Improve Your Finances In 2013

Here are a few simple steps you can take to improve your finances this year.

Step 1: Start by getting out of debt.

Not only does carrying debt mean you could end up paying a ton of interest over time, but it also takes away from money you could save and invest for your financial goals. If you decide that 2013 will be the year you tackle any debt you have, then check out www.PowerPay.org, a free resource to help you develop a debt repayment plan.

Step 2: Make sure you have a cash reserve.

If you don’t have an emergency reserve, then make 2013 the year you start one. The rule of thumb is to have between 3 and 6 month of living expenses saved, but don’t worry if you can only put away a little bit of money to start. Since most high-interest, “pay day” loans are for less than $500, even a small amount of cash can save you in an emergency. You can use www.DepositAccounts.com or www.BankRate.com to find high-yielding savings accounts and CDs to hold your cash.

Step 3: Start investing.

If you’re new to the world of investing then the easiest place to start is with your company’s retirement plan. If your company doesn’t have a retirement plan, then you could start an IRA or Roth IRA at a company that offers commission-free mutual funds. Even if you're already investing in your company's retirement plan, it's a good idea to start additional savings in an IRA, Roth IRA, or taxable investment account to supplement your retirement savings. Consider starting with a “target date” or “asset allocation” mutual fund that will give you instant diversification with a single investment.

Step 4: Get a second opinion.

If you already have investments, you might benefit from sitting down with a professional to discuss things like your asset allocation, individual holdings, tax management, or risk reduction. Keep in mind that someone that earns commissions will have an incentive to recommend changes, so look for an advisor that works on a fee-only basis and never accepts commissions from his or her recommendations. You can go to www.NAPFA.org or www.GarrettPlanningNetwork.com to find a fee-only advisor

To learn more about our company - and find out how we are different from other financial advisors - visit www.VannoyAdvisoryGroup.com or call us at (210) 587-6433.

Year-End Tax Tips for 2012

Tip 1: Don't overreact to talk about the "Fiscal Cliff."

It's almost impossible to turn on the TV, listen to the radio, or pick up a newspaper without hearing or reading something about the "Fiscal Cliff" and the impending economic disaster headed our way. Before you make any changes to your investments, you should think about getting a second opinion from a CPA or fee-only advisor. It's usually not a good idea to react to media hype!

Tip 2: Be careful when buying a new mutual fund. 

Most mutual funds pay out capital gains and dividends toward the end of the year, so you want to check for potential distributions before you buy a new fund. The IRS doesn’t care how long you’ve held a fund so you’ll be taxed even if you buy it just before the distribution. And since the share prices of funds and stocks drop by the amount they distribute, missing the dividend won’t affect your future return.

Tip 3: Prepay your property taxes.

Property tax payments aren’t due until the end of January, but you can deduct them this year if you pay them by the end of 2012. But if you expect to be in a higher tax bracket next year – due to tax increases or higher earnings in 2013 – then you could wait until January to pay and then prepay next year’s taxes in order to double up on the deduction.

Tip 4: Pay your January mortgage payment before December 31st.

Paying your January mortgage payment before the end of the year will increase your 2012 mortgage interest deduction by the extra amount of interest you pay in the January payment.

Tip 5: Review your portfolio.

If you have investments in taxable accounts that are worth less than you paid for them, it might make sense to sell them by the end of the year to realize the loss. These losses can be written off against investment gains, and excess losses can be written off against income up to $3,000. Unused losses can be carried over to future years.

Tip 6: Defer income.

If you have your own business and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income – and have to pay taxes on it – until 2013.

To learn more about our company - and find out how we are different from other financial advisors - visit www.VannoyAdvisoryGroup.com or call us at (210) 587-6433.

Five Steps To Financial Readiness

Some of the work I've done over the past few years has involved working with the military. Along with providing individual consultations, I've also had the opportunity to conduct briefings (i.e. presentations) to groups of Servicemembers.

