Let's get two things out of the way early: (1) there is a lot of noise in the news right now about Bitcoin and its crypto-cousins (and too little information, in my humble opinion), (2) this post is a contribution to the noise, but hopefully contains a little information relevant to my client base and readers.
the briefest of summaries
There are plenty of articles going around about what crypto currencies are supposed to be, and how blockchain technology is meant to work, so I will keep my comments on this aspect super brief. The blockchain is sometimes referred to as a "distributed ledger" for financial transactions, which can in many ways bypass the existing infrastructure of banks and payment processors and clearance / settlement facilities currently involved in exchanges of value between parties. And while this ledger is maintained and processed in a relatively "public" way by market participants, individual participants are able to act in a relatively anonymous way.
Bitcoin is a medium of exchange on one version of blockchain, and it follows a very specific protocol or set of rules about how new Bitcoins can be introduced to the market and how transactions in Bitcoin between parties can be processed (this activity is collectively referred to as "mining").
Bitcoin itself has "forked" into some new variants that have expanded or refined protocols that attempt to address some perceived challenges with actually using a crypto currency, and there are also different approaches to the blockchain that support other coins, like Ether on the Ethereum network.
so, should you own some?
Chances are decent that you are more aware of Bitcoin and its brethren because the prices of crypto currencies have risen so dramatically in the last year; it is a basic function of a "bubble" or hot market that big gains in value attract attention, which inspires a desire to participate, which pushes prices higher, which causes the cycle to repeat...for a time.
So are crypto currencies in a bubble? Sure. Is that "bad"? It depends on your perspective. The primary aim of this post is to offer a framework for considering an individual investment in Bitcoin or one of the other coins, so I will pivot to that:
too long, didn't read? (tl;dr)
Everyone's talking about Bitcoin and the other so-called "crypto currencies". Much of the present attention seems to be driven by a fairly typical "fear of missing out" bubble. Investments in crypto coins have both idiosyncratic and traditional considerations for investors. Proceed with caution!
Current and prospective clients of DRW Financial should feel free to email or call David with questions on how or if it is appropriate to incorporate an investment of this sort within their overall plan.
Many of the posts I write are as much for me as for anyone out there looking for new insights on their financial condition. Today's is one such post.
I have written elsewhere about how our money choices reflect on our values, and that when there is conflict between what we say we value and how we live our values, there is an opportunity for self-reflection and a choice to align the two.
you probably don't need that...
But where does ego fit into this discussion of values and money? One example within my own budget and experience involves technology, specifically smartphones and computers.
I use an Android based phone and a Chromebook for my work and personal computing needs. These choices were originally at least a bit driven by economics: iPhones are expensive and in the early days just having an iPhone required a specialized phone plan that cost more than average; similarly, a decent Chromebook costs around $200, while a similarly featured Windows machine might cost twice as much (or more), and a Mac might cost 3x - 4x just to get started.
But even though I may have started out with fiscal discipline in mind, what happened over time is that at each opportunity to replace or upgrade my equipment I would inevitably spend some time looking at the "nicer" options available. A $200 Chromebook has proven to be sufficient, but the $600 one may be prettier and have some snappier specs... The $150 - $200 "mid range" Android smartphone does 95%+ or more of what the current "top end" phone may offer, but there is always that voice in the background saying "wow, that fancy phone is cool!"
Examine, don't justify
This is where the budgeting rubber meets the road. When faced with an option to spend more or less for essentially the same experience, it is crucial to be honest. When explaining (to yourself or others) why you want the more expensive option, choose to have enough perspective to examine those reasons objectively. It is so easy to justify a choice that we want to take, but it can be hard to be honest about the quality of those justifications.
Shopping while under the influence of vanity or with a heightened sense of your needs can lead to some financially unsound decisions.
Some folks don't have any investments. Others are in a situation where their circumstances dictate a very "keep it simple" approach. But for much of the rest the population, there may be value in working alongside a professional investment manager in pursuit of an "optimal" investing approach for their specific needs.
we follow a fee-only, "fiduciary" approach
DRW Financial offers investment management solely on a fee-only basis and as a Registered Financial Adviser. This means our only compensation comes from providing advice, not by commissions on transactions. We believe this allows us to offer that advice with fewer conflicts of interest and to act as a fiduciary for our clients.
do you have...?
