So You Think This Can't Happen? Think Again?

Mrs. N. 57  a widow for 2 years died unexpectedly of a heart attack in California June 2005.
Unfortunately  she died without a will,  living will or  other estate planing documents. 

no will

She had  a   married sister,  two  children  and two  grand children at time of death .

                1  -Her son -  a  long term non employed 37 year old son living with his girl friend in  North Carolina – with a 16   yr old daughter  in Montana who he doesn’t talk to, from a  prior girlfriend  whom he never  married.   The granddaughter and mother  have  had no contact with the family since the granddaughter was approximately 4 years old. 

                2- a 31 year old married professional daughter living in Texas  with a 4 year old son the   apple of grandma’s eye.

Mrs N's Assets  at time of death included

 1-      Her house worth 775k (paid off) when she died in June 2005

  2-     50 k company stock  in her husbands 401k plan which she had  never claimed

  3      180k in liquid assets cash stocks bonds etc

  4       Photos, jewelry, mementos etc. from her mother ( that were left in her mother's  (Rose's ) will , equally to   Mrs N.   and her sister but were at Mrs N's  house because Rose  had lived with Mrs  N. until she died 4 years ago and Mrs N.  didn't want to part with them    

  5   A 100K  15 year old term life insurance policy - she wrote on the policy face ( her copy)  it was for her grandson’s college education, when she renewed  it for another 10 years 5 years ago.  

  

  Mrs N's know wishes,  known by her son, daughter and sister.

  

burial at sea

 A-     To have her ashes scattered at a special beach  in her homeland and not be buried next to her cheating husband.   

    B -      To have all her mothers jewelry, photos and memento's given to her sister due  to memories involved.

So what actually Happened ?????????  

A -  Mrs N's diseased  husband's   domineering New York  mother descended and insisted that   Mrs. N be buried in the dual plot she had previously bough for Mrs. N. and her son when he passed away.  No one stood up to her and Mrs N. is  now buried next to her husband.

B - While looking for a will in Mrs N.s house at time of death,  the  son  and son in law divided up all the jewlery  and family history  photos ( most were thrown away) left  by Rose  in the house,  leaving none  to the sister who was the rightful owner.

C The  grieving daughter agreed to let her brother  come to California and live in the house, incurring reasonable expenses during probate,  to be sole executor of the estate,  waiving  any fidelity bond and any  waiving any  required accounting of estate activities.

 D - The  named beneficiary in Mrs N's  insurance policy  had never been updated,  it was the deceased husband.  The son and the granddaughter were named as contingent beneficiaries.  The insurance company paid  the insurance policy 50/50 to the  son and granddaughter.  The grandson got nothing. 

party in a spa

E - The son decided that "since his life was on hold administering the estate" he was entitled to a first class life style paid for from the estate while he "had" to be in California.  All  his personal expenses,   gas, car food both purchased at the supermarket and  dining out, athletic club expenses,    as well as a portable hot tub purchase and parties at the house for his "friends" where  paid for by the estate.    This along with true estate expenses and legal and probate fees  ate up  significantly  more than the  180K of liquid assets in the estate during the 21 months it took to  sell the house and  close probate.  

F- Because  Mrs N's death was near the  height  of the hosing market  and the sale of the house dragged on because the son wasn't willing to accept a lower price and didn't wan to give up living there it finally sold  for $  595,000 ( a fire sale price) as both son and daughter needed the proceeds form the sale as money was spent that was not yet inherited and paid out .

G- The 401k stock was distributed to both son and daughter but only after the NY Grandmother signed away her contingent beneficiary rights with much hard feelings. 

Was that it?   not quite !

old fashion fighting over assets

  1 the daughter sued her brother over estate  mismanagement but basically due to the agreements the only ones who made money were the lawyers on both sides. 

 2 The daughter let her husband invest the  her part of the proceeds,  not understanding any of the investment decisions he was making .  He took a very aggressive approach, and they panicked and sold  near the bottom of the 2008  stock market decline losing about 40% of their investment. 

3- The  son continued his high end life style as well as  investing a large amount of money in a "can't go wrong" investment with one of his friends. All his money has been gone for some time.

And there is more

The New York Grandmother  died and left all her assets to the  grand  children of her 2nd husband, that she had met in Florida during retirement, because she was so incensed at her only two biological grandchildren over what had happened.

Conclusion

Something to be said for paying attention to estate planning, and getting good advice during this trying time when your decisions may be clouded by grief.  