I usually wasn't asked to discuss something specific like "budgeting" or "debt", so over the years I developed a briefing that covered a variety of topics in order to cover as much ground as possible. This is a short version of my "Five Steps To Financial Readiness" briefing.

Step 1: Determine Your Current Situation

The best way to determine your current financial situation is to complete a personal balance sheet that lists your assets and liabilities. You can find sample templates online, but the easiest thing to do is to take a sheet of paper, draw a line down the middle, and list everything you own on the left and any debts you have on the right. Think of a balance sheet as a "financial report card" and complete one regularly to track your progress.

Step 2: Deal With Debt

Ignoring any debt you have on your balance sheet will won't make it go away and will almost always make it worse. The website www.PowerPay.org is a free resource you can use to come up with a personalized debt repayment plan.

Step 3: Start A Cash Reserve

You should set a goal of saving at least $1,000 in an emergency reserve even if you're working on paying off high-interest debt. If you don't have bad debt to pay down, then set a goal of saving between three and six months of living expenses. You can go to www.BankRate.com to find a fee-free high interest savings account to use as your reserve. 

Step 4: Review Your Credit Report And Score

Almost everyone looks at your credit report and score these days, so it's important to review your reports for signs of identity theft and make a plan to improve your score if it's low. You can get free copies of your credit reports at www.AnnualCreditReport.com and get suggestions for improving your score for free at www.CreditKarma.com. Go to www.FTC.gov if you've been a victim of identity theft.

Step 5: Plan For Future Goals

Once you've covered the basics you should start planning for financial goals like college expenses for your children, purchasing a home, and retirement. Websites like www.BankRate.com and www.SmartMoney.com have great articles about planning. If you want personalized advice, you can go to www.NAPFA.org or www.GarrettPlanningNetwork.com to find a fee-only financial advisor that never receives sales commissions from his or her recommendations.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

How To Avoid A Ponzi Scheme

On August 17, 2012, the SEC shut down ZeekRewards, an alleged $600 million online Ponzi scheme. This is yet another reminder that investors need to do their homework before trusting someone with their life savings. Fortunately, there are a few simple steps you can take to protect yourself from investment scams.

Beware of the promise of high returns and low risk.

A lot of investment scams attract investors by promising very high returns will little or no risk. After all, everyone wants to make a ton of money but none of us enjoy investment loses! Unfortunately that’s not how things work in the real world. If you want to earn higher returns, you’re going to have to take on more risk.

Be leery of consistent returns.

All investments fluctuate in value. The higher the expected return of an investment, the more volatility you should expect. Be leery of anyone that promises large positive returns on a consistent basis regardless of the market environment.

Check for registrations.

Many Ponzi schemes involve unregistered securities, so make sure any investment you buy is registered with the SEC or state regulators. Also, if you’re getting advice from someone, make sure that he or she is registered and licensed with the appropriate agencies. Here in Texas you can contact the Texas State Securities Board to research an investment or financial advisor.

Check your statement.

You should receive a statement on a regular basis that lists each investment you have as well as the market value at the time the statement was generated. Review the statements for inaccuracies and ask about anything you don’t understand. Also, these statements should come from an independent, third-party custodian, not directly from your advisor (see next tip).

Don't give someone custody of your money.

Never give an advisor custody of your money. Making sure your money is held with an independent, third-party custodian will make it impossible for your advisor to walk off with it like Bernie Madoff did. For example, we use TD Ameritrade as our custodian. Our clients deposit money directly into their own accounts at TD Ameritrade - not at Vannoy Advisory Group - and TD Ameritrade provides them with regular trade confirmations, statements, and other important account documentation.

Avoid complex or secretive strategies.

Warren Buffet’s advice is to never invest in a business you can’t understand, and that’s good advice to apply to investments as well. Swindlers often use complex or secretive strategies as a smokescreen to cover up what they’re doing.

Get a second opinion.

