 401k are unknown (likely a target date retirement fund).

Goals and Objectives

The Crocodile's have presented two major goals with one being more concrete than the other.  The first is to make financial decisions today that they will feel good about in 20 years.  The second is to be able to retire between the ages of 50 and 55, work part-time until age 60 or 65, and travel.

Question for the Case Study

"Given [our] situation, is it 'better' for [us] to pay off [our] mortgage as soon as possible or use [our] money to make another investment?"

The Difference Between Finance and Personal Finance - the Grand Canyon of outcomes

Arguments in the world of finance often revolve around whether to take action A or action B with each having a unique set of risks and rewards that can be quantified by rates of return and standard deviation measures, respectively.  As an example, you can purchase investment A that will return an estimated 8% annually and will have a standard deviation of 14%.  Investment B has an estimated annual return of 7% and a standard deviation of 10%.  Which should you choose?

Herein lies the difference between finance and personal finance as these alternatives have no context whatsoever.  What if you're in debt?  How about if you're 85 years old?  What would be the decision if you didn't have an emergency fund?  This is the fundamental problem in arguments in personal finance.  Often, people fail to add the personal part of the equation that gives us the necessary context to make better decisions.

The questions above are relatively easy to answer.  If you're in debt, you should choose option C - paying off your credit cards.  If you're 85 years old, you could choose either investment to round out your portfolio.  If you don't have an emergency fund, you should choose option D - cash equivalents.  But what if it's a little more complicated than this?  What about paying off your mortgage early?

And this is one of the great debates in personal finance.  If you speak to an accountant, corporate financier, or other numbers nerd, you'll get the finance answer - leverage your investments by keeping a mortgage as long as possible.  If you speak to a personal finance professional, you'll get a different answer - eliminate the mortgage as soon as possible after making sure you have (1) no other debts, (2) sufficient cash reserves, and (3) maxed out tax favored retirement savings opportunities, among other things.

In this example, the finance experts will tell you to do the math and whatever the math comes to, do it.  The personal finance experts will ask for more information and weigh the decision in light of your overall financial position.  The difference is about the size of the Grand Canyon.  On the one hand, a finance expert will say go this direction, turning a blind eye to the rest of the picture.  On the other hand, a personal finance expert will look around, survey the landscape, and arrive at a decision.

You tell me, which would you rather have?  A blind walk from the edge of the Grand Canyon, or perhaps, one with a little more vision.

Principle:  Personal finance employs the math of finance, but is not subservient to its calculations.

If Air Travel Worked Like Health Care

This was something I saw on BudgetTravel.com.  It's funny and scary at the same time (because it's spot on!):

Prognostications for 2010

Last year brought the end to the Panic of 2007-09 or as many are now calling it, The Great Recession.  The term panic seems more appropriate because that's exactly what happened.   We saw an enormous bubble burst in real estate that sent massive shock waves around the globe.  Credit markets stopped functioning and we found ourselves in a panic to get the financial markets and the economy moving in the right direction again.

Indeed, last year marked the end of a bleak chapter in our capitalist experiment, but this year will be an interesting one.  Unlike last year, there isn't a great value opportunity that jumps off the page like corporate bonds in 2009.  The market has recovered, but still sits 25 percent below peak and valuations still look expensive by historical measures.  Government bonds aren't exciting as yields are still quite low and with the current level of fiscal spending, inflation could crush longer maturities.  The cash markets are a complete snoozer.  So what's the deal with 2010?  In a word - balance.

Here's the short version of 2010:

