Monthly Archives: May 2016

Put finances on the back burner

Here’s a piece of counterintuitive advice for widowers and divorcees: You can put financial decisions on hold, at least for a little while.

That’s according to Amy Florian, a thanatologist and chief executive of Corgenius, a Hoffman Estates, Illinois-based consultancy that specializes in educating advisors on understanding the grieving process. (Thanatology is the scientific study of death.)

Florian spoke at the Schwab IMPACT conference in San Diego on Oct. 25. Her focus: guiding women investors through life’s transitions, including divorce and death.

Financial advisors are well versed in helping their clients understand their finances — sometimes to a fault. To an extent, the hard numbers can wait.

“Advisors don’t know how to communicate during times of grief,” Florian said in an interview. She attributes this to two factors: First, financial professionals tend to concentrate on clients’ portfolios and hard numbers. Second, people are generally terrible at addressing others who are hurting.

 

Hit the brakes

Grief is triggered by a break in attachment, said Florian.

“There is a grief process for divorce: What do you call yourself? Where do you fit in? Do you feel safe?” she said. The loss of a spouse, be it through divorce or death, upsets the survivor’s identity and social circle.

Amid those times, a widower or divorcee isn’t in the best shape to make pressing decisions about their finances.

“Your brain gets flooded with cortisol,” Florian said. “You’ll think you’re making rational decisions, but you’re not.”

“Advisors don’t know how to communicate during times of grief.”-Amy Florian, thanatologist and chief executive of Corgenius

Key questions

Rather than responding to news of a death or a divorce with the obligatory and awkward “I’m sorry,” advisors should give the survivor or the divorcee an opportunity to express their feelings.

“What would I say to ‘I’m sorry?'” asked Florian. “‘Thank you’ or ‘It’s not your fault.'”

Instead, advisors should also use open-ended questions to learn more about the relationship and give the grieving client a chance to vent: What happened? What kind of day is this for you?

More from the IMPACT Conference:
Schwab CEO talks robo-advisors
What’s the Fed thinking about a rise in rates?

In the event of a death: What are ways to honor this person’s memory? If it’s a divorce, be sure to recognize the loss of the dream: “This isn’t what you had in mind when you walked down the aisle. Would you like to talk about it?”

“Become aware of what triggers grief, and follow the client’s lead,” said Florian.

Don’t feel pressured to “get over” your loss.

 

If this is your transition

Put off any decisions that don’t need to be made right away, and give yourself — and other loved ones affected by the loss — time to grieve. “Have patience for yourself and for others around you,” said Florian. “They won’t be at the same place at the same time.”

Rely on friends, family members or professionals who can help you work through the process.

“You will never forget [the person you’ve lost], and the point is to never forget,” said Florian. “Honor them.”

Financial Success

Christian:  Hi Laurie, I’m so glad we’re continuing our conversation. I really appreciate your taking the time to share your perspectives. Our prior chat addressed saving, so I guess on the flip side…I’ve been wondering, how will I know when it is appropriate to take on debt?

Laurie:  In short, Christian, some forms of debt are more beneficial than others. An affordable mortgage or a student loan can be considered “good” debt, whereas credit card debt is usually “bad” debt. It’s important to understand the difference between good and bad debt because at some point in your life, most likely while you’re young, you may find that borrowing is your only option to fund a major purchase or investment. (For more, see: Paying Down Debt vs. Investing.)

Debt can be useful for financing large investments like a home or a college education. Although one is a physical property and the other an intangible idea, I think of both as investments because you will extract value from them in the future. Since both of these investments are high cost, it makes sense for individuals with a low net worth to finance these purchases through debt.

In addition, the interest paid on student loans and a mortgage can both be tax deductible, whereas the interest on credit card debt is not. Mortgage interest can almost always be entirely deducted, while student loan interest can be deducted up to $2,500 a year.

Debt taken on to purchase a vehicle falls somewhere in the middle ground. While financing a car purchase is sensible for some, the decision should ultimately depend on the specifics of the deal you are interested as well as your credit score. Although it may be easiest to go through the car manufacturer’s financing department, that’s not always the best solution. With auto loans – and really in any borrowing situation – it’s best to shop around and check out local banks or credit unions to fully exploring your loan options. Be smart, but be sure you don’t shop around too long because prolonged periods of credit inquiries can lower your credit score. (For related reading, see: Student Loan Debt: What Every Borrower Should Know.)

Christian: If credit card debt isn’t “good” debt, why do so many people use credit cards? Is the interest that accrues really that high?

Laurie: Well, many people use credit cards because they are convenient. However, many credit card users are unaware of the hidden dangers such a convenience poses. If you don’t have the funds to back up the purchases you’ve made, you might find yourself in trouble. But there is still a responsible way to use a credit card. If you use it to buy your groceries, maybe gas and sometimes fund a night out, but ensure that you pay off your full balance as soon as you receive your monthly bill, you will avoid potentially high interest payments on your credit card debt.

