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Why is Personal Money Management So Hard?


On June 10, 2009, Fidelity Investments announced the results of their second Couples Retirement Study.  They found that only 15% of couples had confidence in each other’s ability to manage finances.  Why is this so hard?

Successful money management is not easy.  There are four major obstacles to financial success.  First, is a lack of education. Second, is the volatility of the market itself.  Third, is our own human nature and fourth is a system that seems to foster distrust.  Let’s look at each one individually, and see how we can overcome these barriers so that we can enjoy life.

The first problem is a lack of education.  Most Americans went through their entire educational careers without taking a single course on personal money management or investments.  Even the language of finance seems foreign.  It is no wonder that many feel overwhelmed.  While it may be impractical to go out and get a doctorate in finance at this stage of the game, a little knowledge can help make you feel more comfortable when making financial decisions.  You can read books, attend seminars, but the best way to learn is through a mentor or coach.  A money mentor or coach is one who will take the time to fully explain your options so you can make informed decisions.  Moreover, your money coach should continue to work with you in the months and years ahead, providing ongoing advice and counsel.

The second problem is volatility.  The market is extremely volatile in the short run.  This holds true for stocks, bonds, CDs, and money markets.  Change is the only constant.  To make matters worse, the most volatile asset classes in the short term are the ones that have performed the best over the long term.  Let’s take a look at stocks.  According to Jeremy Siegel, Professor at the Wharton School of Business, the total return for stocks from 1809 – 2008 was 6.6% per year after inflation.  That might help to provide consolation to us when the market is down.  Far too often, however, short-term volatility just plain scares us.  While historical performance is no guarantee of future results, we can learn from it.  We must understand both the short-term risks and the long-term potential of the various asset classes when dividing up our assets in our portfolio.

The third problem involves our own human nature.  More often than not, these human traits lead to poor financial decisions.  There are a number of financial mistakes that you should guard yourself against.  One is inertia.  Back in the caveman days, inertia kept us out of trouble.  We would be hesitant to walk into a cave not knowing if there was a predator inside.  Our instincts told us to let someone else go into the cave first.  Today, we are faced with so many investment, retirement and insurance options, many people freeze, like the preverbal deer in the headlights.  Unfortunately, the results are often similar.  Not making a decision is usually a bad decision. 

Another problem is our desire to avoid losses.  Studies show that Americans prefer protection against loss by 2 to 1 over a potential gain.  This desire keeps us from achieving the returns we need to maintain our standard of living in the future.  In a real sense, we are safely managing our money into poverty. 

Some people make the opposite mistake.  These folks too often think overly optimistically.  They will invest in a “sure fire” small business or some wild high-tech investment with dreams of “getting rich quick”.  Usually, these get rich schemes end up with the investor poorer.  Being too conservative or too optimistic is equally bad.

The over reliance of status is another financial mistake.  We tend to believe in something or someone we have heard of.  Big-named companies give us the false sense of security.  Last year’s events proved big is not always better.  Some of the largest companies had the largest problems.  A name, after all, does not provide a service… people do. 

Our desire to maintaining the status quo is another mistake.  Inertia and status quo are different, although related.  Inertia is the fear to do anything, while status quo refers to our tendency to put change off to a more convenient time.  Most of us do this when we choose to eat dessert tonight, but promise ourselves that we will start a diet tomorrow.  With finance, this leads us to keep our current investment allocation, retirement strategy and insurance policies in place, not making changes as the economy or their personal circumstances change.  Every financial strategy should be reviewed at a minimum once a year.

The best way to overcome the negative aspects of our human nature is to have structure.  The best tennis players or golfers hire trainers and coaches.  Trainers and coaches provide them with a structure to do what they know they should, but might not without them.  They also provide invaluable insight from an outside perspective.  An investment advisor or money coach can do the same thing for you.  They can help you select the right financial strategies based on your objectives.  They can help you take appropriate action, now and in the future. 

The fourth problem deals with the current financial system that often leads to distrust.  Getting qualified, financial advice is critical.  But many Americans don’t trust their advisor.  The reason may be caused by the compensation methods the industry uses.  Typically, commissions are paid upfront giving the advisor an incentive to provide service early on, but not later.  Life, however, is an ongoing process.  People often feel abandoned by their broker and understandably become distrustful of the industry.  You deserve more. 

