Ten Commandments of Saving Money

Ten Commandments of Saving Money

“Do not save what is left after spending, but spend what is left after saving.”

Warren Buffett

Warren Buffett’s quotes are timeless, reflecting his wisdom. His words on saving and investments are inspiring. Saving money is the cornerstone of a sound financial plan. Through discipline and hard work, we can save money to reward ourselves with financial flexibility. By making saving a priority and making your money work for you, you are more likely to achieve financial success.

Key Reasons To Save Money

  • Help to achieve our financial goals.
  • Pay our bills on time and entirely, so we don’t need to carry costly debt.
  • Provide an emergency cushion for unpredictable costs.
  • Set aside funds for our children’s college tuition and our retirement.
  • Make investments, the best way to build wealth.

I like to revisit ancient views of saving money from timeworn texts and stories. There is a common thread across varying beliefs on saving, avoid overspending, and investing for a better financial future. Surveying these words adds a different perspective on finances. In the companion Ten Commandments of Personal Finance, we look at home ownership, investing,  retirement, and debt management.

Ten Commandments of Saving Money:

 

1. Spend Within Your Means

Saving money is an essential financial habit. According to a CareerBuilder report, 78% of American workers are living paycheck-to-paycheck.  Even those with higher incomes of at least $100,000 (nearly 10%)  are having trouble making ends meet.

I grew up in a modest household that saved diligently. As a young girl, I didn’t always understand why we were having financial problems. My mom reminded us often that our needs exceeded our wants, and we had to be careful about spending. Later on, I learned that my parents set up a small retail business that took a long time to get off the ground. Savings became part of our mindset from then on.

Control thy expenditures.”

To set aside money for saving and investing, you may need to cut some costs. To control your expenses, assess what your necessary living needs are. These are predictable monthly fixed costs such as mortgage payments or rent, property taxes, utilities, car loans, typical grocery bills, credit card payments, and any expenses you pay monthly. Remember, these costs are for our needs rather than for our wants and desires.

Be reasonable about satisfying your every want. A rise in earnings may not fully accommodate every gratification we seek. For example, that 10% raise on your $80,000 salary may not significantly help you to buy that luxury car (or chariot in ancient times), you have been eyeing.

 

2. Build A Healthy Emergency Fund

As a result of the coronavirus pandemic, record jobless claims caused a dramatic slowdown of the economy. Although federal stimulus packages have added to state unemployment benefits, there is no guarantee this government aid will be ongoing. 

 Economic downturns are cyclical events you can’t time. They cause substantial financial stresses. Recessions remind us of the need for savings on hand. Having an emergency fund is necessary to pay for basic living expenses for at least six months, if not a year. Having readily accessible funds in liquid funds such as money market securities helps you avoid borrowing money.

Joseph’s Emergency Funds

Emergency funds as a prudent strategy appear in Genesis 41:34-36. In this passage, Joseph interprets Pharaoh’s dream about seven fat cows grazing by a river swallowed up by seven skinny cows. Joseph views the seven fat cows as seven prosperous years for Egypt, followed by seven years of famine. As a result of planning for this disaster, Joseph advises Pharaoh to store grain during the good years to use for more challenging years. Save when you have more for those times you have less due to job loss, illness, or crisis.

Adopting a habit of saving more provides you with more flexibility to allocate into investment and retirement savings. Begin by setting aside small amounts of savings of $1,000 but don’t stop there. Tough times prove that amount is inadequate. Don’t think of these savings as wasteful assets. Instead, it is a means to avoid higher debt levels. As Proverbs 13:11 tells us, “Dishonest money dwindles away, but whoever gathers money little by little makes it grow.”

Having Liquidity is Key

Liquidity refers to your ability to quickly convert assets into cash with little to no loss of principal. When your resources are liquid, you have the financial ability to pay for unexpected costs such as a loss of job, death in the family, or your roof is leaking. Monitor your liquidity levels periodically. 

Monetary assets are among the most liquid of holdings. These assets include cash, cash-equivalent securities or money markets, treasury bills, savings bonds, savings, and checking accounts. True, you won’t earn much income as interest rates are still low, but you avoid having to use your credit cards with borrowing rates in the mid-teens.  Use liquid assets to support your fixed monthly expenses for six months or more. Here are two benchmarks to use:

Liquidity Ratio= Monetary Assets/ Monthly Expenses

Your monetary assets should support your fixed monthly expenses such as groceries, rent or mortgage, utilities, and a car loan for six months. A ratio of 6 means having six months of monetary assets to pay for your basic needs of food, rent, utilities, and car loan, if necessary.

 Emergency Fund Ratio

The liquidity ratio is linked very closely to emergency funds. This ratio is essentially a cash fund for emergencies in unforeseen events such as job loss, death in the family, unexpected surgery, or immediate house repair. It works by using a targeted number of months that you believe is ample to support you through emergencies. If you are looking for six months or higher (and this is highly recommended) to set aside money in a high yield savings account or money markets account, then:

Emergency Funds Ratio= 6*Monthly Expenses

This ratio will give you a targeted amount of monetary assets needed to be comfortable for a possible emergency. If your household generates less predictable income, you need to set aside more than six months for a more significant cushion. You can use personal finance ratios as benchmarks to see how you are doing.

3. Pay Yourself First

Start thy purse by fattening

George S. Clason, who wrote The Richest Man in Babylon, is believed to have coined the term “pay yourself first.”  That means you should put away at least 10% of every paycheck into savings. Start to save small amounts working your way up to 20% of income to allocate into retirement savings investment accounts. You can distribute the initial savings to an emergency fund amounting to at least six months’ coverage for essential living costs. Unforeseen events are unpredictable and undesirable but do your planning.

Once establishing this fund, use some savings stashes to invest for retirement and taxable investment accounts. Putting away some money may be difficult at first, depending on your spending habits.

Savings should be one of the most essential parts of your household’s financial goals. Adopt a “Pay Yourself First” attitude. Your monthly budget should call for savings to be at least 10% of gross income.

Savings Ratio = Savings/Gross Income

Savings refer to money in the bank, liquid funds, deposits, money markets, and other liquid funds, such as your emergency fund. Gross income is your total source of income on your budget and includes what you earn, side businesses, bonuses, dividends, and interest income.

Your savings rate should be at least 10% of gross income. It may be challenging to do when you first start to work. As your salary or what you make rises, it should get easier to put money away for savings. A healthy savings ratio of 20% would be a bonus (pardon the pun).

4. Track Your Spending By Budgeting

Spending more than your means is a bad recipe that leads to borrowing more. It is far more profitable to save money and allocate to investments that yield 5% returns or more than having to borrow at mid-teen rates with credit cards to pay for your overspending habits. “Whoever works his land will have plenty of bread, but he who follows worthless pursuits will have plenty of poverty.” (Proverbs 28:19).

Track your spending carefully by budgeting according to your priorities. Bava Metzia 42a instructs us, “A person should always divide his money into three: one-third in the ground (for the future), one-third (invested) in business, and one-third in possession.” That may be an ancient way of splitting your funds. There are several ways to budget, such as tracking your expenses, creating a monthly budget, or using the 50/30/20 rule. The 50/30/20 budget uses 50% of aftertax or net income for your needs, 30% of net income for your wants, leaving 20% for saving money and paying off debt.

Budget In Any Reasonable Manner

Budget in any reasonable way that allows you to control your spending. It is easier now than ever to track your spending using various (free or fee) apps such as Mint, Personal Capital, PocketGuard, and YNAB for zero-based budgeting.  Alternatively, scrutinize your credit card bills and build your own excel spreadsheet.

Our spending changed dramatically during the pandemic. Our bills for grocery and household goods were higher than usual. On the other hand, we saved more from cutting out retail shopping, dining except for occasional outdoor places, hair salon appointments, gas, tolls as we stayed closer to home. While I appreciated the extra cash, I like the return to normal, even as Covid cases are rising.

5. Avoid Lifestyle Inflation

As our income grows, we often increase “essential costs,” leading to lifestyle inflation. While we are allowed the occasional latte and extravagant dinners, we need to keep our spending in check. You shouldn’t deprive yourself of everything. However, fulfilling every desire is no longer a special treat.

