Print
PDF

The Neuropsychology of Saving

Written by Brandon Grundy, CFP®.

One of the things I enjoy most about my profession is continuing to learn. It's required at the regulatory level, with a certain number of hours of continuing education being mandated by the CFP Board, for example. But the broader reality is that with so much changing all the time continuing my education isn't just required, it's necessary.

One area that is gaining more prominence in continuing education coursework is behavioral finance. I've written previously about this field and its importance in understanding the how's and why's of one's relationship with money.

These topics are important because if we can understand our internal thought processes and biases regarding money, we can hopefully make better financial decisions.

Last week I attended a two-day conference in San Francisco put on by the NorCal chapter of the Financial Planning Association. There were several behavioral finance-related options, a change from recent years where there may have only been one.

One of the sessions I attended was The Art of Saving Money and it examined, among other things, the neuropsychology of saving. The content was interesting, so I thought I'd share some of the concepts with you, along with some added commentary.

The art of saving money, it turns out, has more to do with how we manage our impulses and internal biases then it does with how much money we make. We all know people who make a lot but seem to spend it all, right? Savers tend to have these common traits:

Continue reading...

Print
PDF

That Darn Mortgage

Written by Brandon Grundy, CFP®.

Should I pay off my mortgage before retiring? This is a common question for folks planning to retire, and for others who would prefer to not have any debt. While I've written about this previously, the recent tax law created some new wrinkles to consider.

I'm a firm believer that there's no one right answer to questions like this. What's right should always be based on one's own situation. But the new higher standard deduction will crowd out the ability for many to see their mortgage as a tool to save on taxes. For these folks, starting this year, owing money on their house could seem to have no benefit.

Understandably, many will want to simply be done with having a mortgage and will try to pay it off as soon as possible. But is this the best financial decision?

Here's an explanation of one of the ways I think about this question.

Relative Interest –

Assume your mortgage is at 4.5% per year for 30 years and you find out you can't deduct your interest. If you could deduct the interest, you'd reduce this number by your highest marginal tax bracket. But since we're assuming no deduction, your interest expense is just 4.5%

Now assume you want to get rid of this debt. Where will you get the money from? Maybe you have a lump sum sitting in cash and are wondering what to do with it. Or, maybe you need to sell investments.

Continue reading...

Print
PDF

Rickety Rails

Written by Brandon Grundy, CFP®.

Following the theme of last week's post, one of the things I find interesting about the Social Security program is how similar the fundamental funding issues are to those faced by folks planning for, and living in, retirement. Even the methods used for long-term analysis are similar. So, let's dig a little deeper into the Social Security funding conundrum and look at some of the key issues from a retirement planning perspective.

While there is lots of information available regarding Social Security, my preference is to go right to the source. Fortunately, it's easy to find information right on www.ssa.gov, such as The Future Financial Status of the Social Security Program, a good descriptive piece written by the program's chief actuary. The language is a little dense and dated (from 2010), but the content is good and important. Another is the annual report to Congress from the trustees of the Social Security program.

The sense I get from reading both documents is something like watching a slow-motion train wreck. But it's not all doom and gloom since there are known solutions to the problems.

I'm going to include some quotes from the 2010 document and excerpts from last summer's trustee report, so this post might be a little longer than usual. Links to each of these documents are below if you're looking for a little light reading.

Continue reading...

Print
PDF

The Third Rail

Written by Brandon Grundy, CFP®.

Thanks to the wonder of the internet, I recently learned the meaning of the "third rail of politics" metaphor so often used to describe verboten government programs like Social Security.

According to Wikipedia, the third rail is a high-voltage rail used to power trains in some electric railway systems and, being electrified, would likely kill anyone who touched it. This seems an appropriate metaphor since no major politician wants to tackle the funding problems associated with Social Security, even though there are some relatively simple fixes. Ultimately, the third rail goes untouched for fear of the outcome.

Since I've been getting more questions lately about the structure and health of the Social Security system, it seems appropriate to touch on some higher-level factoids about the program.

Social Security provides retirement benefits to over 40 million beneficiaries each year, and to millions more spouses, dependents, and survivors of deceased workers.

The average monthly benefit is $1,350 and 30% of retirees receive less than $1,000.

Social Security benefits make up more than half of the household income for more than half of married retirees.

For a chunk of retirees, Social Security is over 90% of their income and without it, half of all retirees would live in poverty. (14% of seniors currently live in poverty anyway – recall the average benefit numbers listed above and imagine trying to live on that.)

Continue reading...

Print
PDF

Staying Focused Amid the Noise

Written by Brandon Grundy, CFP®.

If having information leads to knowledge and, as Benjamin Franklin once said, "An investment in knowledge pays the best interest", where do you get your information? It can be very, very hard today to get the information you need without all the other "stuff" that often comes with it.

We are under a constant bombardment of information and most of it is, frankly, extraneous. But with the flow seeming to get stronger as time goes by, how do we limit the amount of information we take in? How do we ensure the information we consume is accurate and worthwhile?

These questions are applicable to all aspects of our lives but take on special significance where our money and financial futures are concerned. As we learn more about how complex computer algorithms often guide the "content" being delivered to us, it's disconcerting to realize that providers are much of the time simply showing us more of what they think we want to know.

Our internet browsing history often dictates what news and other content we're offered. If you search for "market correction", future content is likely to be tilted in that direction. If you search for "buy gold", internet ads and even non-traditional news content can be skewed toward an assumption that you're the "Chicken Little" consumer of bad news about the U.S. economy and the dollar. Without realizing it you can find yourself searching for information, for knowledge, from a skewed vantage point, either too positive or, more typically, too negative.

Add to this the unending pressure on media companies (and others) to generate a constant flow of content, and the lax quality control that comes from information and news being viewed as a commodity, and you get what we have now – the general inability to easily tell fact from fiction and what's worth your time versus what's nonsense meant simply to hold your attention.

Along these lines, here's an interesting essay from ThinkAdvisor, an online magazine for the investment advisor community. The author seems to have taken the words right out of my mouth when it comes to how hard it is staying focused amid all the noise...