Minimal work, maximum financial gain.
+ What is the most important tool for financial decisions? Knowing this can save $5-10,000 per adult annually for entire life*
A financial plan that includes all assets, debts, income, expenses, etc and shows how much you can live on throughout your life. The plan should show you how much your lifestyle could be at risk and why.
*Approximate impact of decisions in our case study in today's dollars
+ What is the time value of money? The mathematics here drives all financial decisions.
You learn to equate money spent or received at any time in the future to cash in hand right now. This concept is called net present value. When everything is converted to dollars right now it is easy to see the best choices.
+ How does a contemporary financial plan cover the key issues? Knowing this can also save you $5-10,000 per year as in question 1
A plan should tell you how to navigate the complexities of social security. For investments you want more than statistical mumbo jumbo. You want to hear the words Monte Carlo testing and historical scenario analysis applied to your actual expenses.
+ I get nervous with financial crisis. How can I get more comfortable?
You should review your risks in the way the world has really worked with regular financial crisis. When they occur, given you know you have done your best, you can still be relaxed and respond intelligently. Any new problem can be used to learn to prevent problems or create opportunities in the future. Actions blinded by panic can often lead to the most serious mistakes.
+ How do you figure out if your new home purchase is part of the next real estate bubble? Knowing this could save you 25% ov the value of your home*
You can use the formulas in the housing affordability index to compare the value of homes over time. If no one can afford a home, chances are there won't be too many buyers...
*Recent price declines from 2008 have been as much as 25% in some cases.
+ How do you figure out whether it makes sense to refinance a mortgage? Knowing this could save you 12.5% of value of loan less closing costs*
Look at the after tax savings from the new loan in each period only until you move and the up front closing costs. Convert all of these figures to dollars today and see if it saves you money.
*The difference between a 4% and 6% 15 year mortgage loan in after tax interest costs in today's dollars is 12.61% of the value of the loan if your horizon is 15 years. You need to subtract the up front closing costs. But if you move in 5 years, the savings declines to 6.57%, which could be a loss if the closing costs are higher than that.
+ How do you figure the value of securing your housing costs through owning a home and a fixed rate mortgage loan?
The easiest way is to put the home and the loan in the personal financial planning software you use and see how your lifestyle changes in high inflation scenarios. Run the same analysis but change to renting from owning to measure the difference.
+ How do you measure the economic value of a college degree? Knowing this can save up to $100,000 in tuition*
Look at the differences in income you expect from each college or no college. You also need to consider you might not be employed at all times or may change careers. Convert them to today's dollars and compare alternatives. Cost is only one ingredient though; people need follow their calling in their work.
*Roughly the difference between private and state schools in 2012.
+ What are the key factors in determining whether to use a Roth or regular IRA? Knowing this can save $45,000/adult*
You need the age, tax rates throughout one's life and which type of asset (stocks or bonds) one puts in the IRA. Surprisingly, the decision can be fairly sensitive to the tax rates at withdrawal as well as the type of asset in the IRA. Age is not the only factor to consider.
*Assumes an adult puts $5,000 in an IRA/year for 40 years, earns 4% with inflation at 2%. $45,000 is difference between Roth & regular IRA after considering the stocks/bonds choice - value in today's dollars.
+ Does it make sense to buy municipal bonds through a fund or directly? Knowing this could save up to 3-5% value of investment*
The markup on these securities is sometimes 3-5% when you sell vs. zero on a mutual fund. Index mutual funds may charge fees of 0.3% for 5 years which equate to 1.5% even if you don't sell. The best decision varies by individual circumstances.
*Assumes mark up on direct securities can be 3-5%
+ Is it better to invest in an index fund or actively managed mutual fund? Knowing this can save you fees of $15,000 on a long term $10,000 investment*
You want to know if there is a reason the fund should outperform an index of securities they purchase regularly. You also need to verify that the index reflects their actual holdings to match it to the risk level of the fund. Then buy the better of the index or the fund.
*If you save 1% in management fees on a $10,000 for 40 years when you earn 6% with inflation at 2%, the iniflation adjusted present value of the savings in today's dollars is $14,700.
+ How can I value the tax benefits of a variable annuity with tax deferral? Knowing this can provide the same benefit as the last question.
The best way to look at products that combine several features is to break them up into components. The tax deferral can be compared to an IRA product, the life insurance compared to term life and the mutual fund management fees compared to the fees on any fund.
*This decision can mean a difference of 1% on investment, which is similar to the actively managed versus index question, but the analysis has more possible variation and should be performed individually.
+ What are the best and worst ways to borrow money? Knowing this can save you $7,000 interest on a $5,000 loan*
A mortgage loan is particularly good in that the interest is tax deductible. Credit cards are among the worst as the rates tend to be very high as an unsecured loan and not tax deductible. Student loans that cannot be wiped out in bankruptcy court are particularly dangerous.
*In today's dollars, the difference in interest after 25% tax rate on a 4% 15 year fixed rate mortgage versus an 18% credit card also for 15 years is $7,331.
+ How much money do I need to have available in an emergency?
Common sense is better than rules of thumb like 6 month's worth of expenses. Do you have proper insurance (health, life, disability, etc.)? Can you borrow or sell investments? Also, taking care of others who face an emergency can build a safety network in your community which can ultimately benefit you.
+ When spending down my assets in retirement, what can I do to be sure I have enough to live on?
First you may want to consider when you take social security, as deferring it can benefit in the long run. Spending slowly uses the power of compounding to make assets last longer. You could move to a no tax state in a smaller home, consider an inflation protected annuity, etc.
+ I am getting divorced; how do I deal with the cost of two homes efficiently?
One spouse can prepay the child support for housing on a present value basis and the other spouse can use it to take out a smaller mortgage. This approach circumvents some real inefficiencies in housing support. Here everyone loses with acrimony and everyone wins with cooperation.
Note - discuss these types of strategies with your attorney.
+ How much life insurance do I need?
Life insurance is designed to compensate for lost income with an unexpected death. The amount will change based upon factors such as savings, how much longer you work and taking a pension that provides income for a spouse. Good financial planning software should answer this question.
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