 

     

Is Personal Finance really this uncompllicated?

Now that you are the majority of  way through Business 130.  I am not going to tell you that managing your personal finances is easy.  What I am going to remind you as as overview,  is that the basic concepts are not complicated.  Hard to achieve, perhaps, but available to be understood.

If you stay with   the concept simple is better you'll still make the right financial choices.  So lets review these choices in a nutshell.

Everyone talks about "retirement planning" but it you don't have the basics in place you can't really start.  Based on the success of your goals  and getting the basics right  you are now in the position to think about retirement or longer term planning.

I've tried to keep the class simple 
 

I love the basics

Starting out or when you make the commitment to take charge of your personal finance.

 1 -Live within your means...we started with just $5 savings to think about how you can proactively manage your expenses to improve you cash flow.

2 -Set goals so that you can see your progress. 

  3- Understand that tracking and reviewing helps..you looked at your own personal cash flow and balance sheet.

  4- Understanding that poor credit management and a lousy FICO score help derail your goals  and cost you more to achieve your desired objectives.

5-Saving enough so that  a bump in the road doesn't derail your plans completely.

Understanding the key  financial decisions you will make.  

financial decisions

We don't make the best financial decisions each and every time sometimes we splurge and that's fine but making good decisions on the big stuff helps us stick with a plan.

1.   Proper health care coverage avoids financial ruin.
2.   Smart purchasing of an automobile,   cell phone plan and other large consumer purchases saves your money year in and year out.
3. Why purchasing a home may make financial sense for the long run. 
4. Now you have assets   protect them properly with insurance.
5. Understand enough about taxes not to make bad decisions and minimize your tax bill or get the right help. 

If you  noticed  I've used a similar framework thought the semester .  Its the same one that made  me successful with   financial  planning.  Its basic but its a repeatable mindset.

1- Gain some knowledge, whether from reading (internet)  or a subject matter expert.
2- Think about how you can apply that knowledge to your unique situation.
3-  set goals that you can achieve and take action. ( or simply execute a transaction better ie car purchase)

Long Term Financial Goals - Retirement planning

1. Be willing to defer some of your cash flow in today to help support you in the future 
2. Reasonably estimate what you think you'll need for retirement.   Don't over stress here just review every year.  By the 3rd and 4th time you estimates will improve greatly.
3. Think about what all the sources you  have of income for retirement  from or benefits such as a paid off house.
4. What is your shortfall? 
5. How can you lower the shortfall  by
1. saving
2. choosing the right place to save to make your money grow such as mutual funds .

You don't have to be perfect.. but the more of a dent you make today in your shortfall the  closer you'll be to  enjoyable retirement years.

act now

Keep the focus on doing something today that will help for your future.

It could be anything  saving for a house, paying off your credit cards  etc. ts amazing how when one domino falls they all do  in turn and you are  successful .









     

Mutual Funds: How Times Change

building a 401k

A lifetime ago when i first enrolled in my company's 401k plan, i was totally disappointed that my only choices were Mutual Funds.  If I had a choice, I would have wished that it allowed us to buy and sell individual stocks in the 401k.  Now years later I am not even teaching about  investing in individual stock selection  etc and focusing on Mutual Funds  and   IRA's 401K's.  Now it helps to  understand  stock and bond basics   because   Mutual Funds invest in these,  but  not how to choose and individual stock.

Why this change.  Because the playing field has changed in investing in the stock market. 

Sophisticated computer programs buy and sell within  seconds  or nano seconds based upon the market.  Plus think about it ... for every buyer there is a seller... so you are right only about 50% of the time on average.
Getting it right is a challenge even for individual sophisticated day traders  ( individuals who buy and sell stocks all day).  I don't think any of us has this as our full time  job.

Not that there is anything wrong with buying and selling individual  stocks but do you have the time to do all the things  you need to do to be an expert.  And, if your listening to someone else's advice then you still aren't really doing the research either. 

 I still own an individual stock portfolio in although a lot less than  I own in mutual funds. and of all the numbers and calculations in chapter 12, the only one I really use is dividend yield  pp322 12b .   Why? I want to project my income from these holdings.  Then as I am older I am more concerned about income than growth so that  this may not be the  best tool for you to use to evaluate stocks.  

The most useful part of chapter 12  (last week  )are  the charts on page 316 and 317.  If you truly understand the DB posts  from last week and this..  Are you read to invest ?  Risk and Wealth Triangle  then  you should be able to figure out  where to  invest.