Fortunately, independent financial advice is now more available than ever.  We, at Money Concepts, have been providing independent financial advice for over 30 years.  We are not owned or controlled by an outside financial service or insurance company.  We do not sell any proprietary products.  We are free to give you financial planning advice on an unbiased basis.  Our compensation can come from fees, commissions, or a combination of both.  We will provide you with a full disclosure of all costs, fees, risks, and all other pertinent information so that you can make an informed, thoughtful decision.

Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

July 21, 2009

The End of the Great Recession

image004-300x176This has been one of the longest recessions in over 50 years, but it may end this summer.  This was the finding of BNA’s mid-year survey of 23 well-known economists.  Most Americans won’t recognize the recovery until the middle of 2010.  This delay is due to the fact that the unemployment rate will continue to rise through the end of this year and beginning of next year.


The survey indicates that most economists predict that economic growth will be slow throughout 2010.  They predict a GDP growth rate of just 2% for next year.  At that rate, the economy is unlikely to be able to make any significant gains in employment.  They expect the 10-year Treasury bond rate will rise to 4.33%.  As rates rise, Treasury bond prices fall. 


Other economists disagree.  Brian S. Wesbury, Chief Economist and Robert Stein, Senior Economist at First Trust Advisors in Wheaton, Illinois, see a much more robust recovery.  They are forecasting a GDP growth rate of 3.5% for the second half of 2009, and 4.5% for 2010.  They base their predictions on the following five assumptions.


First – Inventory Levels.  While businesses have been selling off current inventories, manufacturing has slowed to a crawl.  As inventories get reduced, manufacturing will pick up, although it will not be the same as the pre-recessionary level, but it will be significantly higher than its previous lows. 


Second – Trade Deficit.  They project continued declines in the trade deficit.  As the trade gap narrows, exports add to our GDP.


Third – Housing Market.  They expect home building to bottom later this year, and rise in 2010.  Housing starts are now only one-third of the long-term trend.  Any uptick will add to the GDP.


Fourth – Government Spending.  Currently, only about 10% of the $887 billion dollar stimulus package has been spent.  The largest portion is scheduled to be spent in 2010, adding to that year’s GDP.


Fifth – Business Investment.  Plant and equipment upgrades are expected to turn around much faster than previously thought.


Neither Wesbury nor Stein believes that consumer spending will increase dramatically.  They forecast that real consumption will rise only .6% on an annual basis from the end of 2007 to the end of 2010.


Corporate earnings are likely to increase in the next three months, according to the second quarter 2009 Northern Trust Global Advisors survey of investment managers.  Thirty-nine percent of participants think corporate earnings will improve in the next three months, compared to only just one percent who felt that way last quarter.


What the economists believe is far less important than what you do for yourself and your family.  The economic recovery will be meaningless to you if you are not positioned to take advantage of it.  Americans have been shaken by this dramatic downturn.  But, Americans have a long tradition of rising to the occasion in times of trouble.  We recognize what is truly important, i.e., our loved ones, family and friends.  We tighten up our boot straps and move forward.  In the end, the American character will be the driving force that pulls us out of this great recession.


Take the time now to review your situation.  Look at your personal circumstances, debts, investments, and insurance needs.  Determine if you need to make any changes.  Your Money Concepts’ financial advisor stands ready to assist you.  We will be happy to work with you to help insure all your financial pieces of the puzzle are in the right order.


Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

July 16, 2009

Nine Ways to Save

image004-300x176Saving is the key to your personal financial recovery.  Whether you are a retiree looking for ways to stretch your dollar, or a young family just starting out in life, saving is critical.  But what are the best ways to save?  We will examine a number of options you can employ on your road to economic recovery.