“Keeping up with the Jones”  and conspicuous consumption often refers to material goods we may accumulate to fit within a particular social class we admire.  We compare ourselves to our neighbors or colleagues at work.  As a result, people fall into the trap of spending on a better car or house simply to enhance their prestige and social standing. Targeting social status may be costly and divert resources better used for investing your money for more incredible long-term wealth.

It is pretty common for people to spend their raise and bonus as soon as they receive it. Temptation runs high to buy something special upon getting a raise and bonus after a year of working hard. I often bought something special to reward myself for hard work. However, you soon realize your pay hike is pretax and shrinks on an after-tax basis. If you need some things, make a list of what you believe is essential if you had some extra cash.

Overspending And Materialism

Overspending leads to materialism and lifestyle inflation that is hard to maintain. Mishlei Proverbs 13:7 tells us, “There is one who feigns riches but has nothing; one who feigns poverty but has great wealth.”  According to Psalms 128:2 “You shall eat the fruit of your effort–you shall be happy and it shall be well with you.” This text reminds me of another favorite book, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko.

Stanley and Danko profiled and compared millionaires in two categories: those under accumulators of wealth (UAW) and the prodigious accumulator of wealth (PAW). The UAW’s were individuals who had a low net wealth compared to their high income because of spending to maintain their status. On the other hand, PAWs managed their wealth better, often living in blue-collar neighborhoods and buying used cars. It is an eye-opening account of the good and bad money habits of the wealthy.

 6. Bargain hunting or Shopping Addiction?

Shopping is often a fun activity to do with friends or on our own. Marketing experts count on our emotions when we shop. Be aware of the biases we wear when shopping. Retail expert Mark Elwood has written about the psychological benefits of seeing bargains. He points out that stores like Best Buy use Goldilocks pricing or three-tiered pricing from low to high prices. The store hopes you will buy the middle option with higher pricing than the low-end but not necessarily feature-worthy enough to pay more.

We should not pay the list price for anything but make sure it is a real bargain. There has been a lot of worthwhile academic research about bargain hunting being a form of shopping addiction. 

There is the thrill of getting a deal,  even when we may not want that item.

Impulse Shopping vs. Compulsive Shopping

Overspending can cause financial difficulties if you are subject to impulse or compulsive shopping. There is a difference between the two though often seen interchangeably. Impulse buying happens more frequently when a consumer has a sudden urge to buy on the spot without much deliberation. We all do this from time to time. Compulsive buying, on the other hand, happens where one experiences an uncontrollable urge to buy. We may trigger negative feelings relieved by that purchase. This kind of shopping may be more like a shopping addiction that potentially needs therapy before financial hardship occurs.

7. Compounding Growth

Start saving for retirement in your 20s through your employer’s sponsored 401K plans. Deposits in small amounts in retirement accounts regularly benefit from tax advantages and compound growth over a long horizon. Automate these savings out of your paychecks. As such, your contributions are tax-deferred. Employers often match a portion of your contributions. Match contributions are extra money you can earn from your company. Separately, establish an IRA (Roth IRA) for further retirement savings. Target your contributions to amounts capped by the IRS for maximum growth for retirement. Avoid withdrawing from these accounts as you may then trigger penalties and taxes you will need to pay.

As a goal, try to contribute to your 401K plan to the maximum level, which is $19,500 in 2021.  Some years it may be hard to do, especially when you are experiencing a job loss. Resist withdrawing money from your retirement account as there is usually a 10% penalty and taxes to do so before you turn 59.5 years. Withdrawing retirement money will put a dent into your retirement fund that will be painful longer term.

One of my favorite quotes in The Richest Man is this: “It behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he no longer be with them to comfort and support them.”

Compounding Works Best When Investing Early

The power of compounding interest, linked to the time value of money, will benefit you the most if you save and invest early. Let your earnings accumulate and grow rather than withdraw cash from your accounts. It makes a big difference if you start saving for your retirement ten years later than your friends or if you invest for ten years and then stop contributing to your 401K retirement account. It is difficult to catch up by doubling the amount if you start investing later on.

As soon as your child is born, start saving for college through a 529 plan. These plans vary but are available in virtually every state. Like retirement accounts, they have deferred tax benefits and may have contribution limits. Check with your respective state program for details.

 8. Make Savings A Priority

Saving money is hard work and not necessarily natural for many of us. To make it a good habit, take steps to automate your savings. Most banks will allow you to automatically transfer a set amount of money from one account to another account. Your employer will be able to automatically deduct a percentage or a set amount of your paycheck to deposit into accounts such as retirement or investment accounts. Essentially, you are adopting a “pay yourself first” attitude so that you can allocate money into different buckets, especially for unforeseen expenses.

In recent years, there have many headlines about insufficient savings by Americans for years. As the outbreak of the virus caused lockdowns, most of the country stayed home. The personal savings rate rose dramatically to an unusual 32.2% in April 2020 as consumer spending dropped significantly. Over time, it will likely come down to the more normal 7%-8% range. Spending versus saving is a common trade-off with lots of tension. Motivate yourself to save by setting short-term and long-term goals proactively. Reduce spending you can’t afford. Money trade-offs require you to consider the best balance for you and your family.

Saving As A Good Habit. How Long Does It Take?

I had always heard that it took 21 days to break a bad habit. As a member of Weight Watchers, which is ALL about breaking bad eating habits (and it works for me as I am down 30 pounds and declining!), they always refer to the 21 days. However, I did not know of the 21-day origin.

Dr. Maxwell Maltz, a 1950s plastic surgeon, found that it would take his patients about 21 days to get used to seeing their new face, or post-amputation, they would still sense a phantom limb. The 21-day time frame dates back to nearly 70 years. Dr. Maltz wrote about his adjustment period to changes and new behaviors to form a new habit….”.it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell.”

More research indicates that it takes a longer time to form a new habit than 21 days. A 2009 study published in the European Journal of Social Psychology by Phillipa Lally, a health psychology researcher at University College London, indicated it took 66 days on average (in a range of 18 days to 254 days) to form a new habit.

Whether 21 days or 66 days, it takes significant time, effort, and determination to create a new habit

What About A Savings Challenges?

I have been skeptical about savings challenges. Like diets, they work for many and can be fun, especially if you do so with others. The question is whether the challenge can result in having long-term effects. I think any challenge that can motivate someone towards a good habit with lasting results has my endorsement. There are so many good savings challenges to consider. I tend to favor the 52-week challenge, which may help you build some money along with good habits. On the other hand, the no-spend month reminds me of a fasting diet and seems too difficult to attempt for most people with families or busy lives.

I often have turned to using cash only and leaving my credit cards behind. Paying for meals at restaurants or window shopping without cards has rewarded me by limiting my consumption to cash. I am not a big shopper or enjoy going into stores unless I am going purposefully for a specific outfit or electronics. My daughter, Alex, is often upset with me, encouraging me to buy something for myself. She wonders why I don’t love shopping as much as she does. Now that she is working two jobs that she loves this summer, she has become quite a hoarder herself and has asked me about my stock picks. (Okay, I am proud of her!).

9. Don’t Obsess About Money

Maintain balance in your life, and don’t just focus on wealth accumulation. According to Proverbs 21:20, “Precious treasure and oil are in a wise man’s dwellings, but a foolish man devours it.”  While no one seeks to become poor, there are dangers of solely wanting to be rich. “Keep your lives free from the love of money and be content with what you have.” Hebrews 13:5

Martin Luther King Jr. worried about the obsession with money in his famous speech called False God of Money. He said, “We attribute to the almighty dollar an omnipotence equal to that of the eternal God of the universe. We are always on the verge of rewriting the Scriptures to read, ‘Seek ye first money and its power and all these things will be added unto you,’ or ‘Money is my light and salvation, what shall I fear.”

King himself lived frugally, leaving little money for his family. However, he saw other goals like working hard, investing in education and having faith as far more critical.

Price Versus Quality

Being financially secure is important. The alternative is stressful. However, don’t be frugal for frugality’s sake. Consider price versus quality in your buying considerations. The cheapest thing may not be of the best value. Indeed, there are some items where quality doesn’t differ, and I  will pay the best price. I like buying private label products such as Kirkland sold in Costco, discounted from the branded items.

However, quality matters more when buying furniture, mattresses, a car, or a home. We have been burned by looking to get a bargain and not balancing quality. Buying solely on a price basis is foolish for these products or services that I intend to use for a while. That doesn’t mean I am averse to getting a bargain by negotiating.

10. Be Charitable

According to Jewish law, one cannot impoverish oneself by distributing all of one’s wealth to charity. However, one can leave one-third of his estate to charity in their will. A minimum of one-tenth of one’s income belongs to God per measure handed down from the Patriarchs as Jacob himself said to God, “Of all that You give, I will set aside a tenth to You” (Genesis 28:22). Giving 10% of your net income a year is a virtual goal—those who can.

According to HW Charles in The Money Code: Become A Millionaire With The Ancient Code, “Those who love people acquire wealth so they can give generously, after all, money feeds, shelters and clothes people.”

We should strive to be as generous as possible to those in need.

Final Thoughts

I found inspiration from timeless scriptures when writing this article.  Sometimes ancient words remind us that money management was always a challenge to overcome.  Choose success by your actions in saving money. 

Thank you for reading our post. Please let us know your thoughts. We love feedback. If you found some things of value, please visit The Cents of Money for other articles on our blog. Consider subscribing so you can get freebies.

 

Best 43 Quotes On This Independence Day

Best 43 Quotes On This Independence Day

Originally published on July 2, 2019, updated on June 30, 2021.

The Fourth of July is approaching, with images of fireworks, hot dogs, hamburgers, and apple pie. It is a favorite time in our household, sans the apple pie as my husband is allergic to apples. Last year was very different. Fireworks were silent due to social distancing associated with the coronavirus pandemic. Thanks to vaccinations, we are free to celebtate once again Typical events like baseball, concerts, and family reunions are back this year.

Our Fault Lines Are Very Visible And Needs Fixing

This time of year is a particularly good time to be proud of being an American despite our country’s faults. When you are raised by immigrants who loved their chosen country, freedom, security, and independence were always privileges. My mom valued being a citizen in America in her adopted country and fiercely taught me about financial freedom and independence, especially for women. 

However, fault lines have widened as realizations have sunk in that racial inequalities have not narrowed as hoped. in fact, they are reemerging and threatening our union. Peaceful protests are giving voice to needed change.

To help celebrate Independence Day this year, and every year (why not every day?) I am sharing some of my favorite quotes. You may notice that many of these quotes are apt for financial freedom and financial independence. So I took the liberty of sharing those as well. I have added new quotes to represent those who need to be heard.

Freedom and independence mean different things to different people. Today, and forever, our country needs to fix our faults. If we are to have another 244 years, we need to wipe out all our inequalities. Then we can say we are truly free as one.

America, The Beautiful

“It will be celebrated with pomp and parade, bonfires and illuminations from one end of the continent to the other.” –John Adams, Second US President

“Liberty, when it begins to take root, is a plant of rapid growth.” –George Washington

“How important it is for us to recognize and celebrate our heroes and she-roes.”  -Maya Angelou, poet and activist

Liberty

“Where liberty dwells, there is my country.” – Benjamin Franklin

“May the sun in his course visit no land more free, more happy, more lovely, than this our own country!” – Daniel Webster

“There can be no true home without liberty.” – Harriet Beecher Stowe

Power

“America means opportunity, freedom, power.” – Ralph Waldo Emerson

“It does not take a majority to prevail, but rather an irate, tireless minority.” – Samuel Adams

“America…it is the only place where miracles not only happen, but where they happen only the time.” –Thomas Wolfe, Of Time and the River, 1935 

“The essence of America-that what really unites us–is not ethnicity, or nationality, or religion. It is an idea–and what an idea it is: that you can come from humble circumstances and do great things. That it doesn’t matter where you came from, but where you are going.” – Condoleezza Rice, Republican National Convention, 2012

Let Freedom Ring!

“Those who expect to reap the blessings of freedom must undergo the fatigue of supporting it.” – Thomas Paine

“In the truest sense, freedom cannot be bestowed; it must be achieved.” Franklin Delano Roosevelt

“For what avail the plough or sail or land or life if freedom fail?” – Ralph Waldo Emerson

“All we have of freedom, all we use or know, This our fathers brought for us long long ago”. – Rudyard Kipling

“Freedom lies in being bold.” – Robert Frost

“Freedom (n.): To ask nothing. To expect nothing. To depend on nothing.” – Ayn Rand

“We must be free not because we claim freedom, but because we practice it.” – William Faulkner

Education

“Education is the door to freedom.” – Oprah

“Lock up your libraries, if you like; but there is no gate, no lock, no bolt that you can set upon the freedom of my mind.” – Virginia Woolf, A Room of One’s Own

“Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.” – Martin Luther King, Jr.

“Freeing yourself was one thing, claiming ownership of that freed self was another”. – Toni Morrison

“Freedom is not worth having if it does not include the freedom to make mistakes.” – Mathatma Gandhi

“Freedom’s just another word for nothing left to lose.” Janis Joplin, Me and Bobbie McGee

“For to be free is not merely to cast off one’s chains, but to live in a way that respects and enhances the freedom of others.” Nelson Mandela

“He who has overcome his fear will truly be free.” Aristotle

Our Basic Rights

“Liberties aren’t given, they are taken.” – Aldous Huxley

“It is by the goodness of God that in our country we have three unspeakable precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.” – Mark Twain

“If I follow the inclination of my nature, it is this: beggar-woman and single, far rather than queen and married.” – Elizabeth I, Collected Works 

Women

“I do not wish them [women] to have power over men; but over themselves.” – Mary Wollstonecraft

“My own sex, I hope will excuse me, if I treat them like rational creatures, instead of flattering their fascinating graces, and viewing them as if they were in a state of perpetual childhood, unable to stand alone.” – Mary Wollstonecraft, A Vindication of the Rights of Women

“I’ll walk where my own nature would be leading, it vexes me to choose another guide.” – Charlotte Bronte, Jane Eyre

“People have only as much liberty as they have intelligence to want and the courage to take.” – Emma Goldman

“I think the girl who is able to earn her own living and pay her own way should be as happy as anybody on earth. The sense of independence and security is very sweet.” Susan B. Anthony 

Financial Freedom and  Independence

“The highest pleasure to be got of freedom and having nothing to do, is labor.” – Mark Twain

“Everything that is really great and inspiring is created by the individual who can labor in freedom.” – Albert Einstein

“For it is in your power to retire into yourself whenever you choose.”  – Marcus Aurelius, Meditations

Erasing Inequalities For Once And For All

“To bring about change, you must not be afraid to take the first step. We will fail when we fail to try.” Rosa Parks

“Prejudice is a burden that confuses the past, threatens the future, and renders the present inaccessible.” Maya Angelou

“Without a struggle, there can be no progress.” Frederick Douglass

“There is no such thing as race. None. There is a human race–scientifically, anthropological.” – Toni Morrison

“Not everything that is faced can be changed, but nothing can be changed until it is faced.” – James Baldwin

“To suppress free speech is a double wrong. It violated the rights of the hearer as well as those of the speaker.” – Frederick Douglass

“I see what’s possible when we recognize that we are one American family, all deserving of equal treatment.” – Barack Obama

Gratitude

“Let not your mind run on what you lack as much as on what you have already.” – Marcus Aurelius

“All good things are wild and free.” – Henry David Thoreau

“Men spend the best of part of their lives earning money in order to enjoy a questionable liberty during the least valuable part of it.” Henry David Thoreau

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett

Related Post: Gratitude Can Lead To Better Finances

 

America’s Greatness

“It’s never paid to be against America. We come through things, but it is not always a smooth ride. Warren Buffett

“From a standing start 240 years ago–a span of time less than triple my days on earth– Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants and the rule of law to deliver abundance beyond any dreams of our forefathers.” Warren Buffett, 2016 Shareholder Letter to Berkshire Hathaway Shareholders

I have as big an obsession as Warren Buffett appears to have when it comes to prosperity and his gratitude to our country.

Thank you for reading! Do you have any favorite quotes on Independence Day? Please share them with us! Enjoy your holiday! Stay healthy!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Your Guide To Basic Estate Planning In 6 Steps

Your Guide To Basic Estate Planning In 6 Steps

“Death is not the end. There remains the litigation over the estate.”

Ambrose Bierce

Have You Created An Estate Plan?

Most of us want to avoid litigation, especially over an estate. Having a plan helps you do that. The best time to think about your plan is when you don’t have a compelling reason to do. Keep your family’s best interests at heart with a well-developed estate plan. Estate planning will give you control over your asset distribution during your lifetime to your loved ones.

A significant portion of your assets can be easily transferred to your intended heirs, avoiding often painful and lengthy probate court procedures. It is a good idea to sit down with an estate planning attorney or a tax attorney who is familiar with asset protection and tax planning. You may have questions about federal estate taxes. You can consult the American Bar Association for estate planning articles or find an estate planning attorney.

What Is Part Of Your Estate Plan?

To design your estate plan in 6 steps, we address the following:

  • Organize your assets into the non-probate property.
  • Know who your designated beneficiaries.
  • Determine if you have joint ownership with rights of survivorship.
  • Set up your will for probate property.
  • Have a letter of instructions to loved ones.
  • Consider a trust if appropriate.
  • Donate assets to your charity.
  • Health care proxy or advance directives documents are essential.
  • Testamentary Letters.

 

Having a plan is essential for your family and is in their best interests. Yet, only 40% of US adults have created a will or a living trust. Even younger people, especially if they have young children, can benefit from putting together an estate plan.

6 Reasons Why You Need An Estate Plan

#1 Assure financial support for your surviving spouse, children and grandchildren, and even later generations. The passing of a loved one is stressful and often traumatic. Adding financial stability is helpful.

#2 Write out your wishes while you are of sound mind. We never know when our mental capacity diminishes through tragedy, or of aging.

#3 Avoid litigation for your family in the future. Make your intentions for distribution known, so your loved ones don’t have to fight out in probate court. That path takes time and is costly.

#4 Arrange your estate plan with capable professionals to steer away from the potential publicity that can sometimes accompany the passing of a loved one.

The Great Aretha Franklin died in 2018 without a trust or will, forcing her sons to file documents in a probate court in Michigan. Prince’s estate was not covered by a plan when he died in 2016, and the distribution of his assets will likely take more time and more public scrutiny. Just recently I read there are questions arising about Nina Simone’s estate, and she passed away in 2003.

#5 Minimize estate taxes and costs when it is time for asset transfers.

#6 Support a favorite charity, address pet care and consider digital assets.

How To Start Your Basic Estate Planning

Start discussions with your estate planning attorney, tax accountant, and financial advisor. Through frank discussions, your goal is to put together the most beneficial plan for your situation at the most effective cost. Make sure that you consider your digital assets in your will, which we fully address in this post.

You built your wealth. Now you want to distribute your assets according to your wishes properly.

Carry out estate planning for your family, make sure your assets go where you intend them to go and that the person you expect to be the executor of your will, will be the one responsible for administering your estate will be that person. Pick your potential executor.

A Simple Estate Planning Guide In 6 Steps:

 

Step 1

Set up most of your assets as non-probate property. These assets outside the will and, for many of us, are the bulk of our estate. 

This property will automatically transfer to your designated beneficiaries upon your death rather than through your will. One of the most important assets you will need to address is your home (e.g., house, condominium, cooperative, vacation home) unless you rent only.

Your non-probate property is an asset that will transfer to survivors by contract based on your designated beneficiary. Name beneficiaries for all of the assets that you can.

Your Non-Probate Assets Will Include:

  • retirement accounts, including 401(k) plans,
  • IRAs, pension plans,
  • payable-on-death clauses in bank accounts, investment portfolio(s),
  • life insurance policies or
  • by owning accounts with another person, usually a family member,  through rights of survivorship.

These assets are generally transferred directly to those beneficiaries that you designated. At the time you opened these accounts, you likely wrote out your beneficiaries on a legal form.

Review Beneficiary Designations Periodically

You may want to change your beneficiaries as you go through life.  For example, if you designated your mom when you first set up your accounts, it is probably a good idea to refresh your beneficiaries. Often, after life changes such as a divorce, remarriage, or the passing of a loved one, we want to update our beneficiaries. Sometimes we can provide for a contingent or secondary beneficiary. To understand the importance of designated beneficiaries, please read here.

Joint ownership with rights of survivorship

Husbands and wives (or parents and children) may have joint ownership of assets called joint tenancy with the right of survivorship.

Make transfers by property ownership designation. These assets can include bank accounts, investment accounts, cars, and home(s). Upon the death of one owner, the surviving owner(s) will receive this property by operation of law rather than through the will.

These assets will be a majority of our assets, and their transfer is simple.

In most cases, your intended recipient need only present an official death certificate, and the bank, for example, will transfer funds or property to his or her name in the ordinary course of business. These assets do not pass through the will or the probate process.

Step 2

 

Set up your will for probate property

A Will, or often known as “Last Will and Testament” is a formal written document that directs how assets not addressed in Step 1.  Upon the death of an individual, the distribution of these assets occurs. 

The individual making the will is called the testator. He or she decides who gets their remaining assets after their death.

Appoint a personal representative, commonly called an executor, and give the executor the powers necessary to fulfill your wishes. Without a will, your state’s intestacy laws will dictate how your assets are to be distributed.

Don’t have co-executors

Sometimes people opt for co-executors, such as a  spouse and an adult child they believe can work in unison. Relatives and friends are not great choices to perform the executor’s duties.

Choose one trustworthy executor. While co-executors may sound harmless, acting in unison, in reality, can be more difficult. Executors may be called on to pay off debts, liquidate assets, file tax returns and estate tax returns. They may need to get the court’s permission to distribute the balance of the remaining assets, including money.

Spouses have legal rights to each other’s estates

State laws presume that married couples share their fortunes equally.

Sharing your property with your spouse is a right. This property sharing is called “the partnership theory of marriage rights.” Property acquired during the marriage and titled in one partner’s name (except for property acquired via gift or inheritance) becomes property of both spouses typically. Any spousal rights to claim an inheritance from the other spouse under the law are void upon divorce.

The estate assumes any debts of one spouse, not personal liabilities of executor or the beneficiaries.

There are nine community property states where all the money, assets, and debts acquired during the marriage are legally part of the joint property of both spouses. The rights of husbands and wives are equally protected.

 

What A Will Does:

  • Decide what property, including personal property that has sentimental value.
  • Determine who will inherit the assets.
  • Designate a trustee and guardian to manage assets if there are children under 18 who may be beneficiaries under your will.  The trustee and guardian can be the same.
  • Handle digital assets that may need you to designate access to family members to see your social media accounts. Digital assets are a broad category and include new types of assets like cryptocurrencies and non-fungible-transfers (NFTs).

For your will to be effective and valid, the will must be signed according to your state’s law.

Generally, a will must be in writing, signed before a minimum of two witnesses who can attest to your mental capacity and soundness at the time of signing the will.

You want a valid will 

You should challenge-proof your will with your attorney’s guidance. The will becomes effective upon the death of the testator. Up until that time, you can change a will as often as you want. The original (not copied) version of the last will should be kept intact and often stored in a safe deposit box or safe place.

Step 3

 

Leave your letter of instructions.

Write a letter of last directions, separate from your will, that may provide your preferences regarding funeral and burial arrangements, who speak at your funeral, contact information for family, friends, colleagues, and such.

There may be items that weren’t part of your will but are essential to you to let your surviving family members know of their existence. If any instructions conflict with the direction provided by the will, typically, the will overrides the information in this letter.

Leaving Guidance For  Family Is Helpful

Organize financial information, people to contact, essential papers (this could be in the form of a memoir, for example), and provide the location of where your family may find these things. This letter doesn’t have the legal force of the will but may amount to personal information that the family could use and you wish to share.

Step 4

 

Who Should Consider A Trust?

 

Trusts have additional features not found in wills.

Most people know what a will is, and it is the first place to handle probate property, but trusts are increasingly more popular in estate planning. Use trusts when you have a more complex estate, have less liquid assets, and desire privacy as trusts avoid probates. Trusts provide some features that a will won’t.

Living Trusts

Before death, you can use a trust as a living trust.  These instruments can take effect while the grantor is alive and can give the grantor the right to make changes. These are called revocable living trusts, and the grantor can be the trustee. However, if the grantor cannot serve because of becoming incapacitated, someone you appoint can name a new trustee.

Living trusts can also be made irrevocable, meaning no changes can be made by the grantor.

Irrevocable Charitable Remainder Trust (CRT)

People who have significantly appreciated assets may want to consider setting up a charitable remainder trust. A CRT is an irrevocable trust that generates a potential income stream for you as the donor to the CRT or other beneficiaries. The remainder of the donated assets goes to your favorite charities. There are several benefits, substantial income tax deductions while preserving the value of your assets. You can read more about it here.

Donating Assets To a Charity

CRTs are tax-exempt irrevocable trusts that reduce the taxable income of the donor during their lifetime. The irrevocable donated assets go to the trust. Distributed income moves from the assets to you and your spouse for a set period or life. The charity you designate will receive the CRT assets when you or your spouse die.

Testamentary Trusts

A different kind of trust is the testamentary trust, usually contained in wills that go into effect after the grantor’s death.

Step 5

Living Wills and Medical Powers of Attorney

 Prepare health care proxies, often called advance medical directives, that is, a living will and your durable powers of attorney.

Write a living will detailing a person’s desires regarding medical treatment when they may no longer express their wishes. The living will provides informed consent.

A living will is separate from your will made in consultation with your attorney and signed by you. This medical directive can help reduce ambiguities during a difficult time using feeding tubes, for example, and keeping a loved one alive unnecessarily.

The Terri Schiavo case

Does anyone remember the legal battle in 2005 surrounding Terri Schiavo? Terri Schiavo was a legal case that spurred a right-to-die movement. As a result of her family’s tribulations, many people recognized a living will as an important document. While challenging, it provided urgent awareness of why you need to address these possibilities. Health care directives are critical parts of your estate plan.

Use the durable power of attorney to appoint someone you trust as your agent, do certain things, and take actions in your name if you cannot do so. This agent is also called “attorney in fact.”

When the grantor is incapacitated or disabled

Under a power of attorney, the agent can bind you to contract obligations, sell, buy or close title to real property in your name, conduct banking, or other transactions. Every state has its requirements for ensuring valid powers of attorney. These powers are “durable,” which means that the agent’s authority survives any incapacity or disability of the grantor. The point is not to go and buy a form online or at a store. You need to designate someone trustworthy.

These powers come into use when the grantor cannot physically appear at a bank, through injury, confinement, or frankly just does not want to go. This instrument is crucial when caring for a person with dementia, Alzheimer’s Disease, or other limited mental capacity diseases. The most common uses of this power of attorney are in banking and real estate transactions.

Step 6

Upon your death, your executor will become the administrator and fiduciary of the will effectively.

After appointing an executor, the probate court will confirm the appointment upon your death. The executor’s role is to be effective and he or she can be expressly relied upon by financial institutions and insurance companies.

This executor will submit a petition to the probate court in the jurisdiction where the testator passed away. Assuming no challenges, the court will formally appoint the executor by issuing Letters Testamentary.

Testamentary Letters

Usually, third parties require original letters, so you have to get these directly from the court. They are not available online. These letters are court documents that allow the executor to act as a fiduciary under the supervision of the court.

These testamentary letters, along with the legally binding death certificate, are the essential documents that give the executor the force to deal with potentially numerous parties that have an interest in your estate.

Final Thoughts

Estate planning decision-making can be complex. However, it provides peace of mind by reducing some of the uncertainty that may arise for your family. Estate planning is in your family’s best interests.

Protecting your assets and having a plan to distribute them to loved ones should reduce potential angst that may follow. Engage a tax accountant with a CPA to help you realize tax efficiencies, an important component of estate planning.

Have you started thinking about estate planning? It is usually easier to do when you have no urgent reason to do so but are thinking of your family’s best interest. This guide should move you to think about your plan but you need careful consideration and professional guidance.

Please share any thoughts or comments you may have. We would love to hear from you! Please visit The Cents of Money for other articles of interest.

 

 

Your Guide To Basic Estate Planning In 6 Steps

How to Choose A Financial Advisor

“A goal without a plan is just a wish.” 

Antoine de Saint-Exupery, The Little Prince

 

“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.” 

Confucius

When you are seeking a financial professional, you may be confused by your choices. Many professionals help you with planning when giving you financial advice, whether making investment recommendations for your portfolio or providing tax-efficient savings.

“Financial planner” or “financial advisor” are terms often used interchangeably. They may provide similar financial planning services. However, their level of education, certifications, designations, and standards may be quite different. This post discusses how to choose a financial advisor that is right for you.

The Main Differences When Seeking A Financial Advisor

 

1. Type of Personal Financial Services You Are Looking For

You may be looking for someone to advise you for a single purpose like debt management or a comprehensive plan. Here, we will focus on how to choose a financial advisor or planner. This type of advisor can handle various services (discussed below) to guide you towards your goals strategically. At the end of this article, you should be able to hire a financial advisor.

You may turn to accountants and attorneys for setting up a new business, debt management, bankruptcy, taxes, and estate planning.

2. The Fee Structure

Generally, your fees range from the fee-based only, commission-based, flat fee, or a blend of fees and commissions. However, there may be extra costs for additional services such as insurance.

3. Education, Certification, and Designation Requirements Vary

Financial advisors or planners have a bachelor’s degree with an accounting or finance focus as the minimum requirement. Advanced educational degrees are not uncommon. Their course of study distinguishes certified financial planners (CFPs), with a rigorous exam, required experience, and high standards.

Consider your candidate’s soft skills such as adaptability, communication, and problem-solving and if you have good chemistry. We have a list of questions below you should ask your candidate when choosing your financial advisor.

 4. How They Are Regulated

Different regulators play a role according to the primary designation. Regulation of financial planners may be according to their professional title. Planners with CFP credentials are subject to the requirements of the Certified Financial Board of Standards.

The Securities Exchange Commission (SEC) and the state where they do business regulates investment advisors who provide financial planning.

The  State Board of Accountancy regulates the accountant preparing a financial plan.

Key Financial Services

 

1. Money and Debt Management

Consider a money coach or credit counselor when you need help saving money, setting up a budget, reducing expenses, and debt management. You can often get free assistance from a certified credit counselor by searching on the nfcc.org website.

Accredited financial counselors or AFCs can aid you in money management through their organization 

 

Related Post: How To Pay Down Your Debt For Better Financial Health

2. Investment Advice and Trades

Investment advisers and brokers provide all manner of investment services, from do-it-yourself online trading to full-scale investment advice and money management. Generally, investment advisors and broker-dealers need to register with the SEC and the Financial Industry Regulatory Authority (FINRA), and state regulators. They are subject to the suitability standard, less demanding than the fiduciary duty.

A Registered Investment Advisor (RIA) advises high-net-worth individuals on their investments and manages their portfolios. They have a fiduciary duty to their clients, which means they provide investment advice by acting in their clients’ best interests.

3. Financial Planning

Financial planners are financial advisors who provide clients with a range of personal financial services. They can help you create a simple one-time financial plan if you are just starting, grapple with a specific financial objective, or provide a comprehensive goal-based plan. The latter may encompass savings, investments, college savings, insurance, retirement, tax planning, and estate planning.

Each plan should be tailored to your needs and provide a disciplined approach to achieve your financial goals. Financial planners will want to gather data from your personal and financial life and make forecasts to achieve wealth. Hiring a financial planner is a good starting point when you are in the early stages of accumulating assets or already have substantial assets but need guidance in their complex financial situation.

A core financial plan includes:

Cash flow management will look at the specifics of your current and projected budget and net worth, debt management, creating an emergency fund, savings for a house, vacations, college tuition, and retirement.

Risk management will consider life, disability, and medical insurance protection for you and your family.

Wealth management will address investments, diversification, risk tolerance, and asset allocation.

Related Post: 10 Tips To Diversify Your Investments

Tax and retirement planning should provide strategies to minimize your tax burden using capital gains strategies, charitable giving, tax-free and tax-deferred retirement savings. Advisors should speak with their clients about what kind of lifestyle they expect for their retirement years.

Estate planning involves questions about wealth transfer to loved ones most appropriately and efficiently.

Related Post: Your Guide To Basic Estate Planning

This Designation Is Preferable

Certified Financial Planners, or CFPs, have an essential designation issued by the Certified Financial Planner Board of Standards. This designation is difficult to obtain. It requires passing rigorous exam testing in specific personal finance areas. The CFP certification is distinct from CFAs, also or certified financial analysts who are highly respected in the investment analysis field.

CFPs must commit to continuing education on financial and ethical matters. They need at least three years of experience and must adhere to pretty stringent standards to earn and maintain their title. Before hiring a financial planner, you should verify the status of anyone claiming to be a CFP and whether he/she has undergone a disciplinary process.

When choosing a financial planner, CFP credentials may provide added comfort and confidence in your choice. However, it is not a guarantee of excellent performance. You want to pick the right financial advisor or team with the right fit for your needs.

Look For A Fiduciary

At a minimum, you want planners who are experts, professional and trustworthy. You should pick your planner who adheres to the fiduciary standard. The fiduciary standard is a higher standard requiring the planner or investment adviser to act in the best interests of their clients at all times.

Fiduciary duty standard is the highest standard of care referring to the financial professional.  A fiduciary is someone who holds a legal and ethical relationship with clients. They manage people’s money in their clients’ best interests rather than in their interests.

Registered Investment Advisors or RIAs help you manage your assets, mainly by way of your investment portfolio. These professionals are knowledgeable about market patterns, investing in stocks, mutual funds, and other securities. They are fiduciaries making similar recommendations to a CFP. Their pay structure is fee-based but earns commissions from the sale of financial products. CFAs or chartered financial analysts are highly respected in the investment analysis field, distinct from financial advisors.  

Don’t Paint Advisors With A Broad Brush

Investment advisers and brokers who work for broker-dealers and offer investment advice are primarily commission-based. They may have obtained CFP credentials through the hard work required.

From my experience, you cannot paint these individuals with a broad brush. Many are product salespeople interested in selling the latest service from their firm, yielding commission dollars. Other advisors are problem-solvers for their clients, helping them to manage their assets as a business. If you are fortunate to find one of these value-added professionals, grab them.

In contrast to the stricter fiduciary standard, FINRA requires the suitability standard for financial professionals who work for broker-dealers. Suitability is a lower standard than the fiduciary standard, which means the financial professional should only make recommendations suitable for their clients. A recommendation doesn’t have to be consistent with the individual’s objectives and profile.  For example, buying risky securities would not be suitable for retirees.

Financial Planners With Specialities

You may be seeking a financial planner for a specific goal like buying a house, retirement planning, or estate planning. Some planners specialize in particular areas such as addressing families with special needs, women executives or planning for single people.

Related Post: 10 Ways For Women To A Financial Independence

Look For Fee-Based Only Planners

The pay structure differs for different financial professionals from fee-based-only or charging flat fee, commission-based only, or a blend. When you want to develop a financial plan, I recommend seeking a fee-based adviser with more incentives to help with your financial goals. Fee-based structures can be fees by the hour, a flat fee for your plan, or a percentage of your annual assets.

Hourly rates may be in the $100-$400, with one-time financial plan costs of $1000-$3000+, and annual fees of percentages ranging 1%-2% of assets under management (AUM). Finding a planner that charges a flat rate or by the hour is best for those just starting to make money, who want a simple financial plan, and don’t yet have many assets.

Alternatively, you may want to consider Robo-advisors, such as Betterment, Wealthfront, Vanguard Personal Advisor Services, and  Schwab Intelligent Portfolios. Robo-advisors are an excellent option for those seeking low-cost financial advice and zero account minimum.

These providers have a range of investment and retirement planning services, digital planning tools and may provide access to human financial advisors. Their management fees vary from 0.25%-0.50% or flat annual fees. Some people prefer a human financial advisor for a specific part of their financial plan and several Robo-advisors offer blended services for a higher fee.

It Depends On Your Needs

You may be seeking a one-time financial plan after getting a sizable bonus or an inheritance. Others want to have a planning team to be able to work with them on an ongoing basis. There are a plethora of financial strategies to handle for a family moving through changing life cycles.

Trustworthy financial planners can help you build wealth with a disciplined approach. They may help you alleviate the financial stresses that you encounter when saving for a house, college tuition, insurance, and retirement using the most tax-efficient strategies.

When you have a busy career earning a high income, it may be challenging to wrestle with these personal finance specifics. Paying $10,000-$20,000 annually on a $1-$2 million portfolio that may produce savings isn’t bad.

Many traditional financial planners require a minimum of assets to invest, usually in the $250,000 range or significantly higher, and may not work with you. Other planners may prefer to grow with beginner clients to add a lot of value, particularly as clients have expanding family needs.

Where To Find The Right Financial Planner

The National Association of Personal Financial Advisors (NAPFA)  are fee-only planners who adhere to the fiduciary standard. They accept no commission-based planners. Their standards are high and generally meet or exceed the requirements needed for CFP credentials. Ask your friends and colleagues if they would recommend someone to you.

If you are just starting with fewer initial planning needs, you may consider the Garrett Planning Network. They are certified financial planners or persons working towards obtaining their credentials. They tend to focus on smaller projects for an hourly fee.

XY Planning Network is relatively new, focusing on young professionals looking for fee-based financial planners with the CFP designation. Their organization serves Generation X and Millennials. Their fees appear to be within the ranges of hourly rates or flat fees.

There are great Facebook Groups to visit, such as Females And Finance, run by Sheryl Hickerson, to help you find the right person for you. Women, in particular, have distinct needs for financial planning.

Do I Need A Financial Planner?

You can develop a simple financial plan on your own as you are starting. Even if you do not work with a financial planner, you need to consider your short-term and long-term goals. Managing money well is time-consuming and requires expertise in many areas.

As your assets grow, you may need guidance and assistance in developing financial strategies.

 10 Questions You Should You Ask When Seeking A Financial Advisor

Professional Caliber

  1. What are your qualifications, credentials, and experience?

You will want to know who you are dealing with in terms of expertise, education, certifications, and experience.

  1. Do you work with a team, and how do you work together?

Financial planners often have their specialties and overlap with others who can complement their skills.

  1. Are you a fiduciary?

A fiduciary standard is a more stringent duty of care. When speaking to a professional financial candidate, you want to understand how they view their role to you. It is your money and your financial future. You want your advisor to be working on behalf of your best interests, not theirs.

What Does This Cost

  1. What are your fees, and what are my costs all-in?

Understand their fee structure. Be clear about the extra costs you may incur, such as buying an insurance policy.

  1. How will I be communicating with you and your team?

Biannual plan reviews are common. How often will they be reviewing your financial plan with you?  If you will have an ongoing relationship with your financial planner, it is essential to understand how you will review and update your plan. What kind of communication should you expect, particularly when you are making changes.

  1. How will they work with you?

Will they take the time and have the patience to explain complex concepts to you. This information does matter, and it may take time to build confidence and a good rapport.

Characteristics of Your Financial Planners

  1. What is your investment philosophy? You want to understand your planners’ fundamental beliefs regarding growth and value investing. Markets can be turbulent, so you need to know how they may address investments during recessions.
  2. How should I measure success in our financial plan?

You need to understand the benchmarks that will provide you with results relative to your financial goals. There may be different measurements for various aspects of your plan.

  1. What added value may I expect from you as our financial advisor?

This question is tricky. Of course, you should expect expertise, professionalism, and trust. You want to know what kind of relationship you will have. When you want to make an investment that advisors believe is not a sound one, will they tell you “No”? They must have your back.

  1. What are some of the criticisms your clients say about you and your team?

No one person is perfect, so knowing those criticisms will help you measure your prospective financial planner and how he/she fits with your needs.

Final Thoughts

Prudent financial planning is vital to achieve your short- and long-term goals and to support your family values. We outlined the characteristics of a financial planner or advisor, the varying fee structure, and how to pick the right financial advisor for you.

What are you looking for when seeking out a financial advisor? What traits are essential to you? We would like to hear from you!

Thank you for reading! Please consider subscribing to The Cents of Money blog and get our weekly newsletter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend Aristocrats For Reliable Income And Growth

Dividend Aristocrats For Reliable Income And Growth

In a market environment with low yields,  investors may be better off with dividend-paying strategies as an excellent way to build wealth. Total return benefits from dividend income, potential dividend growth, and capital appreciation. Every well-balanced portfolio should contain high-quality dividend stocks along with growth stocks, bonds, real estate, and other assets.

When seeking high-quality names above-average yields and higher growth potential, there is no better place to look than investing in Dividend Aristocrats. In contrast to typical dividend stocks, Dividend Aristocrats provide favorable exposure to both growth and value stocks.

This elite group’s characteristics produce:

  • higher and more reliable dividend income.
  • consistent dividend growth.
  • lower volatility in market downturns.
  • favorable risk/return profile.
  • an inflation hedge.

 

What Are The Dividend Aristocrats?