Unfortunately, it’s easy for less responsible people to view credit cards as a type of personal lender. Say you want to buy a new smart TV, but don’t have the cash on hand so you charge it to your credit card and plan to pay it off over the next few paychecks. Your paycheck comes the next week, but on payday you accidentally rear-end someone. Now you have to pay for the car repair or an insurance deductible, so the balance on the card for the TV carries over to the next month. Credit cards profit the most when you use your card this way, since they use your previous month’s unpaid balance and your current month’s purchases to calculate your interest. (For more, see: How to Use Your Credit and Debit Card Safely.)

So now not only do you have to pay back the balance and interest from the original balance, you will now also have to pay interest on the interest from last period. This wouldn’t be much of an issue if the rate were 1%, but usually interest rates on credit cards are much higher – often 20-30%.

We recommend that you use your credit card to make affordable purchases and then pay off your balance each month to avoid the exorbitant cost of carrying an unpaid balance. The steep interest charges can quickly make your debt unaffordable. (For more, see: How to Budget and Spend to Maximize Your Happiness.)

Christian: That’s shocking, I didn’t know that could be the case. This is something I will definitely keep in mind. I’m also wondering, do you have any thoughts on how to obtain the best possible mortgage?

Laurie: Your ability to obtain the best possible mortgage and lowest interest rate in general is heavily affected by your FICO or credit score. There are many ways to either build good credit or improve upon your current credit score. It’s important to know however that building or improving a credit score will take time. The easiest way to start building good credit is to always pay your bills on time, pay off credit card balances monthly and avoid carrying over balances into the next period. Keeping a low balance on your cards (somewhere around 25% or less of your credit limit) can also help to build good credit.

It is also important to avoid opening extraneous credit card accounts. The last big component of your FICO score is your credit history. Older adults are more likely to have had major credit events take place, such as a possible mortgage foreclosure during the 2008-09 global financial crisis. For young individuals like yourself, there isn’t much history to even look at, so you may instead want to look towards building your credit history. If you use your credit card responsibly, refrain from opening too many credit cards and pay your bills and balances promptly, you will be well on your way to establishing excellent credit that will help you qualify for the best rates on future loans.

How They Differ

If you’re in the market for a major purchase like a new car, or need some extra cash to fund a personal project, taking out a loan could be your best bet.

Personal loans and car loans represent two of the most common financing options. Assuming you meet their respective lending requirements, they can be relatively easy to obtain. These days, most lenders accept online applications for personal loans, and car loans are generally approved on the spot at the car dealership.

So what’s the difference between the two? A personal loan can be used for many different purposes, whereas a car loan (as the name implies) is strictly for the purpose of purchasing a vehicle. If you want to borrow money for a car, you could simply take out a car loan, but if you require funding for a purpose that’s less specific or falls outside the typical lending box (such as a vacation, wedding or home improvement), a personal loan provides more flexibility.

Each loan type bears its own pros and cons, so it’s important to weigh and compare them before signing on the dotted line.

The Personal Loan (Unsecured)

A personal loan provides the borrower with funds from a lending institution (generally a bank), whereby the full loan amount is paid in a lump sum that can be used at the borrower’s discretion. Personal loan amounts typically range anywhere from $1,000 to $50,000.

A personal loan can be secured against something of value, such as a vehicle or home, allowing the lender can seize your asset to recover its losses in the event that you don’t repay the loan. However, most people opt for an “unsecured” personal loan, which means the loan is free from collateral.

Interest Rates

Generally, unsecured loans have higher interest rates than comparable secured loans with collateral attached. Unsecured personal loans also come with much more stringent approval requirements, so you’ll want excellent credit on your side. If yours is in poor shape, a personal loan might not be an option – that is, until you can strengthen it (see 3 Easy Ways To Improve Your Credit Score). Both the loan amount and the interest rate (which can be fixed or variable) will be largely influenced by your credit rating. The better your credit rating, the higher your borrowing capacity and the lower your interest rate. Conversely, the poorer your credit rating, the lower your borrowing capacity and the higher the rate.

The Terms

Personal loans have a set repayment period, stated in months (e.g. 12, 34, 36). Longer loan terms will lower your monthly repayment, but you’ll be paying more interest over the term of the loan. Conversely, shorter loan terms mean higher monthly repayments, but incur less interest overall, since you are paying off the principal faster.

Ticking Time Bomb

Many have lamented that the biggest casualty of this election season (aside from civility), is the short-shrift given to some of America’s most pressing issues, notably the debt, and specifically Social Security and Medicare. (See Investopedia’s Election Center)

Fiscal savants Robert Reich, a prominent Democrat, commentator and former Secretary of Labor under the Clinton Administration, and Alan Simpson, a Republican former senator from Wyoming and fiscal hawk, had much to say about both topics, what needs to be done to fix them and what’s standing in the way at this week’s Schwab IMPACT conference in San Diego.