• Economy - the economy will continue its recovery throughout 2010 and will be helped along periodically with additional fiscal stimulus.  Look for GDP growth in the 2.5% to 3.0% range with a meaningful portion of this generated by government spending of one sort or another.
• Interest Rates - with continuing weak growth numbers and fiscal stimulus, it will be difficult for the Federal Reserve to raise interest rates without potentially killing the recovery and throwing us into a double dip recession.  As a result, short-term rates will remain near historic lows, but don't be surprised to see yields on long-term Treasuries continue to move higher.
• Inflation - without significant growth numbers in GDP and with commodities prices remaining in check, inflation shouldn't be much of a concern for the coming year.  It is low and will remain that way for the year.
• Stock Market - small companies should outpace their larger counterparts, but overall, the market will be modestly higher or lower at the end of the year.  In other words, +/- 10% for the year, but don't be surprised to see increasing volatility as the year progresses.  It would not be surprising to see the market up or down 20 percent at some point during the year only to finish nearer the start.
• Emerging Markets - some developing countries continue to chug along and have recovered since the 2009 lows to near peak prices.  Obviously the prospects for growth are much more enticing for Brazil, India, and China compared to the developed world, but emerging markets may be overpriced.  For investors opening positions in these markets, dollar cost averaging is a good idea.  For those already there, keep an eye on this allocation and rebalance as needed.
• Fixed Income Markets - with the prospects of higher inflation over the long-term, a run up in corporate bond valuations in the last year, and the global economy still unsettled, there are no great values in the fixed income markets.  Of the major segments, foreign bonds should be the top performers as the dollar doesn't look very threatening at the moment.
• Cash Equivalents - high yield FDIC savings and money market accounts will finish second best to I Savings Bonds again this year, but the spread could close towards year end if the economic recovery shows signs of strengthening.

Overall, a well balanced portfolio should be a winner this year.  Exposure to all asset classes will be a plus and rebalancing will enhance returns.  Since a choppy market is expected, staying awake at the wheel is a must.  The only area of the market that should be avoided are bonds with long maturities.

Related Posts

2009 Prognostications
Report Card for Wealth...Uncomplicated's 2009 Prognostications - 6.5 out of 7

Report Card for Wealth...Uncomplicated's 2009 Prognostications - 6.5 out of 7 isn't bad

Last year I laid out my prognostications for 2009 and all but half of one was correct.  Of course, this past year was a relatively easy one to see directionally what would happen working under a single assumption that the sky would not fall forever.  The result is that 6.5 out the 7 prognostications were on target.  What did I miss?  Read on.  The original text is listed and the follow up commentary is italicized.

• Economy - the economy will begin its recovery in the latter part of 2009 with this recession coming to an end before March 31, 2010.  The recovery is definitely underway, albeit at a pace that resembles a snail running a marathon.  CHECK!
• Interest Rates - the Federal Reserve will hold rates steady for the first part of the year, and as the economy shows signs of stabilizing, will begin to raise rates near the end of the year.  Rates were steadily near zero for the entire year, but there were no rate increases.  1/2 CHECK.
• Inflation - with the global recession in full swing, inflation will remain tame for the entire year with only mild spikes in commodities prices.  Inflation?  What inflation?  Consumer prices were nearly in a comatose state.  CHECK!
• Deflation - a month or two of declining prices may occur, and these numbers are more likely to produce sensationalized headlines in the media than cause real duress for the economy.  You might not have noticed, but we actually experienced deflation last January.  Fortunately it was very short-lived.  CHECK!
• Stock Market - equities will lead the major asset classes with positive returns in excess of 10% for the year.  The S&P 500 returned 26.46% in 2009, a little better than 10%.  CHECK!
• Fixed Income Market - corporate bonds will lead the way as bondholders realize many of these bonds have been unfairly beaten down in the marketplace and double digit returns are not out of the question.  This was my favorite part of the market last year.  The lower the credit quality of your bond portfolio, the greater your return.  Here are a few examples from lowest credit quality to highest credit quality.  Fidelity High Income (SPHIX) returned 51.46% with average credit quality of B (pure junk).  Vanguard Intermediate-Term Investment Grade Bond Fund (VFICX) returned 17.71% with A-credit.  Bond Fund of American (ABNDX) returned 14.91% with average credit of AA (high).  CHECK!
• Cash Equivalents - I bonds will continue to be the best place for cash equivalents with high yield FDIC insured bank accounts in second.  Even though I Savings Bonds yielded nothing for half of the year, they still managed to out pace high yield FDIC insured bank accounts.  Currently, you can grab a yield of 3.36%.  CHECK!

Last year was much easier to predict than this year, but I'll have my 2010 prognostications out there later this month.

If you'd like to read the original post, click here.

Wealth...Uncomplicated in 2010 - it's all about principles and processes

This year, I'm happy to announce that Wealth...Uncomplicated will be changing formats ever so slightly and focusing more on content that is centered on the principles and processes that lead to a more secure financial life.  Throughout 2010, you will find posts designed to illuminate the guiding principles of sound personal financial planning and management as well as some very practical processes to help you stay on target.  Of course, the big bonus is that once you have the right processes in place, it become incredibly simple to accumulate wealth...systematically.

Case Studies

While the blogosphere and financial media is littered with short articles that discuss various aspects of personal finance, there is little in the way of detailed case studies that allow readers to understand the full range of complexities involved with planning and managing money.  The case studies presented on Wealth..Uncomplicated will illustrate common situations and the best ways to work through them.  These situations will be varied, but primarily focus on issues faced by individuals and families between the ages of 18 and 45.

Technology

In analyzing these cases and examining possible courses of action, a variety of technologies will be used and recommended to help you address your individual situation.  Most of these tools are readily available to you at little or no cost, while a few of them are considerably more expensive and traditionally available only to financial professionals.  By exposing you to both consumer and professional driven technologies, you'll be able to see the full range of technologies that can be used to help you plan and manage your finances.

Processes that Work

While technology is useful in revealing the numbers of a situation, it is also incredibly useful in helping us establish processes that work.  This ranges from creating or examining your current financial position to developing workable investment strategies that can help you reach savings goals.  In addition, some emerging technologies can help you automate many of these processes, improving the likelihood of accomplishing your goals.

Timeless Principles

Underpinning all of this are a series of timeless principles that are literally as old as civilization.  While personal finances as we know them today are incredibly varied and complex, the cure for what ails us is usually something simple and easy to understand.  These timeless principles drive the financial planning and management process and without them, financial misery can result.

Final Notes

If you would like to be the subject in one of the upcoming case studies, please feel free to send an overview of your situation and your most pressing questions and concerns to me via email on the 'About' page.  All names and locations are changed to protect the identity of the subject and the case study is completed at no cost.

Getting the Most Out of Your Electronics - laptop, hdmi cable, hdtv, netflix and more

I am late to the HDTV party, but believe me when I say I made a serious entrance.  While many have taken the plunge and purchased some really nice HDTVs, maybe even purchased a Blue Ray player or an HD cable or satellite package, I've done nothing but buy an HDMI cable.  With this little piece of heaven, you can turn your television into a little electronics playground.

Our Setup

Here's a quick list of what we have and then I'll share with you what we can do with it and why it's hellacheap entertainment:

1. 37" LCD HDTV with HDMI inputs
2. HDMI cable
3. Computer speaker system with subwoofer
4. Laptop computer
5. Netflix subscription
6. Basic digital cable

What We Get from Our System

We get television programming from our cable provider that includes all of our local stations, all of the PBS channels in the region, On-Demand, and some others.  In other words, our version of cable sucks compared to most.  However, we also have a Netflix subscription so we can watch whatever they have - and that's a lot.  Not to mention that the HDMI allows us to hook into anything that our computer can download.

So here's a sampling of what we can put on the tube courtesy of the internet:

• Netflix
• Hulu
• YouTube
• ABC
• NBC
• CBS
• FOX
• WildTangent Games
• DVDs
• And the list goes on...
• And on...
• And on..

Anything you can view on your PC, we now have available on our television.  It might not seem like such a big deal, but let's count the cost compared to an HD package from a cable or satellite provider:

• Basic Digital Cable: $15/month
• Netflix Subscription:  $18/month
• Hulu, YouTube, ABC, etc.:  FREE

The total cost we pay each month is $33 compared to an HD package at nearly $100 per month.  The annual savings is $792 and we get a lot MORE than just cable.  With that $792, we could just as easily buy two new laptops each year or take a nice little weekend vacation or pay for our sons' college educations.

Of course, the value doesn't stop there.  We can also run household budget meetings through the television so it's easier for the entire family to see (by the way, if you're shielding your kids from money matters, stop it!).  Anything that you would want to see on a bigger screen or share with more than a pair, having a laptop and television that have HDMI ports is a major benefit.

Now, it's not perfect...yet.  That's why I'll be adding a wireless keyboard with mouse to the mix so that we can recline, watch the tube, and have a full blown web television experience.

By the way, a 37" HDTV can be had for around $350 and an HDMI cable is $40 on the low end.  If you buy them, you'll drop $390, but if you have even a classic cable package, you'll pay for this purchase within a year and after that...well...it's gravy.