Not being Catholic, I don’t usually pay a great deal of attention to the Pope. However, the Holy Pontiff is now advocating allowing individuals to decide how they want their tax money to be spent. Its an interesting idea, to be sure.
From his 2006 letter to the faithful.
One possible approach to development aid would be to apply effectively what is known as fiscal subsidiarity, allowing citizens to decide how to allocate a portion of the taxes they pay to the State. Provided it does not degenerate into the promotion of special interests, this can help to stimulate forms of welfare solidarity from below, with obvious benefits in the area of solidarity for development as well.
Miel and I are back in Eugene, Oregon for this weekend. Miel is attending the Oregon Country Fair and I’m visiting family in town. Being back in Oregon is wonderful. The mornings are quiet relative to the busy east coast and the air and water are much cleaner.
However, the economy is absolutely the pits out here. Unemployment locally is roughly 14%. And we’ve been seeing signs that times are tough. For example, my mom Gretchen is a unemployment claims judge and her office is getting hit with way more unemployment claims filings since last year.
She also volunteers as a legal aid lawyer for senior citizens in Eugene. Once or twice a month she heads to a local senior center and talks with retirees who are having legal problems. Many of these problems revolve around debt issues.
For example, she had one client, a senior who relies on Social Security. This gentleman earns about $1,100 per month but had to borrow for house repairs. He was making payments – they had been figured into his budget – but missed a month. It is unclear why. Bank of American then started a cascade of increased interest rates and minimum payments. This left this gentleman with with an effective interest rate of about 38% and a debt balance of over $20,000 – hugely more than the original amount. Because this person is on a fixed income, he will never be able to pay the debt off. With the high level of unemployment, its tough to get the kind of part time jobs that a senior could otherwise use to supplement his income. In short, this poor guy is just out of luck. Even if he lives an extremely frugal life, there is no way he can dig himself out of his debt in his current situation.
The take home message here is that the economic downturn locally, at least among some people, is being exacerbated by predatory lending.
On the topic of insurance this week, it is important to consider how one should utilize insurance in the event of a loved one passing away. The best way handle this is to invest the life insurance to preserve the initial capital and live off of the income generated from that investment. Also keep in mind that your investments need to be adjusted for inflation so that they will sustain you over the long term. You shouldn’t have to worry about building wealth in this situation, just on coping with the loss and living off the fixed income.
Please don’t just live off of the payout. Your loved one will be most honored by seeing you live out your life more securely.
If you do have extra money and want to pay down debt, the thing to do is be sure that the extra funds go directly to the principal of the loan obligation. Sometimes loan companies will try to be tricky and apply your payments in advance towards your monthly fees. For example, back in 2003 I sent my student loan lender $2,000. Instead of applying it to the principle, the funds were added to my monthly payments. The company instead said I didn’t have to make payments for a year. This is obviously a problem because when companies do this, you don’t get out of debt any faster.
So, the way around this is to contact your lender and be sure to understand how they apply extra payments. For example, you may have write on your check that the funds should be applied to the principle. Just double-checking can save you a lot of money and allow you to get out of debt faster and start building some wealth!
As a final caveat, when paying off your debt early, you need to sure you aren’t sacrificing your savings. Unemployment is really high right now. This means you’ll need a healthy emergency fund. In addition you need to be sure that you have enough money to pay your current bills, so if you aren’t that hot at budgeting, consider leaving a little extra in your savings.
Its another brilliant day here in the states. For today’s posting, we are pleased to bring you an interview with Robert Nichols, the Chief Executive Officer of Windward Capital, a Los Angeles based wealth management firm. We are featuring an interview with Robert for two reasons. First, his funds managed to come out of last years stock market bloodletting beating the averages – a rare feat. Second, Bob has worked with a lot of high net worth people and thus has a good sense of HOW one becomes wealthy. This is obviously an important question for those interested in financial security.
In his own words, here are Mr. Nichol’s thoughts on wealth building and successful investment strategies.
ABOUT ROBERT.
My education has focused on business and finance. I am a graduate of the Claremont Graduate University with an MA in Management, an MBA in Business and, a Ph.D. from the Peter Drucker School of Business.
In 1971, I formed an asset management firm, RNC Capital Management Co. (RNC) and served as its President until 1992. During that time, the firm grew its assets under management from $500,000 to well over $1.3 billion, including large institutional clients such as the Arkansas Police and Fire, American Institute of Architects, GTE and the Territory of Guam. By the time I sold the firm to Bank Austria in 1992, we also managed 8 public traded mutual funds.
I created my current firm, Windward Capital Management Co., for the express purpose of implementing an investment strategy that we had been studying at RNC for a number of years. In addition, I was anxious to provide investment services to high-net-worth clients in the Los Angeles area to escape the travel burden I had been experiencing at RNC.
Our clients are now, generally, the Trusts of wealthy individuals and their families.
BUILDING WEALTH?
