The Power of the Roth IRA

Ah, the Roth IRA. A wonderful, magical, beautiful savings vehicle. Ok, maybe not really magical but pretty darn close. I’m going to share with you, undoubtfully, some powerful benefits the Roth IRA has to offer and why you might consider contributing to one. Everyone’s situation is different and it may not be the best vehicle for all - but that’s why I’m here (wink-wink). My contact info is down at the bottom so you know where to find me. Alright, let’s jump into the world of Roth. 

Let’s start with what is a Roth IRA anyway.

A Roth IRA is a savings vehicle designed for retirement. The main difference between a Roth and your traditional retirement account is that this vehicle is funded with after-tax dollars. You’ve already paid taxes on the dollars you contribute to the Roth account. In return, when you go to pull the money out in retirement (more on that to come), you won’t pay taxes because you already have. Your traditional retirement account works the exact opposite: you contribute with pre-tax dollars and pay taxes when you withdraw in retirement. 

There are some things to note about who can contribute to a Roth IRA. First, not everyone is eligible to contribute to a Roth IRA. The IRS has certain income limits you must take into consideration before you can start dumping money into your account. Secondly, the max you can contribute for 2023 is $6,500. This amount does change based on where you fall within the IRS income limits. If you are 50 years or older, the IRS so generously allows you to make an additional $1,000 contribution for 2023. You can find the IRS’s income limits and respective contribution amounts here. 

You will benefit from tax-free growth (yes, you read that correctly).

Remember how I said you put dollars in that have already been taxed? Well, those same dollars will be sowed into the market and grow into a luscious, fruitful nest egg free of tax on your earnings. This is what I was talking about when I said Roth IRAs are pretty close to magical. Don’t skim over that sentence lightly. Think about this for a second. If you start investing and watch your savings grow over the next twenty, thirty, forty years, can you begin to see how much growth is in the picture? If not, I’ll fill you in - it’s a lot (assuming you are in a growth-oriented portfolio, keeping investment fees low, maintaining a long-term mindset, and so on). All that growth is tax-free. Yours to keep - not the government’s. As I said, it’s beautiful.

You will benefit from tax-free withdrawals.

As I mentioned, when you withdraw funds from your Roth IRA, you will not be paying taxes on them. Now, there are some rules that go along with that. You must be 59 ½ years old when you withdraw your earnings and the account must be opened for at least 5 years to avoid any penalties and taxes. If those two boxes are checked, then you are in the clear. 

What if you are younger than 59 ½? What if your account hasn’t been opened for at least 5 years? You can do more of a deep dive into all the specific withdrawal rules here.

Now let’s talk about this thing called RMDs. 

RMD stands for Required Minimum Distribution. This is an amount that the IRS requires you to withdraw each year from your qualified retirement accounts. So what does this have to do with a Roth IRA? You are not required to take an RMD from a Roth IRA. In other words, you get to decide if, when, and how much you want to withdraw from your Roth. More power to you. 

Speaking of more power to you, you have withdrawal power over your contributions - at any time.

Yep, any contributions you make to your Roth IRA are 100% available to you to withdraw, free of tax and penalties, at any time. Notice, I said contributions - not contributions and earnings. Any earnings within your account will follow the rules we talked about earlier. However, your contributions are fair game. (This doesn’t mean it’s always wise to treat this as available cash at all times. However, it does allow more flexibility, freedom, and control over the money you set aside).

There are benefits for your kiddos too.

Did you know that there is no age limit to who can open a Roth IRA as long as they have earned income? Earned income includes both formal employment income and self-employment income. So yes, that means those babysitting dollars can be put to work. Just note that contribution amounts can’t be more than the annual IRS contribution amount or the amount of the child’s earned income (whichever is less). 

Thanks to the new Secure 2.0 Act, unused 529 Plan funds can be rolled over into a Roth IRA for your child. As you’d expect, there are rules that apply to this new offering, but this could be a great way to not let those unused education savings go to waste by redirecting them to a Roth IRA. If you’re curious about the rules, let’s connect.

Do you believe me now that the Roth IRA can be a very powerful tool in your financial life? With benefits ranging from taxes, more control, all the way down to your kids, I sure hope you believe me. Let’s chat to determine if this vehicle can play a role in your growth journey. And just because you are over the income limits doesn’t mean there isn’t opportunity for you (hint: backdoor Roths, Roth 401ks, Roth self-employed plans). If you aren’t excited about a Roth IRA, go back and read this again (you’re welcome). 

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Fiduciary Financial Advisors LLC does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned. Past performance is not a guarantee or representation of future results.

About Leanne…

Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties. 

She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.

W: https://forfiduciary.com/meet-leanne

E: leanne@ffadvisor.com

Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:

1. I will always put your best interests first

2. I will avoid conflicts of interest

3. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional

4. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.

5. I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts

The Problem With (Most) Workplace Retirement Plans

Most workplace retirement plans are great at providing access to low-cost stock and total bond market index funds along with target-date retirement funds. Unfortunately, it often stops there.

There is a whole world of diversification outside of these assets that can potentially improve your portfolio.

In this webinar, we will:

• Review the concept of diversification and take a look at the math behind why diversification can improve your portfolio

• Compare standard 401k offerings against this diversification framework to understand the limitations of most plans

• Discuss other assets that you may want to consider adding to your portfolio

• Review other accounts you may want to use to access these assets

The data used in this video can be found at the links below.

• Standard Allocations

• Economic Scenario Quadrants

• Risk Parity vs Standard Allocations

“I am passionate about helping people improve the efficiency of their finances!”

— Andy Cole

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

What is money? Isn't it really just time?

Time in Place of Money

What is money? If you live in the United States, you probably think of money as the US Dollar. People in Japan might think of the Yen. People in France, Germany, and Italy might think of the Euro. Economists Milton Friedman and Allan Meltzer describe money as, “a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed; as currency, it circulates anonymously from person to person and country to country, thus facilitating trade, and it is the principal measure of wealth.” (Source: Britannica; link below)

What if you thought of money a little bit differently? When thinking about money, try substituting my time in place of money because time is what you have to give up to receive money.

Exchanging Crops for a Phone

Let's say a farmer wants a new phone. He knows how to grow crops but can’t build his own phone. The farmer sacrifices his time to grow crops that he can sell to others for money. Once he obtains this money he can buy a new phone. The owner of an electronics store sacrifices her time working at the store selling phones to earn money. What does she do with that money? She might buy the farmer's crops at the grocery store. The money is just an intermediary for the time between the farmer and the electronics store owner.