When in doubt, get a second opinion from someone that’s not directly related to the investment like a CPA or a fee-only financial advisor that works by the hour. You can go find a fee-only advisor through NAPFA or the Garrett Planning Network.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Money Saving Tips For Back To School Shopping

Tip 1 – Keep your school supplies list with you.

Always keep your school supplies list with you because you never know when you'll come across a bargain. Along with helping you take advantage of unexpected sales, keeping your list with you will help you avoid spending money on unnecessary supplies.

Tip 2 – Don’t shop too soon.

Waiting to shop for clothes until after school starts will give you an opportunity to take advantage of Labor Day coupons and sales. It will also give your child a chance to see what the other kids are wearing.

Tip 3 – Search online for coupons before hitting the stores.

Take a few minutes to do an internet search for coupons for the stores you’re planning to go to. You might be able to find better prices online, free shipping, or a coupon to print out and take to the store.

Tip 4 – Take advantage of tax-free shopping.

Texas allows for tax-free purchases of clothes, backpacks, and school supplies priced under $100 during the weekend of August 17-19. That will save you about $8 for every $100 you spend.

Tip 5 – Look around the house first.

Before you hit the stores, look around the house for extra pens, pencils, scissors, binders, and other supplies that are in good condition that your children can use. There's no reason to spend money on something you already have.

Tip 6 – Avoid buying lunches.

Making your child’s lunch will save a lot of money during the school year. When making lunches, you can save even more money by buying things like juices and chips in bulk and using reusable thermoses, plastic bags, and plastic containers.

Tip 7 – Don’t forget to add names.

Make sure you write your child’s name on his or her backpack, lunch bag, jacket, and other items to help you recover them if they get lost. This will save you from having to replace them.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

The Hidden Costs of Investing - What You Don't Know Can Hurt You!

You might know that nothing in life is free, but do you know the true costs of your investments? Unfortunately, many of the costs associated with mutual funds, annuities, and other financial products are hidden in the fine print...if they're even disclosed at all!

Here are some of the common hidden costs you're likely to find in the financial world.

Mutual Fund Expense Ratios

Expense ratios measure the cost of investing in a fund. They are deducted daily before performance figures are reported and will directly reduce your investment returns. The average mutual fund expense ratio is around 1.4%, meaning that the average fund charges investors 1.4% per year. There are plenty of great mutual funds with very low expense ratios, so don't think that you have to "pay for performance" when investing.

Mutual Fund 12B-1 Fees

12B-1 fees are used to compensate advisors and don’t benefit you directly. They start at 0.25% per year and go up to 1.00% which is the highest allowed by law. When looking for a fund, keep in mind that not all mutual funds charge 12B-1 fees. True no-load mutual funds don’t have a 12B-1 fee higher than 0.25% and many don’t have one at all!

Sales Commissions (Sales Loads)

Most financial advisors receive sales commissions (sales loads) from the products they recommend. (See my post about mutual fund commissions here.) Not only are commissions a potential conflict of interest, but they also make it hard to determine the true cost of advice since most of them aren't disclosed. The only way to be sure to avoid these hidden costs is to work with a fee-only advisor that never receives sales commissions.

Lower Returns

Don't let an advisor try to convince you that you won't pay the sales commission that he or she will receive from a mutual fund, insurance policy, or other product. That money will come from you one way or another! If the commission isn't deducted from your initial investment, then your future returns will likely be lower than they otherwise would be in order to make up for the commission paid your advisor.

Surrender Charges

Products that pay sales commissions to advisors often have a surrender charge that take effect if you sell the product within a certain time frame. I frequently see annuities and life insurance policies with surrender charges that last for 7 to 10 years or more! Although you won't pay surrender charges if you leave your money alone, they do restrict how soon you can move your money without losing a portion of your investment.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Investing On Margin (Beware The Double-Edged Sword!)

Investing on margin is similar to purchasing a home. Most home buyers borrow money to be able to purchase a larger home than they could afford if they had to pay cash for the entire purchase price. Investors that use margin borrow money to increase the amount of stocks they're able to buy.