Simpson, who was appointed in 2010 by President Obama to co-chair the National Commission on Fiscal Responsibility and Reform with Democrat co-chair Erskine Bowles of North Carolina.

The response to their report, which said that America was “going broke and needed shared sacrifice to save itself,” was “everyone ran for the exits.”

“We slaughtered every sacred cow,” Simpson said. “But every person had one issue. ‘You can’t touch that,’ they would say.” He said that there were at least 180 items in the tax code that add up to about $1.1 trillion in entitlements, such as municipal bond tax breaks and mortgage interest deductions. All the organizations favoring those entitlements have building in Washington. “AT&T has 100 lobbyists. How do you think that’ll turn out,” Simpson said, referring to its recently announced $85 billion bid for Time Warner, Inc.

“Out of Control”

The biggest issue, Simpson said, was out-of-control healthcare costs via Baby Boomers that have America paying twice as much for the same health procedures in other developed countries but “get 25% to 50% of the results.” (Related: Passing Boomers Will Leave a Big Economic Wake)

Reich agreed, adding that Medicare costs account for up 18% of the federal budget, which is far more than other developed countries. “And we still have a higher infant mortality rate.”

He said that is it imperative to “get a handle of healthcare costs” and that the “biggest single driver is pharmaceutical costs.” He also cited administrative costs; nurses spend about 31% of their time on paperwork, he said.

In all, the Medicare trust fund is expected to reach a strain point sometime in the early 2030s, Reich said.

Simpson added that one big issue, again, was entitlements. Just whispering ‘means testing’ or ‘needs testing’ and politicians get heat from organizations like the AARP.

When asked what the tipping point will be for healthcare, Simpson said that it could be when America’s creditors start saying “‘we want more money for our money,’” pushing lending costs to unsustainable levels. And when that happens, “the guy who gets hurt. Hosed. Is the little guy.

Fixing Social Security

Both Reich and Simpson agreed that Social Security, while under threat, is fixable, and possibly within the next four years, though whether the political will exists to do so is unknown.

What’s clear is that by 2034 Social Security beneficiaries will get a check for 21% less if nothing is done, Simpson said. (For more on this topic and a fact checking of their numbers, see this article from Advisor Perspectives.)

Reich said there are three ways of dealing with Social Security’s solvency. The first is raising the age of eligibility. When the first person claimed Social Security, the age of eligibility was 65 but the average life expectancy was 61.

The second was raising or removing the ceiling on taxable earnings. And the third is means or affluence testing.

Harsh Climate

Another big hurdle, according to both Reich and Simpson, was the incivility that has come to define political discourse in America.

Simpson noted that “some people believe that Hillary [Clinton] should be wearing an orange jumpsuit” and others think that “you could give Donald Trump an enema and bury him in a shoebox.” (Related: What are Donald Trump’s Chances of Being Elected President?)

Both lamented a lack of willingness to compromise and a tribal populism that comes with that stance.

Simpson said that what America is experiencing is dislike, “but hatred. Which is unacceptable and unknown in this country.” He said that much of it is coming from the House of Representatives. He believes that G.O.P Representatives were so tired of being over a barrel for so long during Democratic control that when they gained power they wanted a measure of revenge. Reich narrows the moment to 1995 when Newt Gingrich became Speaker of the House.

“Populism comes from politicians saying we can fix health care, Social Security, defense, education and more without touching a thing,” Simpson said. “That’s what’s known as a terminological inexactitude. A lie.”

Dangerous Countries For Travelling

From the terror attacks in Nice, France to the ongoing spread of the Zika virus, the past year has been a dizzying one in terms of violence and disease outbreaks throughout the world. These factors, among others, increase the likelihood travelers will be required to stay up to date on travel safety advisories. Using 2016 data from the Canadian government and The Global Health Data Exchange, HealthGrove, a health visualization site by Graphiq, created an ascending list of the most dangerous countries to travel to.

The Canadian Travel Advice and Advisories data comprises four major categories — “exercise normal security precautions,” “exercise a high degree of caution,” “avoid nonessential travel” and “avoid all travel.” HealthGrove’s list includes countries with at least an “exercise a high degree of caution” rating or higher and nations are ranked by worsening travel advisories. Ties were broken by using the Travel Mortality Index, which provides an aggregate score representing the likelihood of death caused by traveling to a given country. The higher the index, the higher the probability of traveler death. The causes of death in the Index vary from diseases like Tuberculosis and HIV/AIDS to causes like “interpersonal violence,” “exposure to forces of nature,” “collective violence” and “legal intervention.” The variation in causes explains why you’ll see France, for example, with a score (116.2), which is separated from that of Honduras (120.4) by only a few points.