I am showing my prejudice here but  the book  shows all kinds of fancy financial calculations  and almost nothing on choosing the  right funds for your retirement account?  For an investment that is likely to be your largest or 2nd largest after you home  investment ever?  Spend more time buying a phone than good investments? YIKES!  The numbers can be calculated by someone else  understand  the  concepts  and you will make better choices. 

Every analysis you see says the same thing.  In the long term Asset Allocation and Diversification will make you successful so weeks 13 and 14 are really designed as follows

Week 14  Understanding your 401 k plan or IRA itself ,   Understand mutual funds and whats in your plan or will be some day .

Week 15  figuring out how  much you need for retirement and looking at an asset allocation and diversification strategy that might be right for  you.     

Will you be the carton the left or on the right? Or neither and be like your professor who didn't wait until 65 to retire.

Saving and Investing

Saving and Investing

Have you  ever thought about these terms … do you save  or invest? What’s the difference?  Do you use these terms interchangeably?

save and invest

I am  going to paraphrase from Investopedia  here;

Savings :  The amount of  money left over after your  expenditures are subtracted from your income.

Investing: The act of committing money  with the expectation of obtaining an additional income or profit:

When you stated this class many of you  had  or had in the past negative savings.  In other words  you spent more than you earned such as  incurring  credit card debt or taking out a school loan.  We spent  most of the first 10 weeks of this class on savings.   Once you  HAVE BEGUN creating savings then  you can think about investing.  (or reducing debt). 

Investing involves  risk and  therefore  you  probably don’t want to  “invest” all your money,  i.e. you will probably  have some money  that  you don’t care if it earns more,  you  just want to be sure it is there if and when you need it. 

jars labeled for different savings

  Examples:

1.     An emergency fund .  You want the money there if you need it.

2.     Vacation or Christmas present fund etc.

3.     A house or a child’s college (if within a few years)

It’s hard to invest effectively if  you  don’t know you goals.

If your goal  is to buy a house in the next few years  you will probably make different choices than if you goal is to create wealth to supplement your retirement in 30 years.  How soon you will need the money and the concept of withstanding a loss (risk vs return) drives your personal decisions.  There are slightly different   for everyone in this class. 

The funny part is that  not all good investment decisions are necessarily planned out,  the trick is that when  an opportunity  comes along you have to be willing to consider it.   Some of my better decisions  were just that….  opportunity.   I was able to take advantage of those however because I had had  my savings plan in place.. therefore when  opportunity came  I could take advantage.

Buying my first house:  I really had no   immediate plans to buy my first house.  I was living with a roommate in a nice apartment in Santa Monica after college and they announced they were going to raise the rent 10%.   The same weekend a college roommate  visited and told us that he had gotten the head basketball job  at a high school in Orange County.  He complained that he could not afford a  townhouse condo in  Orange County even though he had one where his prior job was. When we got talking I realized that  my “rent” in Orange  if I bought half a condo with him would be  less than my apartment rent  in Santa  Monica.  I had enough for my share of the down payment so  it was an easy decision. 

Our first rental property:  When my wife and I got married  we both owned Townhouses  near each other. We decided that rather than sell one right way we would try to rent one out.  Because we had owned them for a few years,  the rent was enough to cover the mortgage so by  holding on to it we could take advantage of the appreciation and future rent increases.  If we had sold it the money  probably would have been spent on something and been gone.

I just share these because  we didn’t overly plan ,  we just took advantage of opportunities.  We were able to do this because we had out saving under control  i.e. we had more income than expenses, so it  allowed us to make prudent choices on how we were going to invest for ourselves ( retirement)  and daughter  (college).  If we hadn’t first managed our savings  then we could never have made an investment plan work. 

I planned as well.

Our daughters education..  About the time our daughter was 3 we got serious about saving for her education. We decided on a monthly amount and never missed.   This gave us 15 years to save.   Because we had time we took some risk  with our investments.  However after about 12 years.. 3 years before she would  start college   we changed to a much more conservative approach so that the money we had saved would be there for  her. 

Retirement .  Both my wife and I saved  for retirement  beginning not long after we started out jobs ( and before we were married).    Savings started out small but  every time I got a raise I put some of that raise into my 401k plan.  Over time  I was saving a fair amount.  Again  I invested with more risk when younger and  changed as I got older  ( not as many work years left) .

To summarize… get your financial house in order …. More income then outgo and then make the plans that work for you.