While this is a simplistic example, this is how many transactions happen in our society. If you start thinking about money as actually being your time, then it could make you wiser with your money. Being wiser with your money could lead you to be more efficient with your time!

How to Apply to Your Life

Here is a real-world scenario where you could apply this money as time principal. The average new car price as of November 2022 was $48,681. (Source: Kelley Blue Book; link below) Economics is all about opportunity costs. If you spend $48,681 purchasing a new vehicle then that is $48,681 that you do not have to purchase something else. Let’s assume that you make the average hourly wage of $32.80/hour. (Source: St. Louis Federal Reserve Bank; link below) We can find how many hours you would have to exchange for purchasing a new vehicle by dividing $48,681 by $32.80: 1,484 hours! Once you take taxes into account the number of hours will probably be even higher.

While you might normally ask if the car was worth $48k, instead ask yourself if it’s worth 1,484 hours of time working at your job. Are you willing to spend 74% (1,484/2000) of a year working to purchase that new vehicle? If the answer is “yes,” then go for it and enjoy your new vehicle. If the answer is, “Hmmm I think I might be able to use those 1,484 hours more effectively somewhere else in my life”, then keeping your current vehicle could result in a wiser use of your time!

I am currently in this scenario right now in my own life. I drive a 2011 Prius that only has around 75,000 miles. It runs great, does not need any major repairs, and gets 50 MPGs! I don’t need a new vehicle but have been intrigued with the 2023 Rav4 and 2023 Prius. I utilized this process in my head and determined that was too many hours of my working life to pay for a newer vehicle that I might want but don’t need. I would rather use those hours spending time with my friends/family, writing blog posts, creating YouTube videos, and staying healthy by playing beach volleyball/pickleball.

Words to Live By

You can utilize this thinking in many different scenarios. Just take the price of what you are considering buying and divide it by your hourly wage. That will tell you how many hours it will take you to work to pay for that next big purchase. Then decide if you are okay with that tradeoff. 

Here is one of my favorite quotes from the book, “The Psychology of Money,” by Morgan Housel. He states, “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.” Make sure you are being wise with your money so you can enjoy your time to the fullest!

Sources:

https://www.britannica.com/topic/money

https://www.kbb.com/car-news/average-new-car-price-sets-record/

https://fred.stlouisfed.org/series/CES0500000003

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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

Balancing Your Portfolio

A 60% stock, 40% total bond market portfolio is often considered to be a "balanced" portfolio.

As it turns out, it isn't very balanced.

In this episode, we literally use a balance to better understand how unbalanced the 60/40 portfolio is and alternatives we may consider to find better balance.

Portfolio Visualizer data shown in this episode can be found here.

“I am passionate about helping people improve the efficiency of their finances!”

— Andy Cole

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

Artificial Intelligence Reveals the Secrets to Being Healthy

Health and Why it is Important

I recently posted about how I was able to have Artificial Intelligence (AI) write a blog post on how to become a successful investor. I thought it was amazing to see what the AI was able to generate on the topic. Click here to read that post. Since wealth and health usually are intertwined, I thought it would be interesting to see what AI also had to say about staying healthy. Here are two responses that the AI wrote when prompted with, “Write a blog post on how to stay healthy.” (I used the website https://openai.com/) 

AI’s First Response

When it comes to staying healthy, there’s no one-size-fits-all solution. Everyone’s body is different and requires different types of care, so it’s important to find a plan that works for you. Below are some tips that can help you stay healthy and make sure you’re getting the most out of your body. 

1. Exercise regularly: Exercise isn’t just good for your physical health, but it can also help improve your mental health as well. Whether it’s taking a walk, going for a run, or taking a yoga class, find an activity that works for you and make it part of your routine. 

2. Eat a balanced diet: Eating a balanced diet is essential for staying healthy. Make sure you’re getting enough fruits and vegetables, whole grains, and lean proteins. Also, try to limit your intake of processed foods and sugary drinks. 

3. Get enough sleep: Sleep is an important part of staying healthy. Aim for seven to nine hours of quality sleep per night and make sure you’re getting enough rest. 

4. Manage stress: Stress can have a huge impact on your physical and mental health, so it’s important to find ways to manage it. Try yoga, meditation, or simply taking some time for yourself to relax and unwind. 

5. Stay hydrated: Drinking enough water is essential for staying healthy. Make sure to drink at least 8 glasses of water a day.

AI’s Second Response

Staying healthy can be a challenge, especially when it comes to maintaining a healthy lifestyle. But with a little planning and dedication, it’s possible to keep your body in tip-top shape and enjoy a happier, healthier life. Here are some tips to help you stay healthy: 

1. Eat a Balanced Diet Eating a balanced diet is essential for maintaining good health. Focus on incorporating plenty of fruits, vegetables, and whole grains into your meals. Limit saturated fats, trans fats, and processed foods, and make sure you’re getting enough protein, fiber, vitamins, and minerals. 

2. Exercise Regularly Regular exercise is just as important as diet when it comes to staying healthy. Aim for at least 30 minutes of moderate activity each day. This can include walking, jogging, swimming, or biking. Strength training is also beneficial for maintaining muscle mass, bone density, and overall health. 

3. Get Enough Sleep Getting enough sleep is vital for your body to function properly. Try to get about eight hours of sleep each night. If you have trouble sleeping, consider making lifestyle changes such as limiting caffeine consumption, avoiding screens before bed, and establishing a regular sleep schedule. 

4. Manage Stress Stress can have a major impact on your physical and mental health, so finding ways to manage it is essential. Consider activities such as yoga, meditation, or deep breathing to help keep your stress levels in check. 

5. Practice Self-Care

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Wealth and health! The healthier you are, the less money you need to spend on healthcare. The wealthier you are, the more resources you have available to stay healthy. Instead of a downward spiral, this is an upward spiral! If you want to get wealthy and stay wealthy, you should probably focus on one of your most important assets, your health! If you need help changing any of your health habits, one of the best books I read in 2022 was “Atomic Habits” by James Clear and I would highly recommend it. https://jamesclear.com/atomic-habits

“If you can get 1% better each day for one year, you’ll end up 37 times better by the time you’re done.”

— James Clear

“It is only when looking back 2, 5, or 10 years later that the value of good habits and the cost of bad ones become strikingly apparent.”

— James Clear

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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

How Do I Improve Investment Efficiency? - Part 1

Engineers are very familiar with the equation for efficiency:

Efficiency = Output/Input

We want to know we are getting the most productivity out of a system or machine in order to make the best use of resources or energy.

Our investment portfolio should not be any different. We should want to get the most return for the amount of risk we are taking.