Building wealth normally takes time and patience, and because time is such an important element in the wealth building process, a certain amount of discipline is also necessary. One of the important rules is to “pay yourself first.” Let me explain. Most people like to spend everything they make, and that is a huge and, obvious, impediment to building wealth. It’s so easy to buy that more expensive car or take that nice vacation trip, but it’s a habit the wealthy have learned to break. If you “pay yourself first” you will set aside at least 15% of your paycheck as soon as it is cashed. A good rule is to save about 10% in a retirement account (that will also give you some tax-savings) and put 5% in a cash account for a rainy day. Don’t kid yourself, life is going to deal you a number of very difficult financial moments; have some cash on hand and prepare yourself for those difficult times. In the wealth-building arena, nothing is more important than financial discipline.
OUR CLIENTS’ WEALTH-BUILDING EXPERIENCE?
Believe me when I tell you that 99% of our wealthy clients didn’t accumulate their wealth overnight. Most of them can tell stories of near-despair and more than one period of time in their lives when their financial outcome was uncertain. In almost every case, however, they have said that spending discipline brought them through the tough times. I have noticed, over the years, that the ability to build wealth is present in almost any occupation that becomes the PASSION of the worker. Passion soon transforms itself into PERSISTENCE and DETERMINATION that are key elements to wealth building. We have wealthy clients who are dairy cow brokers, plumbing supply owners, engineers and clients who participate passionately in a large number of other occupations. The key to their success is the love of their work. There is an old saying that says, “Love what you do and you will never work a day in your life.”
MARKET CONDITIONS?
There are many different factors to be used by an investor in allocating investment assets including age, debt, and other financial and family factors. It would be worthwhile to mention, however, that the single largest deterrent to making good investment decisions in all economic conditions has been investor EMOTION. The emotions of greed and fear are not equally distributed in the human mind, however. Fear trumps greed by a 2 to 1 ratio. Today, investors need to ask themselves, “Is the U.S. ever going to recover from this economic downturn?” If the answer is “ Yes” then investors should put their fears aside and begin to buy equities. Small investors can buy Exchange Traded Funds or mutual funds and gain the diversification they need to partially allay their fear of another stock market downturn. In my opinion, investors with long-term horizons (5-10 years) are being presented with a compelling investment opportunity.
Small portfolios of individual stocks should be built around a core group of large company equities. Stocks like Proctor & Gamble and Johnson & Johnson pay excellent dividends and, in my opinion, are good examples of such core long-term holdings. (Investors should seek the advice of their financial consultants before investing). The mistake most small investors make is in being too speculative. Remember, becoming wealthy is a long-term process, and there is nothing wrong with getting paid to wait by collecting dividends.
There is always a reason NOT to invest. Wealthy investors are contrarians, and they are always looking to swim against the tide of fear that keeps smaller less experienced investors on the sidelines.
(Bob and Teammember At Work)
THE WINDWARD STRATEGY?
The most important research we perform is research designed to identify two or more dominant economic themes. We buy equities for both our Growth and Value investment strategies that are participating in more than one such theme. In other words, we want the stocks we use to have more than one dependable source of revenue and, if possible, we would always prefer a company with a reliable, strong, free-cash flow. Our Growth portfolios are a little more volatile than our Value portfolios, but the two key issues with us are to contain the portfolio risk while continuing to produce exemplary investment returns.
As I said, we are very risk averse. Our growth strategy allows us to use value stocks to offset the inherent volatility of growth stocks, and our use of a limited number of growth stocks, in conjunction with a greater number of value stocks, is designed to enhance the performance of our Value portfolios.
LIFE CYCLE INVESTING?
Certainly, as an investor ages, or takes on more financial responsibility, he or she should consider the role that bonds might play in their portfolio. Bonds are not “bullet proof,” however, they do provide additional stability to a portfolio during a stock market downturn. Having said that, I would also say that it may prove to be very difficult to keep up with inflation with a fixed-income-only portfolio. There are a number of excellent balanced (some stocks and some bonds) mutual funds that can accomplish almost any tolerance for risk that an investor might have.
OUR WEBSITE?
Our website has a lot of information about our investment Philosophy, Portfolio Managers, Investment Process and Performance over our many years of investment management. If you do not find what you are looking for on our website, just give us a call and we will send you a complete brochure.
www.windwardcapital.com
Thanks for listening.
Robert W. Nichols, Ph.D. CEO/Portfolio Manager 310-893-3000
If you are shopping for life insurance for your significant other or family, here is a quick rule of thumb: buy at least ten times what both of you together make. So if both of your earnings are $50,000, consider getting life insurance in the amount of $500,000. The ten times earnings metric is a good rule of thumb as it ensures enough time for your dependents to get on their feet while accounting for taxation and the fact that the grieving processes can take a long time. For a stay at home spouse, you might consider getting something in the range of $400,000 to $500,000. Don’t bother with getting life insurance for your minor children. If, heaven forbid, your kids do pass away, you might consider getting a rider to your policy that allows for some funding for burial expenses.
Keep in mind that the main purpose of life insurance is to enable your family or partner to maintain a similar level of lifestyle as they are accustomed to. For instance, in our case, I would want James to be able to stay in our current place and also to be able to finish his doctorate without having full employment. On the flip side, while I could manage our mortgage and finances on my income, I couldn’t do so while still fully funding my retirement and being able to save for additional goals. It’s important that building wealth isn’t a major concern for your loved one if you were to pass away.