These are a few examples of issues and areas where we have helped others improve their understanding and their approach to investing. DRW Financial works with artists and engineers, physicians and educators, "millenials" and retirees.
are we a fit?
For a quick and "no cost" consultation to evaluate our "fit" for working with you on investment management, email David@DRWFinancial.com
"I don't have any finances to plan"
I hear this pretty regularly. And I get the humor. The reality is that there are valuable opportunities for most people (or families) in going through the process of financial planning. And it is a process; done well, this process can lead to some very positive outcomes:
DRW Financial offers financial planning services on a flat fee basis. This means that there is an agreement upfront to address a given scope and scale of planning, and a stated fee that covers a full calendar year of work and revisions to that plan.
For many people, paying income taxes is something that happens "automatically" with every paycheck, via the mechanism of payroll deductions. Line items like Social Security, Medicare, and an approximate amount of income taxes owed come out of each paycheck, and the process of completing and filing a tax return in April of the next year results in a reconciliation of that process: did the taxpayer pay "too much" or "too little" over the course of the year, and do they get a refund or a bill for taxes due?
for the self-employed, and...
But for folks who earn income "on the side" or are self-employed, payroll deductions are far less common. For many people in this scenario, the typical approach is to pay "quarterly estimated taxes" via the IRS form 1040 ES.
The general idea here is that the taxpayer will figure out what they are likely to owe for the full year, and make four equal payments by the quarterly deadlines. In reality, for many self-employed people their income does not come in conveniently steady streams, and accurately forecasting their full year income can be difficult. For people in that situation, it may be necessary to make adjustments along the way to get the cumulative tax payments close to the right amount.
"gig economy", "side hustles", investments...
Even for people who get most of their regular income from a salary or W2 paycheck, there may be a need to consider making 1040 ES payments. Drive Uber for extra cash? Rent out a room on AirBnB? Realize some significant investment gains? All of these could potentially raise the tax liability for the year; if the amount paid in along the way is too low, there could be a penalty in addition to the eventual tax owed.
the next due date: april 18, 2017
If any of the above applies to your situation, get ready for the first 2017 quarterly due date in mid April. If this date seems familiar, it's because that's the 2016 personal return filing deadline too!
If you belong to the portion of the population aged 60 or older, you have probably given a good bit of thought to Social Security; if you are much younger than that, the concept is probably not high on your current list of priorities.
But as a financial planner and investment adviser, I routinely find that the various benefits available via the Social Security Administration are an important and often misunderstood part of folk's financial picture.
it's your money, coming back
One thing to understand upfront is that almost everyone earning income in the United States pays a tax into the Social Security fund throughout their earning years. Although Social Security benefits are sometimes described as "entitlements" in a way that suggests otherwise, the money that retirees get back comes primarily from their own contributions and those of their peers and the generations preceding / following them.
spouses and kids can benefit, too
Some of the benefits available via Social Security are available to spouses and children of the income earner who paid into the system. For instance, in a two parent household if one worked outside the home for a wage and the other spent their working years raising kids and caring for the home, the one without an income history may also qualify for a retirement benefit based on the contributions of the working spouse.
check your benefits early and often
The Social Security Administration offers a couple of tools that are really very valuable for gaining a basic understanding of where a given person stands in relation to their potential benefits.
We now live huge chunks of our lives online, and do ever more of our financial transactions and interactions via email, applications on our phones, and through websites.
As a provider of financial planning and investment advice, I am perhaps a little more sensitive than most to what can go wrong in terms of online security and privacy. The recommendations below are not intended to be comprehensive or "fail safe", but could form a foundation for improving online safety.
lock your phone
This one should be obvious, but it seems that a number of us out there in the world are still resisting the step to add a PIN, fingerprint, or password to our smartphone. These devices typically have unrestricted access to email, social media, and maybe even financial accounts via apps. Accidentally leaving an unlocked phone on the bus, coffee shop table, or a park bench can provide one-stop access to a stranger.