In this episode, we take a look at the types of risk we can use as inputs in our investment machine. We will also review the Sharpe ratio, which is the widely used measure for efficiency of investment return and consider how we can go about increasing the Sharpe ratio of our portfolio.

The data included in this video was obtained from Portfolio Visualizer’s Asset Class Allocation tool found here.

“I am passionate about helping people improve the efficiency of their finances!”

— Andy Cole

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

Why Should I Care About Volatility?

When most investors think about volatility, they think about riding a roller coaster or a wave. They know the path of more volatile portfolios has a larger amplitude than smaller portfolios but the additional risk may lead to higher returns over time. While many investors think about how bumpy the ride may be, not many investors consider the variability of outcome that comes with higher volatility.  

In the first episode, we saw how diversifying across a basket of companies can lead to a portfolio that has similar expected return with less volatility than investing in a single company. In this episode, we will take a look at why that matters and how that lower volatility can lead to a higher probability of success in your financial plan.

The data included in this video was obtained from Portfolio Visualizer’s Monte Carlo simulation tool found here.

“I am passionate about helping people improve the efficiency of their finances!”

— Andy Cole

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

MoneyGeek Feature: How to Start Saving and Investing

Leanne Rahn had the privilege to be featured in MoneyGeek to talk to readers about “How to Start Saving and Investing”.

Leanne answers the questions of how much should you invest, how you choose the best stocks and bonds, how to start investing while living paycheck to paycheck, and her take on investment apps.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

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Should We Pay Off the House Early?

Is paying off your mortgage early the smart thing to do? It sounds great having that extra cash flow in your pocket each month by not having that monthly mortgage payment. That being said it is not quite that simple, lets see if paying off the house early makes sense for you.

Consider these factors:

• Once your mortgage is gone you will be missing out on your mortgage interest tax deduction.

• Dependent on your interest rate you may be earning more on investments rather than paying off the bill.

Lets look at an example, say your mortgage is $400,000 and you are in year 5 of your 30 year loan with a 3.5% interest rate. In this example that makes your monthly payment roughly $1,800. If you decided to pay $3,600 a month instead of your $1,800 you would shorten the loan term all while spending less money on the house. This sounds greatly appealing I understand. My goal here is to simply bring math and facts to the table.

As you can see with the increase payment schedule your mortgage will cost you 532k rather than 646k. At the same time you saved more than 100k on interest. The downside to this is the fact that all of this interest can be deducted and create tax savings in the tens of thousands of dollars.

The largest point I would like to address here is the fact that I believe there is a better use for that additional $1800 a month.

Rather than cut down the mortgage what if we took that extra cash and invested it into an index fund? If we took the $1,800 a month and did just that, given a 10% rate of return you would accumulate $368,720.96 in just a 10 year span. Now what if we did it for the remainder of the loan? Investing that extra $1,800 a month for the 25 remaining years on the loan will accumulate a value of $2,388,300.13! That’s one expensive house…

Now this math has changed somewhat in the current marketplace we reside in. With mortgage rates anywhere from 5 to 7 percent the math becomes less appealing and there is definitely a stronger argument to pay down that mortgage. The rule of thumb should be, can I use this money to out earn the 6% I am paying the bank to borrow for my home? If not then consider paying down that mortgage.

One final thought, I am fully aware that owning a home is an emotional decision and not just one to be solved by math. There is something to be said about you owning your home and the dirt under it, not the bank. With that in mind I am not directly telling you to keep the mortgage payment we often find a healthy balance of investing and early payment being the most logical answer for our clients. As I said before, I wanted to present to you the math and logic around the process.

I would love to help you analyze your own situation. Please reach out!

MoneyGeek Feature: Finding the Right No Annual Fee Card

Leanne Rahn had the privilege to be featured in MoneyGeek to talk to readers about “Finding the Right No Annual Fee Card”.

Leanne discusses the pros & cons of no annual fee credit cards and what consumers should consider when paying for an annual fee credit card.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

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Should I Own My Employer's Stock?

Many engineers have the opportunity to own stock in the company they work for. Whether it’s through a 401k match, Employee Stock Purchas Plan (ESPP), Restricted Stock Unit (RSU) grants, stock options, etc., owning a piece of your company can be a great way to build wealth. However, that doesn’t necessarily mean it’s the best way to build wealth.

In this video, I take a look at the difference between owning shares of an individual engineering company vs. owning a diversified portfolio of engineering companies. I break down the math to show that diversifying across many companies is generally going to be your best bet.

The data shown in this video was obtained from the Portfolio Visualizer backtest available here.

“I am passionate about helping people improve the efficiency of their finances!”

— Andy Cole

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

How Saving for Your Retirement Has Changed

Leanne Rahn had the privilege to be featured in West Michigan Woman’s Magazine to talk to readers about “How Saving for Your Retirement Has Changed”.

Retirement isn't what it used to be, which means we need a new way to plan for it. Not sure of the best way to do so? You're not alone.

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529 to Roth IRA Conversions Under New Cares Act 2.0 Rules

Under the Cares Act 2.0 passed in December, savings from 529 education savings accounts can now be rolled over to a Roth IRA (starting in 2024).

This is an important update for parents or grandparents saving for their children or grandchildren’s future. A major concern with 529 accounts has always been “what if my child/grandchild doesn’t end up going to college”? Previously this would have triggered income tax and a 10% penalty to distribute that unused money. Under these new rules, the balance could now be rolled over to a Roth IRA for the beneficiary of the 529 (in this example the child/grandchild).

This new rule creates a few major opportunities for savers:

• You can take advantage of 529 account tax advantages to save for a child’s future education without as much concern you may be penalized in the future.

• You could use a 529 as a “stealth Roth account” for a child to get savings growing tax-free for them long before they have an income that would allow you to fund an actual Roth IRA for them. An extra 15 to 20 years of compounding gains is a powerful thing!

• In the “stealth Roth account” situation you may get the dual-benefit of state income tax deductibility as a bonus (this applies for states with income tax that allow a deduction for 529 contributions and assumes they won’t tax 529 conversions which is yet to be determined).

• Open a 529 account for a child immediately and fund it with $1 or $25. This gets your 15 year conversion clock going (details on this below).

• If your child received grants or scholarships that cover most of their costs they can be rewarded with a head start to their retirement savings by converting their 529 balance to a Roth IRA.

• If you’re fortunate enough to be able to pay for your child or grandchild’s college out of pocket without using all of their 529 account, you could choose to transfer up to $35,000 to a Roth IRA for them instead of using it for college expenses.