When seeking dividend-paying stocks, the S&P 500 Dividend Aristocrats make an excellent investment choice. There are several requirements to become part of the Dividend Aristocrats. A company must be:

  • Listed in the S&P 500 Index.
  • Paid and raised its dividend (excluding special dividends) consecutively for 25 years or more.
  • The minimum market capitalization of at least $3 billion and liquidity of at least $5 million.

 

Dividend aristocrats began in 1989 with only 26 companies with high-quality dividend payers’ profiles based on their strong histories of revenue and earnings growth, solid business fundamentals, and strong company management.

By their very nature, dividend aristocrat companies have high-quality businesses with durable competitive advantages and respect their dividend histories. Typically, they sport favorable metrics, including dividend payout ratios, net debt to capital, and net profit margins.

The dividend aristocrat stocks share attributes of both growth and value investing, discussed in this article. We address the benefits of a dividend growth strategy here. 

Dividend Kings

An even more elite group of dividend payers are the Dividend Kings. A dividend king is a stock with 50 or more years of consecutive dividend increases. There are 31 companies that qualify as Dividend Kings, and there are several overlapping names that are on the Dividend Aristocrats list.

However, there are three differences as the Dividend Kings:

  • Do not have an ETF available.
  • Are not formally followed by the rating companies.
  • Do not have to be part of the S&P 500 index.

 

How To Buy Dividend Aristocrats

You can buy all of the dividend aristocrat stocks through ProShares S&P 500 Dividend Aristocrats ETF (NOBL) with an expense ratio of 0.35%. A $10,000 investment would cost $35 annually. Alternatively, you can pick stocks individually or by industry you are seeking for your diversified portfolio.

The industries represented in the group by percentage are:

  • Industrials 20.4%
  • Consumer Staples 19.8%
  • Materials 12.7%
  • Financials 11.2%
  • Health Care 10.3%
  • Consumer Discretionary 9.2%
  • Real Estate 4.5%
  • Utilities 4.3%
  • Energy 3.1%
  • Information Technology 3%
  • Communication Services 1.4%

The Dividend Aristocrats consist of some defensive sectors that complement tech growth stocks in any diversified portfolio.

In 2021,  65 companies are dividend aristocrats with some changes. More companies tend to fall off the list in weak economies, especially during the Great Recession. The Dividend Aristocrats’ dividend yield is usually 50 basis points above that of the S&P500 dividend yield, or closer to 2.5%. Many of the stocks carry yields in the 3+% range.

Pros of Dividend Aristocrats

 

1. Reliable Income Source With Above-Average Yields

Dividend aristocrats offer reliable income sources, backed by corporate boards that voted for at least 25 years of paying and increasing their dividends. These companies are high-quality, stable, large-cap, blue-chip companies that tend to be leaders in their industries. Their stocks offer a healthy balance of growth with higher yields than the S&P 500 for investors. 

 

2.  Dividend Growth Compounding

Compounding, or earning interest on interest in fixed income investments, is a powerful way to build wealth. It becomes even more mighty when you are talking about the benefits of a dividend growth strategy. Combining the growth of dividends per share, compounding reinvested dividends, and share price appreciation results in exponential growth.

Investors take a longer-term perspective in their investments when they anticipate rising dividend payments. This investment strategy aligns well with a Buy/Hold mentality. We discuss compounding along with other financial concepts you should know in this article.

3. Lower Volatility And Higher Total Return Potential  

Stocks that pay dividends tend to be less volatile than the broad market. As a group, dividend aristocrats exhibit defensive characteristics represented by sectors like utilities and consumer staples. Its beta tends to be below that of the S&P 500. Dividend aristocrats reflect value and growth with 56% exposure to value and 44% exposure to growth.

Since its inception, the S&P 500 Dividend Aristocrats capture more of the gains (92%) and less of the market losses (80%). Through the first quarter of 2021, S&P 500 Dividend Aristocrats’ total return was 11.46% versus 10.31% for the S&P 500 but less volatility (15.71% versus 16.49%).

 

4. Investor Confidence In Corporate Financial Health

When high-quality companies pay dividends and increase their payouts, it gives investors confidence in the stocks they hold. Companies that consistently pay and raise dividends are in excellent financial health, transparent about their revenue and earnings growth, and reflect superior financial discipline. 

Many of the dividend aristocrats, like 3M, have high dividend payout ratios in a 55%-60% range. This range is healthy rather than those companies with the highest payout rates and don’t necessarily perform the best. 

5.  Capital Preservation

Generally, dividend-paying stocks are less risky and hold up better during market corrections. Investors are virtually paid in dividends to wait it out through turbulent times rather than engage in panic selling. Companies represented in the dividend aristocrats group are high-quality leaders with strong management, growth, and consistently raising their dividends. As such, these stocks can help preserve and build wealth for investors.

6. Portfolio Diversification

We always stress how investors must have a diversified portfolio among different asset classes. 

Investing in dividend aristocrats (e.g., NOBL) provides exposure to growth and value through various industries. As dividend-paying stocks, they provide an income source to help balance exposure to growth stocks. 

7.  An Inflation Hedge

Stock investments tend to outpace inflation, with value stocks tending to do better than growth. Higher-yielding shares like dividend aristocrats will help investors to maintain purchasing power through income sources better. Also, some dividend aristocrats, notably materials and energy companies, can pass some of the inflationary effects into higher product prices. 

Alternatives like savings accounts or bonds will not do as well with high inflation.  Many companies pay dividends above the rate of inflation.  

8. Tax Advantages

Dividend-seeking investors realize tax advantages.  Investors pay capital gains rates rather than the higher ordinary tax rate. About a third or more of dividend aristocrats’ total return comes from dividends, with the remainder coming from share appreciation. Additionally, they are more likely to have longer-term perspectives and hold onto their stocks longer than a year, so price appreciation would also receive capital gains treatment. However, there is potential for change in the capital gains rate.

Cons of Dividend Aristocrats

 

1. Is The Dividend Safe?

Investors of dividend aristocrats rely on receiving dividends and realizing growth in that income source. The nature of inclusion in the list requires keeping up with at least 25 years of increasing dividends. Many companies have a track record of more than half a century. The companies and their boards are well aware that investors seek that consistency.

These companies have excellent track records of maintaining strong growth, even during recessions though some companies fall off the list. As all investors should know, past results don’t guarantee future performance.

Weak economies or strategic changes may require companies to address their longstanding commitment to dividends.  One company that is likely to lose its dividend status after 35 years is ATT. 

In May, ATT announced that its Warner Media entity and Discovery Communications would be forming a separate standalone entertainment company. This development will cause ATT to likely reduce its dividend payout from the 60s% to 40% range.     

While rare, dividend cuts and suspensions do happen even for Dividend Aristocrats.

2. Less Price Appreciation

Dividend aristocrats realize less price appreciation than non-dividend growth stocks, which are growing at substantial rates. Some industries represented by dividend aristocrats are slow-growing industries like the utilities, banks, oil, or some older companies.

 3. Tax Policy Changes

We think there is a chance that we will see changes in the capital gains tax rate but, we will leave it for the politicians to figure it out.

Final Thoughts

Dividend aristocrats are an elite group of high-quality companies that share attractive attributes for investors seeking higher growth potential benefitting from stable dividends that consistently grow.  

Thank you for reading! Please share with others if you found something of value. Visit us at The Cents of Money, where you will find a range of topics and subscribe to our weekly newsletter.

 

 

 

 

6 Tips How To Better Handle Beneficiary Designations

6 Tips How To Better Handle Beneficiary Designations

“Bear in mind the wonderful things you learn in schools are the work of many generations. All this is put in your hands as your inheritance in order that you may receive it, honor it, add to it, and one day faithfully hand it on to your children.”

Albert Einstein

 

Did you know many assets pass by beneficiary designations just by filling out a form?

Create your estate plan so that you have control over your asset distribution to your loved ones during your lifetime. Aim for your plan to be as litigation-free as possible. Beneficiary designations are an essential way to distribute most of your assets quickly and effectively.

You will avoid the often painful and lengthy probate court procedures. Your will doesn’t control who inherits all of your assets. In reality, the average person may transfer the majority of their assets by contract.

Transferring Assets Outside Of Your Will Is More Efficient

Many of our assets are non-probate property. As such, they are transferable to survivors by contract immediately upon death rather than under a will.

The advantages of contract transfer over the distribution of assets by a will are less time, cost, and privacy. Transfers to loved ones by a will could take six months to a year if there is no probate. If contested in court, the distribution could take longer. Even worse, your will would be made public through court documents.

We will explain how to make proper beneficiary designations to carry out your intentions. are carried out.

Three Ways To Transfer Non-probate Property: 

1.  Designated Beneficiaries Upon Your Death

A beneficiary is a person or organization designated to receive a benefit. You can and should also select a contingent (or secondary) beneficiary. Sometimes the first-named or primary beneficiary dies after filling out the form. Most of you have seen one, but here is an example of a form to select your beneficiaries for those who want to take a look.

We usually get the form from our employer insurance or a financial company. It takes only a few minutes to fill out yet carries significant repercussions if incorrectly filled out or ignored. That will be part of our upcoming discussion. You should name beneficiaries for all of the assets that you can.

Your non-probate property is assets that are transferred to survivors by contract upon your death to your designated beneficiary.

Check With A Professional On Legal And Tax Issues

There may be legal and tax ramifications to be aware of, especially your designated beneficiary is already receiving governmental benefits. Estate distributions to a beneficiary may require an inheritance tax payment in certain states but not from the federal government.

 Your Non-Probate Assets:

  • retirement accounts, including 401K  plans, 403b plans, SEPs, solo 401Ks, Keough plans, Roth IRAs, pension plans
  • 529 college savings plans
  • investment accounts, mutual funds accounts
  • payable-on-death clauses in bank accounts, credit union
  • life insurance policies or
  • by owning joint accounts with another person, usually a family member,  through rights of survivorship.

These assets are generally transferred directly to those beneficiaries that you designated 

When you first opened these accounts, you received a legal form to complete that provide you with the opportunity to designate your beneficiary.

Review Beneficiary Designations Periodically

For example, if you designated your mom when you first set up your accounts, it’s probably a good idea to refresh your beneficiaries. Often, life changes such as a divorce, remarriage, or the passing of a loved one happen, so update your beneficiaries. 

2. Property Ownership Designation

Husbands and wives (or parents and children) may have joint ownership of assets called joint tenancy with the right of survivorship.

Each person owns 100% of the asset. These include bank accounts, investment accounts, and cars. They can dispose of these assets without the approval of the other owners. However, in the case of jointly owned real estate, most states restrict the ability of a co-owner to sell or burden the property without the consent of the other.

Upon the death of one owner, the assets transfer on death (TOD). The surviving owner(s) will receive this property by operation of law rather than through the will.

3. Payable-on-death (POD) designation

Like TODs, the designated beneficiary has no right to this property, usually a bank account, until the owner has passed away. Once the owner has died, the beneficiary will provide a copy of the death certificate and show proper identification to access the account.

6 Tips to Ensure Your Designated Beneficiaries Are Proper:

 

 

1. Don’t Forget To Name A Beneficiary

We live busy lives. We get a ton of forms when we start a new job or open new accounts.  We may lose them or forget where we placed them. Worse yet, we honestly want to fill them out, but we are unsure or procrastinate over making such decisions. The form truly takes a few minutes, and it is better to reasonably identify a loved one rather than leaving the form blank.

The absence of a designated beneficiary may result in the respective assets going to the estate itself to be shared among several people rather than the sole designee.

2. Name A Contingent Beneficiary

Besides naming a primary beneficiary, it is essential to name a contingent beneficiary if the primary beneficiary has either passed away before the asset owner or has become incapacitated. It may have been several years since the designated beneficiaries were selected.

3. Reviewing, Changing, and Updating Your Beneficiary Forms

When you first start a job or open an account, you may have been idealistic about who you wanted to receive your assets. I have had friends select their boyfriends. Our lives go through many changes such as marriage, having children, divorce, and our interest in varying social causes.

If necessary, we need to periodically review, update our beneficiaries to who we intend our assets to go.

My First Designated Beneficiary

When I first started working after college, I named my brother Mark as a beneficiary. I was 20 years old, and he was starting high school. As a “big sis” starting work right after college, I wanted to do something special for him. Being naive, I thought he would like the gesture. I left the job 18 months later, so it didn’t have a lasting effect. However, many of our decisions do.

Common Mistakes: An Ex As Your Beneficiary But Your Youngest Isn’t Designated

Your former spouse may still be listed as a primary beneficiary even though you haven’t talked to that person in years.  If you are working at your company for a long time, you may leave out your youngest child or the children of your second spouse.

Review your beneficiary choices quickly online or through the investment account statements you receive in the mail.

Another reason to review your form may be that you have been at the same firm for 35 years (congratulations!). However, are you sure your company still has the form on file?

A True Story

Someone recently told me that a family member had newly been diagnosed with a severe illness. They wanted to make sure they had insurance for the upcoming surgery.  The company told him that there were no records of designated beneficiaries on file for the years he began working there.

Forms get lost when companies move, especially during the pre-digital age (after dinosaurs), and the company may not always convert the paperwork. 4. Be Careful When Designating Those With Special Needs

Three possibilities that need special consideration and requires the expertise of an estate attorney or accountant to consider:

Minor Children: Differences Between Probate And NonProbate Properties

We often may name our children as designated beneficiaries on forms and in our wills, for probate assets. Be aware of legal ramifications.

It is relatively common for parents to have testamentary trusts within their wills that assert minimum ages for our children to get assets. They may want to restrict their children well past the age of majority (usually 18 years of age) to 25 or 30 years. Testamentary trusts, traditionally contained in wills, are trusts that effective upon the death of the grantor.

A trustee is often used to administer the assets at their discretion until the beneficiary reaches that appointed age. That works for probate property.

Outright Distribution To Beneficiaries: Consider Age 

However, beneficiary designations for non-probate property, trump the will’s contents which may carry a parent’s intentions. That means if a parent passes while the children are of minor age,  property, such as an insurance policy or a bank account, will pass to them automatically at 18 years. Most young adults cannot handle significant funds without supervision. Although research shows an inheritance lasts five years, it can be much shorter in a younger individual’s hands.

Therefore, you may want to name the estate as your designated beneficiary rather than your children outright or create a living trust which can specify your children’s age. Your estate attorney can provide help in this area.

Background on Living Trusts

Living trusts are legal documents created during an individual’s lifetime. These trusts are standalone, that is, independent of the will. These instruments can take effect while the grantor is alive. The grantor is the one conveying the property to the heir. It can give the grantor the right to make changes.

These trusts are revocable living trusts, and the grantor can be the trustee. However, if the grantor cannot serve because of incapacitation, a spouse or child may become successor trustee. 

 

The Irresponsible Adult May Need Special Consideration

An adult child who is known for being irresponsible with money may need different treatment. In that case, you should speak to an attorney regarding the setup of a spendthrift trust.

A spendthrift trust benefits a person that is unable to control their spending. It gives an independent trustee full authority to make decisions on allocating money to the beneficiary.

Individuals With Disabilities

You need to be careful about naming a disabled individual as a designated beneficiary. You may jeopardize that person if they are already receiving governmental benefits, such as social security benefits. If they were to receive assets from your designation upon your passing, it might inadvertently prevent them from receiving further governmental aid.

5. Make Sure You Have Correct Spelling of Intended Beneficiaries

When designating an intended survivor, they may have a commonly misspelled name or a title like Junior, Senior, or the III after their name. Check that you are indicating the correct person. It is always wonderful to give to others but make sure it is the person you intend.

6. If In Doubt, File A New Form

Having correct and updated forms is very important, especially when you have retirement accounts, life insurance, bank, and investment accounts. If you think about the changes in your life in recent years, you may just want to go the easier route of filing a new form to transfer each of your assets outside of your will.

Final Thoughts

By keeping your beneficiary designations, and all of your estate planning documents current, you provide the best protection for those you care about the most. A small amount of your time and effort may cover the vast majority of your assets.

Protect your assets and have an excellent plan to distribute them to loved ones. You don’t want to add potential angst to their grief. Engage an accountant to help you realize tax efficiencies and estate attorneys for special situations.

Thank you for reading!

Have you started reviewed your beneficiary designations recently? It is usually easier to do when you have no urgent reason to do so but are thinking of your family’s best interest. Start thinking about your assets and which ones are non-probate property and consider reviewing them or file new ones.

Related Post: Your Guide To Basic Estate Planning In 6 Steps

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