  1. Stop Spending Money.  Well, that’s not really practical, but you can substantially reduce your monthly spending by doing one simple thing… leave your credit cards at home.  Multiple studies show that we are far more likely to make purchases on a credit card.  When using a credit card, we are far more likely to make more purchases and be less concerned about the price we pay.  Spending cash hurts.  There is something in our brains that does not want to part with cash.  That something is missing when it comes to credit cards.  Leave the cards at home and your wallet will thank you.
  2. Never Buy Retail.  With today’s economy, there is no reason to pay full retail.  Sales are everywhere.  But, just because some item is on sale does not mean you should buy it.  Make lists before you go shopping.  If an item is not on your list, don’t buy it.  Lists have proven to be one of the best tools to keep your spending in check.  With large ticket items, make a list of what you will buy this year.  Then, wait for deep discount sales.  Avoid add-ons which retailers try to tack on to the sale.
  3. Pay Yourself First.  The single best way to save is by making your monthly savings the first bill you pay every month.  It is not fancy, but it works.  Decide what you are going to save each month, then make that your top priority.  Next, pay your fixed expenses… mortgage/rent, utilities, and food.  Then, you can spend anything you have left or increase your savings.  Start small, and build.  Your goal should be saving 10% to 15% of your salary.  Begin at a level that makes sense, and schedule increases systematically in the future, i.e., every six months.
  4. Use Two Different Types of Savings.  First, set up a “put and take” account.  This is an account where you put money in knowing that you will take it out in the near future.  Every year, expenses come up that are outside of your monthly budget.  Maybe the washer breaks down, or the car needs a new transmission.  These things happen.  So, part of your monthly savings should be set aside for unforeseen expenses.  The second type of savings should be in a “put and keep” account.  This account is not to be touched.  It is to be left alone to grow for your long-term future. 
  5. Set Up an Emergency Account.  You should have at least 6 months of income in a liquid investment for possible emergencies.  The purpose of this fund is to provide for you in the event of disability, job loss, or serious illness.  Bank accounts and money market funds are good choices.
  6. Pay Down Those Credit Cards.  While this may not technically be savings, each dollar of debt you pay off will save you between 18% – 22% interest.  Americans have become credit card addicts.  We typically own more than 10 cards and carry over $8,000 in debt.  This debt adds up to billions of dollars of interest that we are wasting each year.  Many people only pay the minimum balance.  At that rate, they will be paying off their cards for years and years to come.  Set yourself free.  Pay off those cards!  Start by not using them anymore.  Then, pay two, three or four times the minimum payment.  The higher the payments, the quicker you will be out of debt and the more interest you will save.
  7. Use Tax Advantage Savings.  (401ks, 403bs, Company Pension Plans)  If your company offers a defined contribution plan (401k), enroll in it.  If you are already in your company’s plan, look into increasing your contributions.  For 2009, you can contribute up to $16,500 ($22,000 if over age 50).  If your company has a matching program, all the better.  But if it does not, continue anyway.  Every dollar you contribute will lower your taxable wage and, therefore, your tax bill.  Meanwhile, the earnings in the 401k are tax deferred.  Your goal should be to increase your contributions on a scheduled basis until you hit the maximum.  Your retired self will be glad you did.
  8. Look into a Roth IRA.  If you qualify, a Roth IRA offers unique features.  Currently, the annual contribution limit is $5,000 per year ($6,000 if over 50).  Contributions are not deductible, but earnings grow tax free.  After five years, or age 59½ (whichever is later), you can begin tax-free withdrawals for life.  The Roth IRA does not require you to begin withdrawals at age 70 ½ like traditional IRAs.  So, if you so choose, you can keep your money in the Roth, earning tax-free returns for your entire life, leaving a larger legacy to your heirs.
  9. Check Your Insurance Coverage.  We all need insurance.  Whether it is to protect our home, car or other personal possessions.  We also need to protect our families against the financial loss from the death of a breadwinner or the catastrophic cost of long-term care.  While we all need it, we should not be paying more than necessary.  Check all of your insurance coverages.  Is it enough?  Is it too much?  Are the costs reasonable compared to the competition?  Do an insurance review once a year.  It could make a huge difference down the road. 


Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

July 14, 2009

Mid-Year Personal Review

image004-300x176July is the perfect time for a mid-year review of your personal finances and tax outlook.  By spending some time now, you can save money later.  Let’s take a look at some of the issues you can review.