Because this is the US Congress and tax code they couldn’t let it be toooo simple… there are some important rules to understand:

• Funds must roll to a Roth IRA for the beneficiary of the 529 plan. If the 529 beneficiary is your child, that means it must roll to a Roth IRA for your child. Quick note - changing the beneficiary of a 529 is quite easy, congress and the IRS still need to clarify whether you could get around this provision by making you or your spouse the beneficiary of the account thereby allowing you to roll the 529 funds to a Roth IRA for you or your spouse.

• Funds must be moved directly from the 529 plan to the Roth IRA, you can’t take the distribution as a check from a 529 and then separately go deposit to a Roth for the beneficiary.

• The 529 plan must have been maintained for 15 years or longer before funds can be rolled over to a Roth IRA. Because of this requirement, I would strongly recommend most people open a 529 for a child when they are born and fund it with the minimum amount allowed (for example $1 or $25). This “starts the clock” toward the 15 year requirement in case you ever need to use this provision in the future.

• The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000. This means you still don’t want to “overfund” a 529 account if you’re worried the beneficiary may not end up using the money for college.

• Any contributions made in the past 5 years (and the earnings on those contributions) are not eligible to be moved to a Roth IRA. This doesn’t mean you can never move those funds, you just have to wait until they’ve been in the account for 5 years until you do.

• Conversions from a 529 to a Roth IRA count toward the annual contribution limit for Roth IRAs ($6,500 for 2023). So only $6,500 could be converted in one year and no “regular” Roth contributions could be made if $6,500 was converted. If only $5,000 was converted during the year for example, the beneficiary could still make $1,500 in “regular” contributions for the year. This means to convert the full $35,000 lifetime limit would likely take 5 or more years.

• Income limits do NOT apply for these conversions. Even if the beneficiary is over the income limit to make “regular” Roth IRA contributions, a 529 rollover to their Roth IRA would be allowed.

• The beneficiary must have earned income equal to or greater than the converted amount. For example, if you want to convert $6,000 from a 529 to a child’s Roth IRA they must have at least $6,000 in earned income. If they only have $2,000 in earned income you can only convert $2,000. These are the same rules that apply for “regular” Roth contributions. Many kinds of income can qualify including summer jobs, babysitting, etc. If in doubt, consult a tax professional.

I know, that’s a lot of fine print and may be a bit confusing! I’d strongly suggest reaching out to an advisor if you think a 529 to Roth conversion may make sense for you or if you have questions about how this may impact you. I’m always available to answer questions by phone at 616.594.6205 and email at ryan@ffadvisor.com.

Artificial Intelligence Reveals the Secrets to Becoming a Successful Investor

Technology and why it is Important

My brother once asked me; would you rather be who you are today with the resources you currently have, or would you rather be John D. Rockefeller back in the early 1900s? Rockefeller was estimated to have a net worth of $24.7 billion, adjusted for inflation to 2021 dollars. After considering, I decided I would rather be who I am today with my current resources, even though my net worth is just slightly lower than $24.7 billion, because the average person today lives a far more luxurious life than the richest person in the world did a century ago. We have:

• Indoor plumbing

• Air conditioning for our homes and vehicles

• Penicillin to literally save our lives

• Fast reliable planes that transport us around the world

• The Internet and WiFi

• Computers that automate many tasks for us

• Amazon delivers almost anything to our doorstep within 2 days

• Miniature supercomputers in our pockets that have Apps to do almost anything

I bring this up to remind us to remain grateful/humble for the things we do have instead of being jealous or resentful of the things we do not have. Some people get scared of new technology instead of embracing how it can improve our lives. 

Artificial Intelligence

One upcoming technology is Artificial Intelligence (AI). Just as I am not a billionaire, I am also not a computer programmer, so I don’t know how the technology works but find it interesting that AI is now able to write articles/blog posts. It will be interesting to see what the pros and cons of AI will be as technology advances. Below are two responses the AI wrote when I prompted, “Write a blog post on how to be a successful investor.” Let me know what you think about the AI’s advice! (I used the website https://openai.com/) 

AI’s First Response

Investing can be a great way to grow your wealth over time. It can also be intimidating for many people, especially those who are new to it. Whether you are just getting started or you’ve been investing for years, there are some key steps you can take to be a successful investor.

1. Develop an Investment Plan. Before you begin investing, it’s important to create an investment plan. This plan should include your goals, what types of investments you’d like to make, how much you are willing to invest, and your timeline for achieving your goals. This plan should be regularly updated as your goals and circumstances change.

2. Diversify Your Portfolio. Diversification is an important part of any successful investment strategy. Investing in different types of assets, such as stocks, bonds, mutual funds, and real estate, can help you reduce your risk and increase your potential returns.

3. Research Your Investments. It’s important to do your homework before investing. Research the companies or funds you’re considering investing in, and make sure you understand the risks and potential rewards.

4. Monitor Your Investments.

AI’s Second Response

Are you looking to become a successful investor? Investing can be a great way to make money, but it can also be a huge risk. To be a successful investor, you need to have a clear investment strategy and understand the risks associated with investing. Here are some tips to help you become a successful investor. 

1. Educate Yourself: Before you start investing, you need to take the time to educate yourself. Do your research and learn about different types of investments and the associated risks. You should also learn the basics of financial markets, such as how stocks and bonds are traded. 

2. Set Goals: Before you start investing, you need to set some goals. What are your long-term and short-term goals? Are you looking to make regular income or grow your wealth over the long-term? Knowing your goals will help you decide which investments are best suited to your needs. 

3. Create a Plan: Once you’ve set your goals, you should create a plan to reach them. This plan should include a timeline of when you should invest, how much money you should invest, and what types of investments you should consider. 

4. Diversify: To reduce the risk of losses, it's important to diversify your investments. Don't put all your eggs in one basket - diversify across different asset classes, such as stocks, bonds, and cash.

“The future is already here. It’s just not evenly distributed yet.”

— William Gibson

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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

A second bite at the apple

A second bite at the apple -Originally written January 8th, 2023
 

"I know now, after fifty years, that the finding/losing, forgetting/remembering, leaving/returning, never stops. The whole of life is about another chance, and while we are alive, till the very end, there is always another chance."

-Jeanette Winterson

 
2022 In numbers
 
During the past year we experienced violent tumult in financial markets not seen since the financial crisis of 2008-09.  Here are a few of the most important markets and indicators that impacted clients.
 
Bonds:  The iShares Core U.S. Aggregate Bond ETF: AGG faced a price decline of -14.38% in 2022 which was eclipsed in downside magnitude by the Vanguard Long-Term Bond Index Fund ETF: BLV with its -28.37% decline. I believe that the indices these funds represent have an unparalleled influence on all other risk assets.  Given these historic declines, the interesting change entering 2023 will be the four-plus and nearly five percent yield of each fund respectively. 
 
Money now having a price above zero, editorializing, will have continued impact on all global financial markets.  Does this price of money increase or decrease will be one of the most important catalysts for the general stock market to answer in the year ahead. 

All data sourced from Schwab Advisor Center, Research.  Charles Schwab and Co., Inc.

 
Inflation: According to the BLS survey data, November 2022 being the last reading as of this writing, inflation ended the year at a 7.1% YoY increase.  While 0.3% higher than the November 2021 reading, this reading represents a 2% decline from CPI’s zenith in June of 2022 at 9.1%.  Furthermore, if you were to annualize the last three months average inflation, you would find the current rate of inflation is annualizing at 3.6%.  
 
The Fed erred in calling inflation “transitory”.  While the word implies short-term that “short-term” isn’t defined to delineate three months from three years.  Close watchers of the sources of inflation could make the argument that certain drivers of inflation have been transitory; however, the drivers of inflation have moved from goods to services keeping overall numbers high.  The continued decline or stagnation of inflation will be another factor driving risk markets in the year ahead as it looks like inflation could cool rapidly.  
All data sourced from CPI Home : U.S. Bureau of Labor Statistics (bls.gov)
 
Equity markets: The S&P 500 suffered it’s fourth worst calendar performance since the 1957 inception of the index at -19.4% with the Nasdaq declining a painful -33.1%.  Stocks did not suffer equally as equites in the Vanguard High Dividend Yield Index ETF: VYM decline only   -3.48% which was nearly mitigated by it’s almost three percent dividend yield.  Emerging markets fell just around -29% depending on the index you choose. 
 
A rebound or lack thereof within the equity markets will dominate the coming year.  According to Twain “Prediction is difficult particularly when it involves the future” thus you will not find me gazing into my crystal ball to make predictions.  An important point to remember is that bear markets can and have persisted for more than one calendar year.  Diversification in asset class and equity type can help mitigate this potential continued bear market. This could be the year that international markets finally outperform given their previous streak of multi-year under performance.  

  
 
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”

-Warren Buffett
 

The most interesting story in risk assets
 
Since I started investing in 2007-08 until the beginning of 2022 interest rates have generally moved in one direction, down.  In 2022 the long-term downward trend in rates, which you could easily argue began in the early 80’s, reversed its course.  The Fed raised rates at each meeting in 2022 including several, aggressive 0.75% rate increases later in the year.  This decisive rate-raising regime led to carnage in the bond market especially on the long-end of the yield curve (see BLV above!).  I especially like the Austrian 100-year bond offering maturing in 2117 that lost roughly 54% of its value in 2022. But, where there is carnage so is there opportunity… 
 
While my favorite ETF for long-term bonds, BLV, declined nearly 30% in 2022, it bottomed in late October and has since rallying nearly 9%.  In fact, not to be pedantic, BLV rallied nearly 17% off the lows of October into early December before retreating to end the year; thus, giving us a second bite at the apple. 
 
This rally was powered by the expectation, still yet to be fulfilled, that the Fed will end its tightening spree.  Perhaps, and a theory I find most plausible, entails the anticipation that Fed over tightening leads to a Fed induced slowdown.  The slowdown then is the tail that wags the dog by forcing the Fed to lower rates in response to recessionary pressures. In this scenario you would not expect downside price pressure on long-term bonds. The question becomes, can long-bonds rally higher in 2023? 
 
What makes long-term bonds (municipal, investment grade corporates, and treasuries, excluding high yield) most interesting is the balance of the risks in differing scenarios.  Let’s examine three of the many such scenarios that could unfold.
 
First, if the economy experiences a “soft landing”, that is no recession with an end to Fed rate raises, the price of long-bonds will be difficult to anticipate.  I would very much doubt the bonds fall in price as in this scenario, the Fed would have “vanquished” inflation which, quite clearly, is their stated goal.  More than likely this would leave us with the current yield of these bonds intact. This representing a relatively decent, diversifying return for the average portfolio at higher yields not seen in many years.  
 
Two other scenarios result in yield of these securities plus a duration trade.  That “duration trade” is the increase in price of these bonds because interest rates decline which adds to an already generous yield.  These two scenarios involve either inflation refusing to subdue easily thus forcing the Fed to continue tightening the economy into a recession or a recession that has already taken root due to the lag in the already steep interest rate increases. 
 
In either scenario we could assume that the long bonds would give the opportunity, while not guarantee, to outperform stocks that might struggle during recessionary pressure or continued inflation. While unknown, this seems most likely as investors would seek to move up the capital structure in times of recession. Moving up the capital structure means increasing the likelihood of recovering your investments if the company you invested in experienced insolvency.  Often this simply means becoming a bond holder versus equity holder especially in a year that equities may struggle. The overriding point is that return may be possible outside of the equity market given our current conditions.  
 
This circles all the way back to the earlier point that bear markets can exist for multiple years and require outside the box thinking to overcome.  Utilizing differing asset classes and imagining a multitude of outcomes while pursuing the highest probability opportunities remains our stance at Fiduciary Financial Advisors especially, when you have previewed the upside scenario. Never hesitate to take that second bite at the apple!
 
As always reach out with questions, commentary, or just to say hello!
 
Be well and invest for the long-term,
rob
 
Disclosure: The opinions expressed above are my own and do not constitute investment advice.  When investing in securities, there is always a potential for loss including principal loss. 

3 Steps to Turbo Charge Your Health Savings Account (HSA)

One of my favorite tax strategies for college professors and others is to take full advantage of your Health Savings Account (HSA) offered through your workplace. These accounts are WAY BETTER at saving taxes than 401k and 403b retirement accounts. You probably know that contributions from your paycheck are tax deductible just like contributions to retirement accounts. However, unlike retirement accounts, withdrawals are tax free for qualified medical expenses. Another unique advantage of HSA contributions is that they are exempt from social security taxes. Here are three steps to increase the value of your HSA.

Step 1: Make Maximum Contributions. Many people set their annual contributions to match their annual insurance deductible. For example, your annual medical deductible might be $3,000 so you decide to contribute this amount to your HSA each year. After all, this is what you expect to pay out of pocket for healthcare. If you are lucky and healthy, you might even pay less during the year. So why save more each year? Answer, to build a healthy surplus. No pun intended 😊

Consider this example: Suppose you are married with a family income of $130,000. You choose to make the maximum contribution of $7,300 to your HSA (for 2023). The contribution is not subject to federal income tax (24%), state income tax (4%), social security tax (6.2%) or Medicare tax (1.45%). Your $7,300 contribution saves you $2,600 in taxes this year. But the story gets better!