At a minimum, a 4 digit PIN or "pattern lock" can provide a measure of protection, especially against the mildly curious.
BONUS: take a minute to review the "remote lock" function for your phone model, operating system, or carrier.
iPhone Remote Lock Instructions
Android / Google Remote Lock Instructions
go two factor
An increasing number of accounts (email, Facebook, Twitter, etc) offer what is called "two factor" or "two step" authentication or log-in. What this means in brief is that to initially access your account on a new device (phone, laptop, tablet) you must have both the password AND a code sent to a trusted device. So you may be logging into Gmail on a new computer and Google will send a text message to your phone, adding a layer of security to that log-in.
Generally, you can choose to have your account "remember" that device, so you do not have to go through the two step process every time. HOWEVER, if you are using your phone as a part of this two step process, it becomes even more important to password protect or otherwise lock your phone.
passwords are crucial
The first line of defense against another person accessing private accounts may just be having a decent password. Gone are the days of being able to pick a pet's name or a clever but simple combination of initials and birth date. And it is not reasonable to use the same password for multiple services.
Current best practice in strong passwords require length and randomness.
One approach could be a string of 8+ random numbers, letters (both lower and upper case), and symbols. A challenge with this option is that the password can be overly difficult to remember even one account, much less a similar string for dozens of accounts.
A second option can be a "phrase" or combination of random words: "bananaumbrellafloristdog" is an example that may work in some scenarios...throwing in a number or symbol would make it better.
Using a "password manager" may be helpful for some people, or having a readily accessible (but secure!) reference with various passwords could be supportive.
Some browsers (the software you use to access the internet) now default to a "secure" mode when possible. You can check whether your access is in this secure mode or not by looking at the address bar. The actual language or graphic varies by browser, although most will show some version of a "lock" and include the letters "HTTPS"; an example from Chrome is in the image below. To be clear, being in "HTTPS" vs "HTTP" does not guarantee against invasions of privacy or remove any personal responsibility for security, but is better on a relative basis.
I think it is pretty common for people to fear "running out" of money. We've all heard stories of people "dying broke" or reduced to poverty late in life, and those stories are both sad and scary. So it makes a great deal of sense to avoid that fate. Financial planning and prudent investment management play a crucial role in an overall approach to help ensure there are sufficient assets and income in place as we age, and they can also help prevent having too much left over as well!
how can there be too much money?
If we all agree to the premise that it is generally not comfortable to run out of money during our lifetimes, it may then seem counter-intuitive to discuss the opposite challenge of dying with too much income or assets. But prudent personal financial management also involves making a plan for the eventual distribution or transfer of an estate, as well as the care of the people and causes that have mattered to the person during their life. A well crafted financial plan will seek to find an appropriate balance between having too little and having too much.
quick look at "too much"
What happens when you die with "too much" in terms of assets?
what's the plan?
The points above are meant to highlight that, while having assets and income is probably a better state of affairs for most people than having none, it is also the case that having significant assets and income involved demands careful planning as well.
A robust financial plan with a qualified financial planner, such as a CFP®, should seek to address both ends of this question, from dying with too little to dying with too much, as well as a number of other important financial considerations.
Ready for more information?
Click the "let's talk" button to send me an email. I am a fee-only, registered investment advisor offering highly transparent financial planning and investment management advice in a fiduciary context.
It's not always easy to get a bead on exactly what "normal people" understand about their finances. I tend to frequent public blogs and forums (places like Reddit and Quora) where people discuss personal finance best practices and strategies, as well as industry "insider" newsletters and trainings about investor psychology and behaviors. My top level impression is that most people have a pretty decent, general idea of "personal finance": save some money, invest for the long term, try not to overpay for advice.