The primary reason investors use margin is to increase their investment returns. Unfortunately, using margin can work against you just as easily as it can work in your favor.

Investing Without Margin

Let's start by looking at an investment made without the use of margin. Assume you purchase 100 shares of ABC Industries when it's trading at $50 per share. Your total investment would be $5,000 (100 shares x $50 per share = $5,000 investment).

Assume the stock price of ABC Industries climbs to $55 per share and you sell your total holdings for $5,500 (100 shares x $55 per share = $5,500 proceeds). This would give you a profit of $500 ($5,500 proceeds - $5,000 investment = $500 profit) which represents a 10% gain on your initial investment ($500 profit / $5,000 investment = 10% gain).

Using Margin To Magnify Gains

Now let's assume you used margin for your initial investment in ABC Industries. Assume you invest $2,500 of your own money and borrow $2,500 from your brokerage firm for the initial investment. You then purchase the same 100 shares for a total of $5,000 (100 shares x $50 per share = $5,000 investment).

You would still realize a profit of $500 if ABC Industries climbs to $55 per share and you sold your shares (100 shares x $55 per share = $5,500 proceeds - $5,000 initial investment = $500 profit). However, due to the fact that you only used $2,500 of your own money, that $500 profit now represents a 20% gain on your money ($500 profit / $2,500 investment = 20% gain).

In this scenario, borrowing 50% of the initial purchase amount doubled your gain from 10% to 20%! Of course in the real world you'd pay interest on the money you borrow and might pay trading commissions, but you'd still end up better for using margin in this scenario.

Stocks Don't Always Go Up 

Margin is a double-edged sword. Using margin is great when stocks go up, but even a small drop in price could be enough to wipe out your initial investment if you are using a lot of margin.

To illustrate this risk, assume you purchase 100 shares of ABC Industries on margin at $50 per shares as you did in example above, but this time the price of the stock declines. You would realize a -$500 loss if you sold your holdings when ABC Industries was at $45 per share (100 shares x $45 per share = $4,500 proceeds - $5,000 investment = -$500 loss).

You only invested $2,500 of your own money since you borrowed 50% of the initial investment using margin, but this loss now represents a 20% loss on your investment because you used margin (-$500 loss / $2,500 investment = -20% loss)! Investing on margin looks great when stocks go up, but it doesn't take much of a price decline to realize how dangerous using margin can be!

Some Of The Risks Associated With Buying On Margin

(1) Stocks don’t always go up – Using margin magnifies your losses when stocks decrease in value.

(2) You can lose more than you deposit – If the securities you purchase decline in value, you may be required to deposit additional funds to cover the losses. This is called a margin call.

(3) Your brokerage firm can force the sale of securities – If you are required to deposit cash to cover your losses, your brokerage firm has the right to sell securities in your account to meet the margin call if you don’t deposit money in time.

(4) You pay interest even if you lose money – Interest will be charged on your margin balance whether or not you make money on the trade, and paying interest to lose money just adds insult to injury!

Using margin as a way to increase returns is one of the biggest mistakes that investors make. Make sure you know what you're doing - and understand all of the risks involved - before using margin in your accounts.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

The Nifty, Thrifty Thrift Savings Plan (TSP)

The Thrift Savings Plan - or TSP for short - is a retirement plan designed for members of the uniformed services and Federal civilian employees. If you're eligible for the TSP, don't overlook it just because you have a pension! TSP contributions should be an integral part of your retirement planning.

How Your Money Is Invested

The TSP has five funds that invest in different types of stocks and bonds, as well as several "Lifecycle Funds" that invest in different combinations of the five individual funds based on various investment time horizons. Participants have complete control over the mix of funds they select for their accounts.

Available TSP Funds
C Fund - Large- and Mid-Sized US Stocks
S Fund - Small- and Mid-Sized US Stocks
I Fund - International Stocks
F Fund -  US Government, Corporate, and Mortgage-Backed Bonds
G Fund - US Government Securities
L Funds - Mix of C, S, I, F, and G Funds Based on Various Time Horizons

Contribution Limits and Taxation

Just like 401(k) and 403(b) plans, Servicemembers and Federal employees make contributions to individual TSP accounts. Some Federal employees receive matching contributions in addition to the amount they contribute. You can contribute up to $17,000 to your TSP in 2012, or $22,500 if you’re 50 or older. These amounts are separate from any matching contributions you receive. Servicemembers in combat zones are eligible to contribute up to $50,000.

Currently TSP contributions are tax-deductible when made and withdrawals are taxed in retirement. Beginning sometime in the next few months participants will have the option to make Roth-type TSP contributions that won’t be tax-deductible now but will provide tax-free withdrawals in retirement. Withdrawals of Roth-type TSP contributions can be a great way to balance out taxable pension benefits in retirement.

Fees and Expenses (Or: My Favorite Part of the TSP)
Mutual funds sold by brokers often charge up-front commissions of 5.75% or higher. In addition to sales charges, they often have very high ongoing expenses.  According to Morningstar, the average expense ratio of funds that invest in large US stocks is 1.45%. The expense ratios for small US stock funds and international stock funds are much higher, averaging 1.61% and 1.68% respectively.

There aren't any sales charges or commissions on TSP funds. In addition to avoiding those charges, you'll also pay some of the lowest expense ratios I've ever seen. According to the TSP website, the 2010 expenses of all of the funds were 0.025% or less! These low costs are one of the best reasons to invest in the TSP. The less you pay in investment costs, the more you keep for yourself!

What Happens When You Leave

Any money you contribute to the TSP is yours to keep. When a Servicemember separates from service, or a Federal worker leaves his or her job, they have the option to roll their money to an IRA or leave it in the TSP. There’s also the option of cashing it out, but that can lead to taxes and early withdrawal penalties if you’re under 59 ½.

My suggestion is to consider leaving your funds in the TSP when you separate from service or retire. It has all of the basic asset classes you need to build a diversified portfolio and some of the lowest costs around.

You can go to www.tsp.gov to learn more about the TSP and available investment options

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Financial Tips for New Graduates

Here are a few financial tips for recent - or soon to be - college grads.

Tip 1: Review your student loans.

The place to start when reviewing your loans is to find out when your payments start. Never miss a payment or pay late because doing so can wreck your credit. Next, check to make sure your loans have fixed interest rates. Try to consolidate any variable rate loans into a fixed rate loan to avoid a surprise rate increase in the future. Lastly, take advantage of special incentives offered by your lender such as a reduced interest rate for setting up automatic payments.

Tip 2: Start a cash reserve.

Start by setting aside whatever you can, even if you can’t reach the recommended goal of 3 to 6 months of living expenses right away. Just having a few hundred dollars saved to pay for emergency expenses can help you avoid building up debt that can haunt you for years. Check out www.bankrate.com to find fee-free places to stash your cash.

Tip 3: Take advantage of your retirement plan at work.

If your employer offers a 401(k), 403(b), or similar retirement plan, make sure you sign up as soon as you're eligible. This will help you get a head start on retirement, and most plans offer matching contributions that can help boost your savings. You should at least contribute enough to get the full match offered, if not more.

Tip 4: Shop around for auto insurance.

If you were on your parent’s auto insurance, don’t automatically stick with their company. Shop around and make sure you find the best deal for yourself. You can use www.insweb.com to speed up your comparison shopping.

Tip 5: Get renters insurance.

Renters insurance covers things like your electronics, furniture, clothes, and other items if they are stolen or damaged. It's inexpensive but many people never think of getting it. Going through the same company as your auto insurance can save you money.

Tip 6: Start setting financial goals.

It’s never too early to start setting financial goals. The earlier you start planning for goals like buying a home and retirement, the easier it will be to save enough money to accomplish them.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Unique Ways to Gift Money to Children

My parents let me open a checking account when I was 15. I'm thankful they did because having that account - and having to balance my own checkbook and make sure I didn't bounce checks - helped me learn smart money habits at a young age.

Here are a few suggestions on how to turn a gift of money into a learning experience for your children.

1. Teach them good money habits by gifting money through a checking or savings account.

Setting up a checking or savings account is a great way to teach children how to balance a checkbook, budget, and the importance of saving for a rainy day. Parents of children that aren’t old enough to have individual accounts can open an account under their name and let their children treat it as if it were their own.

2. Turn college savings into a learning experience by gifting money through a 529 college savings plan.

Saving for college is something that most parents want to do for their children, so why not turn it into a learning experience? Children that understand bank accounts can relate to 529 plans as a “savings account" designed for a single goal: education. You can use a 529 plan to teach younger children about saving, and you can gradually bring them in on the investment selection process as they get older.

3. Help them get a head start on retirement by gifting money through a Roth IRA.

While it might be tough to convince a teenager to invest part of his or her paycheck, there isn’t a requirement that IRA contributions have to come from your child's earnings. As long as they have earned income, you can make the contribution for them up to the maximum they are eligible to contribute. This is a great way for kids to learn about investing and will give them a huge head start on their retirement.

4. Help them save by gifting money through a custodial account.

If you want to gift money to your child, but don’t want to dedicate it toward a specific goal like college or retirement, a UGMA or UTMA custodial account is a great option. These accounts are available at most financial institutions and allow the custodian – usually a parent – to maintain control of the assets until the child turns the age of majority, which is18 for UGMA accounts and 21 for UTMA in Texas.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Car Buying Tips

My wife's Pathfinder turned 15 this year. Although it still started up every morning - and we've LOVED not having car payments on it for a decade - we decided it was time to replace it. I just hope that replacing her car after only 1.5 decades won't blow Simone's frugal street cred!

Here are a few car buying tips in case you find yourself in the market for a car:

Tip 1: Know the type of car you need.

Cars depreciate in value so start your search by determining the type of car that’s likely to fit your lifestyle over the entire time you’ll own it. For example, if you’re planning on starting a family soon, it doesn’t make financial sense to buy a two-seater sports car.

Tip 2: Know your credit score.

Your credit score will determine whether you’re able to get a loan as well as how low your interest rate will be, so review it ahead of time. You can get free copies of your reports at www.annualcreditreport.com. I prefer to purchase my score score directly from one or more of the credit bureaus, but you could also get a free score from www.creditkarma.com.

Tip 3: Get financing before shopping.

Being approved for a loan before you start your car shopping puts you in a much better bargaining position. You can shop for loans from a local bank or credit union or use an online service like www.myautoloan.com or www.up2drive.com. Credit unions generally offer better rates than banks.

Tip 4: Know how a car dealer makes money.

A car dealer can make money from (1) the price you pay for the car, (2) the amount they give you for your trade in, (3) the financing they arrange for you, and (4) add-ons like extended warranties, environmental packages, and fees. Being aware of all of the ways a car dealer can make money on the transaction can help you avoid paying too much.

Tip 5: Focus on the total price.

A low monthly payment doesn’t matter much if the interest rate is too high and the payments last too long. Pay attention to how much you’re paying overall – not just monthly – and try not to buy a car you can’t pay off in three to four years.

Tip 6: Consider buying used.

Most of the depreciation in value occurs during the first few years, so consider buying used, especially if you don’t keep your cars for long. If you prefer buying new cars, then it's best to plan on driving them for years, and years, and years, and years, and....

Tip 7: Do your homework.

As with most things in life, the more you know about buying a car, the better off you'll be. Use sites like Kelley Blue Book (www.kbb.com) and Edmunds (www.edmunds.com) to research car reviews and pricing. Another great website about car buying is www.carbuyingtips.com.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com