Step 2: Invest in Stocks and Bonds. You may not realize that you can invest your HSA funds in stocks, bonds, and other investments. Your money does not have to stay in a boring savings account earning less than 1%. These investments will likely provide a better return over many years. Granted, you are restricted to the specific investment options available through your workplace, but it is worthwhile knowing your options.

Step 3: Delay HSA Withdrawals. The final step to really take advantage of tax-free growth is to keep these funds invested for as long as possible. Pay healthcare expenses out of pocket each year, if possible, and let your HSA account continue to grow. Think of your HSA to be a retirement account for healthcare that you let grow until age 65.

Consider the example of a married couple in their 40s who contribute $7,300 each year and invest the account in a conservative portfolio of index funds and exchange traded funds (ETF) that could earn 7% per year. The account would grow to almost $300,000 after 20 years. These funds are then withdrawn completely tax free to pay qualified healthcare expenses during your retirement years. Yes, this is a best-case scenario that will be difficult to achieve but the approach yields benefits even with less rosy assumptions. For example, you may still have a tidy $150,000 for healthcare during retirement by saving half of the maximum contribution each year.

Your Homework: As a college professor, my natural inclination is to assign homework to ensure students take positive actions. So here is your homework! Review your HSA investment options and consider increasing your annual contribution to the maximum.  When possible, pay for healthcare out of pocket and let the HSA account continue to grow tax free. Consider your HSA as a retirement account for healthcare. You will have plenty of healthcare expenses later in life so why not start saving now?

I have been a college professor for almost 30 years and now I teach other professors how to graduate from academic freedom to financial freedom. Sure, investments are important. But it is just as important to minimize taxes, moderate personal debt, live below your means and use insurance wisely to prepare for the unexpected. Review my approach to financial advising and schedule a no obligation introductory call by clicking here. We will discuss your financial worries, answer questions, and then you can decide if working together makes sense.

Inflation Is MUCH Lower Than You Think

The media and the average person misunderstand and misinterpret inflation for two important reasons:

1. They focus on the ANNUAL reported inflation number which tells you what has happened over the past year but not where inflation is headed.

2. The SHELTER component of inflation which measures rents and home prices makes up about one third of overall inflation but lags real-time housing data by up to 12 months.

The most recent inflation report that was published on 12/13/2022 makes an excellent illustration of these two points. Understanding the nuance of inflation reports and where we are headed rather than where we have been is key for setting expectations for how much further and how quickly the Fed will continue to raise interest rates as well as how long rates will remain elevated.

Annual CPI (consumer price index) tells us how much prices have gone up over the past year as a whole.

This is the figure most often reported by the media. As shown in the line chart below, this figure peaked in June of 2022 at just over 9% and has been trending downward ever since to its current level of 7.1% (as of November 2022). This annual figure is calculated by taking all of the monthly increases for the past year (each of the bars in the bar chart below) and adding them together. For example, if you take all of the bars in the bar chart and add them together, you get that 7.1% current ANNUAL inflation.

This is great for telling us what happened over the past 12 months, but it’s a very bad way to measure what is happening right now. On the way up, the annual figure lags the real-time situation making it harder to see inflation heating up, and on the way down it lags the real-time situation making it hard to see inflation cooling down. Later we’ll see how the lag in rent and home price data makes this problem even worse.

A better way to understand what is happening right now is to ignore the ANNUAL number and instead ANNUALIZE the most recent 3-6 months of data. A couple of examples. If you take the most recent 6 months of data (June through November) you get a 4.5% annualized inflation rate. That’s much lower than the 7.1% figure for the past 12 months. If you take 5 months of inflation data (July through November) you get a 2.4% annual inflation rate. If you take the last 3 months of data you get a 3.6% annualized rate. These examples tell us that for the past 3 to 6 months we have been MUCH closer to the Feds official target of 2% annual inflation than most people believe.

It works the other way too - if you had taken the last four months of data when inflation peaked in June, you would have had an annualized inflation rate of 11.4%! This is much higher than the reported 9.1% annual figure.

Chart of annual cpi from bls cpi bulletin december 2022

chart of monthly cpi from bls cpi bulletin december 2022

Looking through this lens and understanding how annual inflation data lags what is happening right now shifts the narrative surrounding inflation. It didn’t just burst onto the scene a year ago and it hasn’t remained “stubbornly high” as the Fed has taken measures to push it back down to an acceptable range. According to the data, what actually happened was:

1. Inflation accelerated quickly as our economy reopened following the pandemic, particularly after the vaccine rollout in early 2021. The 3 month annualized rate (red line below) reached its first peak at 9.2% in June of 2021 while the annual rate that is broadly reported (blue line below) had just surpassed 5%. The Fed and many economists believed inflation would be transitory and inflation was not yet a “mainstream” topic.

2. Inflation remained elevated through it’s eventual peak in June 2022 but it wasn’t resisting the Fed’s efforts, the Fed just wasn’t doing anything. As the annual inflation rate caught up to the 3-month figure and gas prices spiked in January 2022, inflation became a hot mainstream topic (as evidenced by google search data).

3. As the Fed began to raise interest rates (yellow line below) in earnest with it’s first 0.75% increase in July 2022, the 3-month annualized inflation rate plunged into the range of 3% to 4% while the annual rate has lagged substantially in the 8% to 9% range. Ignoring this dramatic near-term decline and focusing on the much higher annual number would lead you to believe the Fed has “a lot of work left to do” when in reality the work may be nearly finished and the (lagged) data just hasn’t caught up yet.

chart was created using data from bls cpi bulletins dec 2018 - dec 2022, fed funds rate data from st louis fed

Home and rent prices accounts for a massive one third of CPI - but the way they are measured lags reality by UP TO 12 MONTHS

This is according to a paper written by the Bureau of Labor Statistics in conjunction with the Cleveland Federal Reserve Bank. An excerpt from their paper explains how large of an impact this has and why it’s such a big deal:

“Shelter is by far the largest component of the Consumer Price Index (CPI), accounting for 32 percent of the index. Accurate inflation measurement therefore depends critically on accurate rent inflation measurement, which is the primary input to both tenant and owner equivalent rent. It is therefore concerning that rent indices differ so greatly. For example, in 2022 q1 inflation rates in the Zillow Observed Rent Index (ZORI; see Clark (2020)) and the Marginal Rent Index (Ambrose et al. (2022)) reached an annualized 15 percent and 12 percent, respectively, while the official CPI for rent read 5.5 percent. If the Zillow reading were to replace the official rent measure in the CPI, then the 12- month headline May 2022 CPI reading of 8.6 percent would have read more than 3 percentage points higher.” (emphasis mine)

As the authors explain, if CPI had accurately reflected real-time data on home and rent prices, inflation would have peaked near 12%! Piling this huge lag for such a major component of CPI on top of a focus on the annual vs. near-term inflation rate puts policy makers and investors very out of sync with economic reality. Had the Fed paid more attention to the shorter-term trend and real-time data on rent and home prices sky-rocketing in the spring of 2021, they may have moved to raise interest rates 6 to 9 months sooner and curbed inflation at a rate of 5% to 6% rather than the near 10% rate we ultimately suffered.

This home and rent price lag is now working in reverse to create the illusion of higher inflation.

chart from st louis “Fred” website - data is published with a lag - sep 2022 most recent reported

Taking the principle above and applying it to our current situation, the rent & home price component of CPI today largely reflects the economic condition one year ago. At that time, the Fed had not even begun to increase rates and the average 30 year mortgage was around 3%. From June of 2021 through June of 2022, US home prices shot up by nearly 20% per the Case Schiller Index. That massive increase (which in reality happened in the past) will continue to feed through into CPI data making the rate of inflation look much higher than it really is. The reality is that From June 2022 through September 2022, home prices dropped by 2.6% or an annualized rate of 10.4% (September is the most recent data published by the Fed - the irony of this lag is not lost on me). So while home prices in reality are dropping, CPI data will continue to show robust price increases for its hugely important “shelter” component.

If you adjust the annualized 3-month inflation rate using CURRENT home price data, you see that inflation has slowed much more than official CPI data indicates.

If you replace the high growth rates the official CPI data use with zero growth in home prices over the past 3 months, the 3.6% annualized CPI rate we discussed earlier drops to just 0.85%. If you include the drop in home prices that the Case Schiller Index shows, the 3 month annualized rate of inflation drops even further to 0.2%! Both of these are well below the Fed’s target inflation rate of 2%.

Even if you strip out the recent price decreases for gas, energy, and used cars… without the lagged shelter component you’re still at just a 2.4% annualized inflation rate. All of this tells us that while some contributors to inflation like food, transportation, and some service industries may prove stickier and harder to bring back below 2%, if the current trend continues and no major geopolitical event occurs REAL inflation (ignoring that pesky lagged real estate component) is likely to remain in the 2% to 4% range.

The economists at the Fed aren’t stupid, they’re aware of the lag and impact of the real estate component. Heck, their own team wrote a paper on it! This should mean they factor it into their policy decisions and look through the noise in the data to the REAL economy. If they do, I’d expect the upcoming 0.5% increase to be the last large hike with the “final” rate topping out around 4.5%. Coincidentally, this is what the bond market is also predicting based on the current yield curve (12/13/2022).

MORE TO COME - I’ll be following this post shortly with another breaking down what this could mean for stock and bond markets in the coming year. In the meantime, I hope you enjoyed this trip down the rabbit hole of Inflation and CPI. Always remember, the media is a business. They are out for clicks and traffic, not to educate you. Scary headlines and political narrative sell. I encourage everyone to seek out the data and let it speak for itself or rely on trusted advisors who do the digging for you.

Footnotes

All CPI data is from official Bureau of Labor Statistics bulletins

Case Schiller home price data and Fed funds rate data is from the St. Louis Federal Reserve website

My own calculations of annualized data modified by adding/removing/adjusting specific components is based on archived CPI bulletins published by the Bureau of Labor Statistics from 2018 through November 2022.

Current 3-month and 6-month annualized calculations were based on the November 2022 bulletin detailed categories data from the BLS.

Home Renovations & How to Get the Biggest Return on Your Investment

Shauna Speet, owner of Shauna Speet Interiors, and Leanne Rahn, Financial Advisor with Fiduciary Financial, have teamed up to tackle some of the most burning questions when it comes to your house renos and their corresponding investment returns.

Shauna and Leanne fill you in on all the things like how to decide what to renovate, how much renovations cost, cash versus home equity loans, your realistic investment return, and so. much. more.

Jump into the conversation with them and leave feeling informed, educated, and motivated (with just maybe, a demo hammer in hand).

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How do I decide what to renovate in my home?

Shauna recommends making a master list - every house project that will require either time or money goes on the list. Then prioritize that list based on need vs. want, and the space that is functioning the poorest/or with the most worn-out materials gets the very top priority.

Other factors to consider when deciding what you want to renovate are:

1.  How long do you plan to stay in the house? 

2. What is the top value your house could be worth? You don’t want to out-renovate your neighborhood.

What are some tell-tale signs that I should renovate my space?

First, is it a want or a need? Does the space need to be renovated due to worn-out materials or poor function? If so, it would get top priority on Shauna’s list. 

If the space functions well and the materials are in good shape overall, Shauna would recommend a purely cosmetic update and save the renovation budget for a more pressing area.

What if I don’t know if I’m going to stay in my house long-term? Does it still make sense to renovate?

If you aren’t planning on staying in your home for the long term, Shauna’s opinion is this: she does not think it’s worth the cost/life disruption to renovate if you plan to move in 5 years or less.

UNLESS - you can do a lot of the work yourself. If you need to hire out 90% of the labor, there goes your profit margin along with it! Sweat equity is what you can count on getting back.

Realistically, what is the return I can actually receive from renovating? 

In Shauna’s experience, less than in the past. Things are more expensive now, and homes are selling for record highs even without the updates. So talk to your realtor before renovating the kitchen just to sell the home, it is probably not worth it. (BUT - if you are thinking of removing a wall to open up the kitchen, or ADDING a bathroom, those improvements yield a significant return.)

Is putting money into my home considered a good investment? 

Leanne challenges you to ask yourself this: what are you after? Is it renovating to stay in the home longer? If yes, what is your current mortgage interest rate? It might make sense to renovate and stay in the home longer than to sell and buy a home with a higher interest rate.

Maybe is it renovating to add more value to your home to be able to sell it? If that is the case, how much will it add to the selling price? What is the market like?

These are just a couple of scenarios. This answer is definitely very situational. Investing in your home can be a very good investment! It really depends on what your goal is.

How can I estimate how much the renovation will cost?

Google! Google the average square footage of everything you can. Things like the Flooring/tile/counters/backsplash you want and then multiply that by the surface area of each material. That will get you a ballpark for materials.

Once you have that number, add 75% - 100% of the cost of materials for the labor to install all those items (if you plan to have a builder manage the project for you).

Lastly, add in the cost of the appliances/bathroom fixtures you want, as well as an approximate cost for cabinetry (also by googling!), and that gives you a rough preliminary budget.

Should I save up the full amount prior to starting a renovation or should I take out a home equity loan/HELOC?

This is a very situational answer and depends on what the alternative is. Maybe you have been in the home a few years and built up some equity, your mortgage rate is good, and renovating by utilizing a home equity loan/HELOC would allow you to stay in the home for a few years. Looking at today’s rates, Leanne might say it may make more sense to take out a home equity loan/HELOC and keep your current mortgage rate rather than go out and buy a home (which has a good chance of being priced higher) at a higher interest rate. 

Maybe you are debt adverse and you have the extra cashflow plus your renovating timeline isn’t a rush. Then it may make sense to just aggressively save up for your renovations. 

Overall, the main variables Leanne thinks affect this answer would be your timeline, your mortgage rate, the current housing market, the home equity loan/HELOC rates, your cashflow, your feelings toward debt, how much equity you have in your home, and your renovation estimated costs.

What are the steps to start saving for a renovation? 

1. Know a rough estimate of costs (like Shauna mentioned, Google!).

2. Get on the same page as your spouse and be transparent about the all-in costs and your realistic savings timeline. Take a look at your budget and cashflow - are there ways to cut expenses to reach your goal sooner? If there aren’t ways, take that into consideration when determining your realistic timeline or be creative on how you can earn extra income to throw at your savings goal.

3. If you have a timeline longer than 3 months, consider chatting with Leanne about ways you can give your savings a chance to grow. If you have a more immediate timeline, look to utilize high-interest-earning checking accounts (think LMCU and Consumers Credit Union to name a few).

4. Stay motivated! A big savings amount can feel daunting and you may feel impatient with the thought of saving. Write out your goals and hang them on your fridge, create a mood board and hang it up in your office, schedule “money dates” with your spouse to go over your budget and get an update on your savings. Being intentional about this is key!

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Maybe your demo hammer is staying in the garage a little bit longer or maybe it’s in hand right now. Either way, Shauna and Leanne are here to support you and give you guidance.

Be sure to check out shaunaspeet.com for renovation guides that walk you through the whole planning and hiring process of a renovation as well as a Custom Home Analysis. Shauna personally analyzes your answers you provide to a questionnaire she sends, as well as images of your home and your Pinterest boards. She then provides you with a custom report on your personal design style and the architectural style of your home.

Leanne is ready to build new relationships by giving you personal, tailored guidance on cash savings, home equity loans/HELOC, helping you grow your savings, and preparing for the short AND long term.

What are you waiting for? Dream like Joanna. Demo like Chip.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

About Shauna…

Shauna Speet, owner of Shauna SpeetInteriors, is an interior designer focused on studying and educating homeowners on the function of a home. She has devoted her focus to identifying functional pain points and creating solutions to solve them.

Shauna lives in the lakeside town of Holland Michigan with her husband, two children, and their energetic golden retriever Coby. They all enjoy being on the sandy shores of Lake Michigan in any season - especially Coby! 🐶

W: shaunaspeet.com

IG: @shauna.speet.interiors

About Leanne…

Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties. 

She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.

W: https://forfiduciary.com/meet-leanne

E: leanne@ffadvisor.com

Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:

1. I will always put your best interests first

2. I will avoid conflicts of interest

3. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional

4. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.

5. I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts

Home for the Holidays Magazine - Seeking Peace with Leanne Rahn

Leanne Rahn had the privilege to be featured in Real Estate By Aubree’s Home for the Holidays Magazine to talk to readers about “Staying the Course”.

With a Christmas twist, Leanne emphasizes the importance of not just your destination but your journey and the steps you take along the way. Leave feeling encouraged, confident, and motivated while understanding the value of remaining steadfast on your current course.

Leanne, Aubree, along with many other West Michigan businesses are wishing you a very Merry Christmas!

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Boring Is Better

With holiday season in full swing and many more festive gatherings to come you may find yourself having conversations around the state of our economy, the cost of living, possibly even how your portfolios may be preforming, or more likely, how they are not preforming.

As we have watched the market react through this cycle of underperformance one thing has remained true, there is beauty and pride in proven investments. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

Let’s create some context, In the 19th century it was common for surgeons to reject the concept of micro bacteria, also known as germs. There was no process of sterilization when preforming surgery, which led to many infections and later a general knowledge of germs. This seems unfathomable to you or I reading this now but, like many things in life, it took countless mistakes to create a form of “Cumulative Knowledge” in the field.

For some reason this form of knowledge seems to pass over a large majority of the investment community. Although we have vast knowledge, an abundance of research and thousands of examples of different investment philosophies and strategies over time. Time and time again human behavior has not drastically varied through market cycles. The majority of investors participate in this form of “Cyclical Knowledge” mentioned by investor Jim Grant.

Let’s look at this mathematically -

 We have spent the last decade in a flourishing economy where nearly anyone from anywhere could create wealth in the equites market, in the last 12 months this entire concept has drastically changed. The majority of stocks are down year to date and all of the main indices listed above have suffered losses, although not in equal proportions.

Those boring old blue-chip stocks that pay a nice dividend and have strong cash flows are looking as bright as ever. Rather than the trendy investments in crypto currencies, blockchain, robotics, cyber security, and many more innovative concepts. It is time to be more methodical and rational in our investment philosophies.

Success in the stock market should look boring! You will not be sitting at the dinner table talking about your hot stock tip that doubled this year. Or how someone you work with got rich overnight on a hot investment.

This is not a proven way to create wealth. Diligence and patience are the greatest tools you possess in order to create lasting wealth. This sort of thing takes decades not weeks.

Invest continually over long periods of time, keep fees to a minimum, and wait patiently over years and decades to effectively build wealth.

This is not a declaration that index funds are the only answer to success in the realm of investing. I too enjoy variations of asset allocation; yet, this is a reminder of the importance of these strategies when considering the portions of your financial plan that are crucial to your retirement. As well as a reminder to be diligent in where your money is and who is in charge of it.  

My encouragement to you, as you hear those stories of large gains and news articles of the next big thing, find a way to stay true to the fundamentals. Understand although someone may be holding a hot stock up 80% odds are the rest of their holdings are suffering, they just failed to mention it. Exciting investments may have had their time in the spotlight but one thing will remain true over centuries. Boring investments do not have an ego, boring investments always have been and always will be sexy. 

Wealth is Built Over Time.

 Fiduciary Financial Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.