Everyone’s situation is different, so think about what works from you and what is important to leave to care for your family.
This posting came across my radar screen a couple of days ago. Its a posting by a tax blogger whose postings I read with some frequency. In it, he discusses the problems a couple of his clients had with a major tax preparation company – I think its H&R Block.
The posting is relevant I think because it illustrates a couple of things:
1) The importance of getting competent tax help. The more one gets involved in personal finance, the more complicated one’s tax situation becomes. Its important to have either the right kind of education or help so you can make the right decisions regarding your money and its tax implications. The last thing you want is to have tax filing problems infringe on your ability to build wealth. Imagine what a large fine from the IRS would mean for your investments, nest egg, etc.
2) It also indicates that not all tax preparers are alike. In this case, H&R Block *probably* screwed up this couples taxes. This would be in following with this companies very poor track record.
With permission, I am reposting the TaxGuy’s post.
——————————————————————–
Bruce writes…
Friday I was interviewed and retained by a new client. This particular client has several issues that actually can fall in line with a great debate we have all been following.
First, a little background:
A young newly wedded (three years) couple has their tax return done by “pros” as they are not among those who follow the taxing world. We will call them Pat and Jody Taxpayer. Having just started their own Business they left HeRBert (the group who prepared their returns) for what to them was perceived as a tax professional. They retained a CPA to handle some general bookkeeping and complete tax returns.
Good choice?
Of course it is, “All but the militantly nefarious and hopelessly deluded concede that CPAs are experts at keeping books and records. There simply is no higher accounting designation.” then CPA.
The CPA (Certified Public Accountant) maintained records by gaining access to Pat & Jody’s bank account using the online statements. The first tax season for this CPA came around and she completed the 2007 tax return. Another year passed, and she completed the 2008 return.
Several months ago, the IRS notified the Taxpayers that the 2007 return was under investigation. Seven lines on two different Schedule Cs were in Question.
Considering a CPA had prepared this return there should be no worries.
So how did I get this return?
When the time came for the audit with the “Tax Compliance Officer”, the CPA, had manufactured information to provide the IRS to validate two of the seven lines in question and did not show up to guide the Taxpayers through the 3 ½ hour long ordeal. Needless to say, the IRS found no substantial proof or validation for seven lines in question. P & J now are holding a bill from the IRS for over $10,000.00.
As we head off to San Francisco Chinatown we are on a mission to see where we can find the best cheap, hole in the wall place for steamed buns. Adventures in finding fun dive places to go can often be more fun than going out to some fancy restaurant.
As a tip for the summer, make it a game around family/friends to see who can find the best cheap eats deals. You might be surprised at what great stuff you’ll find at much less than you might otherwise spend. Saving money on food can allow you to build wealth much faster than you would think is possible because of the excess cash you have to put towards investments.
Generally speaking, I’m skeptical about the need for insurance. I think a lot of personal finance gurus – and lots of bloggers – tend to buy into the notion that you’ve got to have insurance. Also, I tend to have a low opinion of many insurance companies – they tend to have incentives to deny even legitimate claims or to hold up payment to maximize their own profits.
That said, here are some types of policies you might want to consider.
1) Health Insurance. If you don’t have it through your employer it’s possible to buy insurance through a high deductible insurance that also allows you to open a Health Savings Account (HAS) to be prepared for health expenses. This will protect you against catastrophic risk.
2) Auto Insurance. A lot of state laws require this. Plus accidents can totally ruin your car. When I was younger and more reckless I ended up getting in a couple of fender benders. One time I got hit (I wasn’t at fault), and the insurance covered the payment. One time my wife Miel got blindsided by an uninsured and unlicensed driver, the damage left her car much less valuable.
3) Life Insurance. Get term insurance. Whole life insurance has a savings portion, but it’s often not worth it – usually you only get 2 or 3% on that portion of the policy.
4) Disability Insurance. Guru’s like Dave Ramsay argue that you should have disability insurance – but I’m less optimistic about this. Probably this is the lowest priority of all the types of insurance and is especially low priority if you have a desk job and don’t really engage in risky sports.
5) Homeowners or renters Insurance. The rationale behind getting homeowners or rental insurance is that you’ll want to cover your place in case of a catastrophe. For example if your apartment gets burned out you’ll want to at least get some money to fix the place or get some of your stuff back. Due to the housing bubble and subsequent bust a lot of insurance companies are changing their reimbursement schemes. Be sure your information is up to date when you’re researching these options.
6) Long Term Care Insurance. If you are over 60, this might make sense to look at. Many elderly people lose their ability to perform regular activities of daily living – like going shopping or cleaning the house, etc. A long term care insurance policy covers some of the expenses of having to hire help.
Also keep in mind that one of the first steps before adding additional insurance is to look carefully at what you have through your employer. Chances are, unless you are paying very close attention, you likely don’t know exactly what you already have. Check it out and see where your gaps are. If you are trying to build wealth, it is usually a good idea to know what insurance you have and how exactly it will lower your risk in the time of tragedy.