One very basic part of every financial plan, and one that tends to be reduced to a simplistic rule, is the "emergency fund". It could also be called "cash on hand" or "liquid funds" or something similar, but the idea is the same: this is a stash of money set aside from the monthly budget (it shouldn't be spent down and replenished in a "normal" period) and that it mostly held in a very low risk way (checking or savings account at the bank is very typical); the purpose of this money is to cover extraordinary expenses or demands on the budget to prevent serious disruptions to regular bills, lifestyle, and use of credit. It is impossible to know the future with certainty and to plan for ever possible eventuality, but it is possible to plan for a series of reasonably likely demands on the household budget (as suggested in the picture above). So that explains in general terms what the emergency fund is, but leads to the more practical questions around where does this rank among goals, how much is necessary , and how to hold the funds.
the emergency fund is a priority
Every person and every household have different specific needs and challenges, but everyone engaged in the process of financial planning is going to share in some measure this goal of having cash set aside for budget shocks, and that goal is going to be very near the top of their list of priorities (or should be). "Cash flow" may not sound sexy, but once the flow of cash through a budget is pinched, everything else financial becomes very difficult to manage. For that reason, in my planning and investment advisory work with clients, we focus on addressing this goal early and revisiting it often as life changes impact the answer to the how much question. And speaking of...
the "rule of thumb" is a starting place - Not an end to the conversation
If you were to Google "emergency fund amount" or "how much do I need in savings for emergencies" you will likely find a number of sources pointing to a rule of thumb suggesting "three to six months of expenses". And that is totally a reasonable place to start the conversation, provided that person's budget is pretty stable to begin with and they earn more than they spend on a regular basis. But this is only a starting place for the conversation, because the details in peoples' lives vary so much. Here are some considerations that could move a given person's emergency fund needs up or down significantly:
consider a tiered approach to risk
Having money in an emergency fund but not being able to access it in an emergency renders the whole exercise pointless. With this in mind, it makes sense to consider liquidity and risk for how those funds are held. Some people may wish to consider a "tiered" approach to holding or investing their emergency fund, particularly people with a relatively high dollar amount allocated for this purpose.
review, revise, pivot
To wrap this up with one more piece of practical insight: The amount set aside of emergencies should be informed by each person / household's actual circumstances and exposures, and these should be reviewed periodically for fit. When things change, the emergency provisions should also change. In some cases, the "emergency" turns out to be the new status quo and things must be adjusted more dramatically for the long term; for example, a "short term" unemployment may turn out to be more permanent, and the emergency fund alone will not defend the existing budget and financial goals. Or on a more positive note, people who find themselves with total wealth and income far outstripping their potential needs may choose to stage themselves out of holding a reserve account.
Ready to do some planning?
If conversations like this one pique your interest and you are ready to dive deeper into planning your own finances, email me at David@DRWFinancial.com. I am registered as an investment adviser in the states of Tennessee and Georgia, and may provide advice to residents of 46 other states under certain circumstances (no TX or LA at this time). Or for a quick review of your current situation, feel free to click the following buttons:
Quick and free risk analysis
Simple retirement goal check-up
Budgeting tends to be a consistent area that people struggle with in their personal finances, whether or not they work with a professional adviser. In my experience, I've found that one of the primary stumbling blocks along the way to a workable budget is the desire to work backwards.
there is a logic to the order
The first step to developing a budget is to identify current spending, but too often we start by trying to justify our spending. What's the difference?
To be clear, there is no judgment here about each person's justifications, but rather a suggestion that building a budget backwards by justifying current spending and wants will often lead to an overspent or under-considered budget.
But approached the other way, with a clear picture of where the money is going each month, which categories get the most and least money, and what patterns are apparent, you now have the ability to single out which items most need to be justified, and what it will take to make it fit the overall budget.
how to begin?
There are tons of apps and worksheets and systems out there to help people with budgeting, but my absolute favorite and most simple option in the days of electronic banking and online credit card accounting is to download your spending history directly from your bank and credit card companies in a spreadsheet. They will most likely have things grouped in categories already, but it is a simple thing to add a new column and sort your stuff into groups you find useful.
I recommend starting with no more than four to six categories and putting every line item into one or another.
That's where you start!
David R Wattenbarger, president of DRW Financial
DRW Financial is a registered investment advisory (RIA) and is registered in the states of Tennessee, Illinois, and Georgia.
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES PRODUCT, SERVICE, OR INVESTMENT STRATEGY. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN.