Stacy’s Savvy Financial Advice
Stay Savvy with our founder Stacy Francis’ latest articles on financial planning, budgeting, debt management, investing, divorce, retirement planning, and more.
Stacy Francis founded Savvy Ladies® in 2003 with the mission to educate women about their finances and empower them to make proactive choices. Inspired by her grandmother who stayed in an abusive relationship due to financial reasons, Stacy has been determined to never let another woman become powerless by financial instability.
Get the resources, knowledge, and tools you need to make smart and informed decisions about your money and your life.
In addition to being the Founder and Board Chair of Savvy Ladies®, Stacy is the President, CEO of Francis Financial, Inc., a boutique wealth management and financial planning firm. A nationally recognized financial expert, she holds a CFP® from the New York University Center for Finance, Law, and Taxation, and is a Certified Divorce Financial Analyst® (CDFA®), a Divorce Financial Strategist™ as well as a Certified Estate & Trust Specialist (CES™).
Stacy has appeared on CNBC, NBC, PBS, CNN, Good Morning America, and many other TV & Financial News outlets. Stacy too is ofter sought out for her advice and can be found quoted in over 100 publications such as Investment News, The New York Times, The Wall Street Journal, USA Today. She shares her wisdom and expert financial advice here for you to learn and get savvy about your finances.
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STACY’S $AVVY ADVICE
An Emergency Fund: Your First Line Of Defense
by Stacy Francis, CFP®, CDFA
If you don’t have an emergency fund, it’s time to get serious about building one.
The purpose of the fund is to sock away a minimum of three to six months’ living expenses. But this money could also be used when you’re staring at major, unplanned expenses such as a car breakdown or a leaky roof.
What’s important is that you put the money away consistently, and then tap it only for true emergencies. And let’s be clear! A new dress for your best friend’s wedding does not qualify as an emergency!
Why You Need It
Emergency funds are an absolute necessity for financial security because they give you funds to fall back on if you become ill or disabled and can’t work, or if you or your spouse lose your job, incur large medical bills, or have an unexpected large bill such as a major car or home repair.
Without an emergency fund, you may be forced to use credit cards that could take you many years to pay off. The steep interest rates of credit card debt will end up costing you much more in the long run. Pretty depressing.
How Much You Need
The minimum amount in your emergency fund should be three to six months’ worth of basic living expenses. Singles who don’t have dependents who rely on them may be able to get by with three months’ worth, but couples or anyone with dependents should definitely shoot for six months’ worth. The more people you support, the more likely you are to have unexpected or unplanned costs.
If you don’t have short- and long-term disability insurance at work or a private policy of your own, it’s a good idea to have even more cash stashed in your emergency fund. When estimating how much money should be in your emergency fund also consider the degree of difficulty you’d have in finding a new job if you lost yours. For example, if you’re a teacher and teachers are in demand, you probably wouldn’t be unemployed for as long as a person with skills that are not in demand.
Where To Keep It
While you wouldn’t want to keep your retirements funds in these types of accounts, saving accounts, money market accounts, certificates of deposit, money market funds, and short-term bonds are all good places to stash the cash you may need on short notice. These are the most liquid investments. Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. Stocks are somewhat more liquid than real estate, but you can lose money on stocks if you’re forced to sell at a time when the market for your stock is less than favorable. Even though interest on liquid investments may barely keep up with inflation, the lower risk is worth the lower return when you may need the money quickly.
Savings Accounts
Savings accounts usually pay somewhat higher interest and segregate your savings from the money that covers your living expenses. They’re less likely to have monthly fees. One of the highest interest rates in town are offered by Capital One and Ally Bank.
Make sure that the account is FDIC insured so you know your account is always secure.
Money Market Funds
You can think of money market funds as low risk mutual funds. They’re not 100 percent risk free, but they’re safe enough. The Securities and Exchange Commission regulates these funds and limits the kinds of investments fund managers can make – primarily U.S. Treasury issues, and other securities carrying the highest credit ratings.
What should you look for when shopping for a money market fund?
Make sure the fund has low management fees. You want to pay less than 0.50% percent. Make sure to watch out for fees for check-writing privileges or electronic transfers from the fund to your checking account. Also be sure to ask what is the minimum check size. You should expect it to be between $100 and $500. You’ve got to shop around. Large, reputable financial institutions are your best bet. They are a good place to start.
Like any other mutual fund, you want to read the prospectus before you part with your money. Many investment companies will let you download prospectuses right from their Web sites. If you use an investment firm, talk to someone there or visit the company’s Web site to see what it has to offer.
Be sure to see a professional for guidance if you have questions about selecting a proper fund. Then set up an auto-withdrawal from your regular checking account or direct deposit amount from your paycheck right into this new account. Adjust your budget to accommodate having less money each month and forget about it.
You can also give your emergency fund a boost now and then by putting “windfall” money into to it. You know “free-money”: birthday gifts, inheritances, insurance settlements, escrow overages, rebates, tax refunds, etc.
Your emergency fund becomes your own financial insurance policy. And if you never use it you will have that much more money to play with when you retire. Or even retire early with the extra money you have saved!
How Smart Investors Blow It
by Stacy Francis, CFP®, CDFA
Going back to the early 2000s, our friends at Dalbar have been conducting a study to determine whether investors’ investment decisions impacts their investment performance. Unfortunately, it does. In a BIG way. As with every year’s study so far, the results illustrate a big difference in what the S&P 500 gained versus the average equity mutual fund investor. The results of the twenty year numbers ending 12/31/10:
S&P 500 – 9.14%
Average Equity Mutual Fund Investor – 3.27%
Greed and fear often lead investors to bad decisions. In the tech bubble of the late 1990s, investors poured their money into technology stocks for easily gotten gains and took risks they should have avoided. We all know what happened soon after. The tech bubble burst and fear clouded the judgment of tech investors as they dumped these stocks like hot potatoes and a few even avoided owning stocks at all. Many individuals are still trying to recoup the losses they sustained and have the majority of their money in savings accounts and the like.
Fear and greed are natural human emotions. However, when it comes to investments these emotions often cause us to make decisions that are not in our best interests over the long-term. Investment decisions should be made with clarity and conviction. The best way to do this is to create an investment plan. You need to decide upfront what percentage of your money should be in stocks versus bonds, and within stocks, how much in large companies versus small companies and how much in growth stocks versus value stocks. You should also be sure to invest in international and domestic stocks.
Once you decide on how to divvy up your money, you should never change your plan unless your objectives change and you are going to need the money in the next three years. Examples of a shift in objective could be a home purchase or you are nearing retirement.
Many investors are burned because they make an investment and forget about it. Be sure to rebalance your portfolio every year. Why do you need to do this? If you are hoping to have a break up of 40% bonds and 60% stocks in your portfolio you need to check that you have the same percentages. It is natural that stocks will grow faster than bonds over the long-term. Most likely you will be over weighted in stocks in several years if you do nothing.
We all should be disturbed and moved to action by Dalbar’s findings! Start an investment plan and stick with it. Monitor your investments on an ongoing basis and don’t be scared to get help if you need it.
Top IRA Trouble Spots
by Stacy Francis, CFP®, CDFA
Individual Retirement Accounts (IRAs) now hold more assets than any other retirement savings vehicles, but many people do not understand how they work and many IRA owners make critical mistakes that can cost them money. Here are some ways you can ensure that your IRA works for you.
1. Begin your required minimum distributions on time. Regardless of whether you are still working, you must begin taking an annual minimum required distribution from your traditional IRA no later than April 1 following the year you turn 70 1/2. You have much more flexibility with a Roth IRA and are not required to take distributions. However, for a Traditional IRA you will have still penalties if you don’t withdraw enough or you don’t withdraw it on time. You will owe up to 50 percent of the difference between the amount you took out and the amount you should have taken out. Why is the IRS so strict about taking distributions from a Traditional IRA and not a Roth IRA? The IRS wants your tax dollars. You must pay taxes on your distributions from a Traditional IRA while distributions from Roth IRAs are generally tax-free.
2. Don’t wait until the last moment. Don’t wait until the April 1 deadline to take out your initial minimum withdrawal. Don’t forget that you’ll have to make another withdrawal by December 31 of the same year. Watch out because these withdrawals in the same year could bump you into a higher tax bracket and increase your tax liability. Don’t let this happen.
3. Name a “real” beneficiary. One of the biggest mistakes is not naming a real (human) beneficiary. If you do not name a person, your assets will most likely go to your estate and this will cost you more money. That’s because if you hadn’t already started taking distributions yourself by the time of your death, the IRA assets must be distributed to your estate’s heirs within five years of death. Or if you had started, distributions must be paid out to the heirs over what would have been your remaining life expectancy. Either way, leaving your IRA to your estate deprives your heirs from “stretching out” the tax-deferred assets over their own lives and creates a bigger tax bill.
4. Name a contingent beneficiary. This allows the primary beneficiary to “disclaim” (reject) the IRA inheritance if he or she doesn’t need the money so that it automatically passes to the contingent, who typically is younger and can stretch out the inheritance longer.
5. Name the right beneficiary. Your spouse or parent isn’t always the best choice to name as the primary IRA beneficiary. An adult child might be a better choice. If you choose a young child you will want to consult a professional to find out if you need to set up a trust in their name to control the assets and distributions.
6. Changing your beneficiary. Don’t forget to change, in writing, your beneficiary in the event of a marriage, divorce, birth of a child, death of a beneficiary or similar circumstances.
Making Money a Family Affair
by Stacy Francis, CFP®, CDFA
Make saving a habit not only for you, but for every member of the family including children. A rule that a percentage of all income must be saved, whether it’s from a part-time job, a weekly allowance or any other source, will teach your children the value of “paying yourself first” which they will keep for a lifetime.
Savvy Ladies’ Tip: Check out these fantastic money-saving products:
The Money Savvy Pig Cost: $18.99 plus shipping and handling
Description: Four-chambered, see-through plastic piggy bank allows children to apportion their money for spending, saving, donating and investing. Includes a booklet to help parents teach money basics and a sheet of goal-setting stickers. My favorite is the purple piggy bank. To order: Visit www.msgen.com
Money Mama & The Three Little Pigs Cost: $40.00 plus shipping and handling
Description: A ceramic, four-chambered bank with a big mama pig compartment for spending and three smaller piglet compartments for saving, donating and investing. This is a nicely-illustrated hardcover book aimed at teaching money concepts to kids plus a read-along CD.
Moonjar Cost: $7.95 plus shipping and handling
Description: Three diamond-shaped metal tins for spending, saving and giving. The tins have removable plastic tops, and a wide rubber band holds the three together in a six-sided shape. Includes a small booklet on how to use the Moonjar and a passbook for recording transactions. To order: Visit www.moonjar.com
Mid- Year New Year’s Resolutions for the Savvy Lady
by Stacy Francis, CFP®, CDFA
It’s halfway through the year and it’s time to make some changes. So what’s it to be? If you are REALLY serious about saving money and are willing to make a few changes in your spending habits, then read on.
1. Set goals and have fun The key to making your resolution become a reality is to set a ‘goal’. In other words, what do you want or need the ‘extra’ money for? Are you saving for a new beautiful handbag? What about a family trip to Las Vegas? Set up a savings account for nice things like shopping, holidays and other treats, and you won’t begrudge putting some of your hard-earned cash to one side each month.
2. Pay off one loan/debt over the next 6 months Some of us tend to collect debts like others collect handbags. The fact is, debts are not a necessary part of life. Make a pact with yourself over the next 6 months to get rid of as much of your debts as possible. Contact each credit card company and ask them for the total current balance. Work out how much that will cost you to pay off the debt completely over the next 6 months. It will probably surprise you how little it will impact on your lifestyle. Set up a direct debit and forget it.
3. Get a pay rise You know how, no matter what you earn, you always seem to live beyond your means? Well, now is as good as any time to take action. Collar your boss and ask for that pay rise. The worst that can happen is they’ll say no. And if they do, start looking for another employer who will pay what you deserve.
4. Cut out one money wasting expense like eating out This may be your number one money saver depending on how often you dine out. Trips to restaurants and fast food ‘joints’ quickly add up to be an expensive bill. Try and limit your outings to once a week. Not only will you find yourself saving money, but you’ll be eating healthier at the same time.
How International Do You Want to Be?
by Stacy Francis, CFP®, CDFA
Paris, London and Rome, here we come!
Care to own a little of London or un petite peu de Paris? The relationship between international stocks and retirement savings is along the same lines at brie and French baguettes – you shouldn’t have one without the other.
There is no practical limit to how much of a retirement account can be invested internationally; although, like anything, you don’t want too much of a good thing. Usually 10 percent to 35 percent of international exposure in your portfolio is sufficient.
Mutual funds are by far the easiest way to invest internationally. Your options include international funds (which invest in countries outside of the U.S.), global funds (which invest all over the world, including the U.S.), regional funds (which specialize in one region, such as Europe or Latin America), and country funds (which invest in just one country). There are also emerging markets funds, which invest in countries with younger, less well-developed economies.
The United States stock market is the largest in the world, but it still only represents about half of the global stock market. So get out there and see the world and invest in international stocks through mutual funds.
Savvy Ladies’ Tip: Look at all the things you normally would when choosing a fund, like the fund management, costs, past performance and overall fit with you portfolio. Pay special attention to fees, which tend to be higher in foreign funds than domestic funds, and the experience of the fund manager in that particular part of the world. Visit http://www.Morningstar.com to get this important information.
Make Sure Your Cash Works as Hard as You Do
by Stacy Francis, CFP®, CDFA
Not ready to put your cash in the stock market? Feeling like you are not getting anywhere making 0% on your extra dough? We have the answer for you.
One of the easiest ways to get higher interest rates on your checking and savings is to do your banking online. You need to make sure that you use a bank or brokerage firm whose name you recognize. Also, make sure the accounts are FDIC insured. What does FDIC insurance do for you? A lot – so listen up.
Established by the federal government in 1933, after the bank failures of the Great Depression, the FDIC guarantees deposits in banks and thrift institutions for up to $100,000 per depositor per bank. If the bank fails, the government will protect your money up to the established limits. So make sure the bank accounts you stash your cash in are FDIC insured.
Savvy Ladies’ Tip: One of the highest paying savings accounts is 0.75% offered by Capital One and Ally Bank. Another great resource for finding the best interest rates is at BankRate. The site has a great tool for comparing rates.
Overreacting to the Market
by Stacy Francis, CFP®, CDFA
If you are developing a nervous twitch lately it may be a sign that you are a market over-reactor. While there will always be an economist that preaches doom and gloom, be assured that while the economy may have slowed, it hasn’t fallen off the cliff.
Let’s look at a few bright spots! The housing market is booming. Record numbers of people are buying and selling homes. Look at house construction. Yes, it’s higher too.
Consumers like you and I are also spending in droves. We are helping this country actually buy itself out of this recession. And overall job growth is slowly increasing.
Fact is, while many people overreact to bad news, it pays to keep your cool.
Should You Be on the Field or On the Sidelines?
by Stacy Francis, CFP®, CDFA
When the market is in transition, it’s tough to decide whether to be in the game or on the sidelines. In order to know the answer to this question what we really need is a crystal ball. Since neither you nor I have access to a crystal ball we need to look at alternatives.
The best way to accurately predict the future is to invest in it. Certainly it’s better to have money working. Worried money sitting in a checking account never makes money.
The best bet for the future involves investing in a diversified portfolio of stocks and bonds. By spreading out your investment portfolio, you usually can reduce risk, minimize losses, and take advantage of the next “surprise” winners.
Savvy Ladies’ Tip: Throw your crystal ball away and start getting in the game.