  • Evaluate Savings:  One of the best ways to save is through the various tax advantage savings plans.  The most common is the 401k program.  Every dollar, up to $16,500 ($22,000 for those over age 50) deposited into a 401k reduces your taxable income, and therefore, your tax bill.  If you are not currently participating… START!  If you are already participating, make it your goal to increase your contributions over time until you hit the maximum. 
  • Evaluate Your Portfolios:  How are your assets allocated?  Should you consider moving part or all?  Now that the dust has settled, it is a great time to review your options.  A word of caution… make sure you get a full disclosure of all risks and fees before investing.  Review your investment portfolio with your financial advisor before making any decisions.
  • Tax Savings Strategies:  Many activities, such as home improvements, may provide tax benefits.  The Energy Tax Act offers tax incentives for energy efficient products installed in your home.  The benefit allows taxpayers’ credits up to 30% of the cost of the improvements.  There is a maximum credit of $1,500 for 2009.  Consult your tax advisor for more information.
  • Review Your Withholdings:  Many Americans end up owing taxes because they did not have enough withheld during the year.  This year will likely be worse than normal.  The Make Work Pay Bill provision of the stimulus package automatically lowered withholdings for most taxpayers.  The problem is many of those same taxpayers will not be entitled to the $400 (single) or $800 (for couples filing jointly) tax break.  If you are one of these individuals, you could find yourself $800 short in your withholdings.  Check with your tax advisor for help.
  • Buying a Home:  If you are a first-time homebuyer, or if you have not owned a home in the last three years, you can claim a refundable credit of 10% of the purchase price, up to $8,000.  This credit applies to homes purchased after December 31, 2008 through December 1, 2009.
  • Buying a New Car:  New for 2009, you can claim sales taxes paid on the purchase of a new car.  There are also additional credits, up to $7,500 for the purchasing of a hybrid or “plug-in” car.  Congress has just passed this so-called, “cash for clunker” bill.  Under this legislation, you can turn in a gas guzzling car and receive between $3,500 – $4,500 in tax credits toward the purchase of a high-mileage vehicle.  There are a number of requirements that will make it difficult for most Americans to qualify, but if you do, it is a great opportunity.
  • Commit to Getting Organized:  Start filing important statements and receipts.  Safely store all tax-related documents, financial statements and insurance contracts.  If possible, keep an electronic copy of all important documents.


Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

July 6, 2009

Americans Are Saving More

image004-300x176The American savings rate continues to climb.  For the last two decades, the savings rate hovered around zero percent.  Now, it has leaped to over 6%.  The recession and the credit freeze seem to be the turning point.  But, is this change in the savings rate temporary?  That is the big question.  Economists are concerned that without a spike in consumer spending, the economic recovery will be less robust.

While the overall economy might suffer a bit from a more restrained consumer, your personal economic recovery will benefit from your increased savings.  Fifty years ago, the American savings rate was 12%.  During the recent economic boom times, more and more people stopped saving and increased their consumer debt.  Credit cards became ubiquitous.  People refinanced their mortgages, taking equity out of their homes, spending it on consumer products.  Businesses too, got caught up in the credit frenzy, over leveraging their books.  Now, both individuals and businesses are cutting back.

Americans are going back to basics.  They are paying off debt and increasing their savings.  Ben Franklin was quoted as saying, “that a penny saved is a penny earned”.  That is good, old fashion common sense.  We need to save for rainy days.  But, Franklin did not live in times with income and social security taxes.  In today’s environment, a dollar saved is more like a $1.30 earned.  After all, you must first earn $1.30 to net $1.00 after taxes.

Paying off debt is the best action anyone can make.  For every dollar of credit card debt you reduce, you save 18% – 20% in interest.  It is virtually a guaranteed return on your dollar.  Today, Americans are paying down debt at an increasing clip.

These changes in attitude do not seem temporary.  A structural change is occurring in our society.  Americans are remembering what is really important… family and friends… not possessions.  Flamboyant excess is out.  The virtue of “all things in moderation” has taken its place.

Does this structural change spell trouble for the economy?  If Americans continue to spend less and save more, that will likely slow the economic recovery.  But, capitalism needs capital as fuel for long-term growth. Over the last twenty years, American business relied on foreign investments as its capital source.  An increased savings rate will mean more “home-grown” capital sources for American business, which, in the long term, will be a positive for economic growth.

In summary, Americans increased saving rate might slow the economic recovery in the short term, but it produces positive benefits for the economy as a whole.  But, for your personal economic recovery, increasing your savings and paying off debt will reap nice rewards.  Financial advisors generally agree that a 10% savings rate is the benchmark.  This rate should increase as you approach retirement.  The key to saving is to pay yourself first.  Put your monthly savings ahead of all your bills, and then you can spend whatever is left.

Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

June 29, 2009