# GE and the Risk of Company Stock

Investing in your company’s stock is nothing out of the ordinary. Many people invest in their employer’s stock without much thought. Being heavily invested in a single stock is risky no matter if you work there or not. There are several reasons why we do this and some pitfalls we should avoid.

## Familiarity Bias

Familiarity bias is our tendency to choose the things that are familiar, or well-known to us. This bias can be harmless in some areas of life, such as choosing the same restaurant over and over again, taking the same way home from work every day, or dating an ex (okay, this may be dangerous).

This bias is not as innocuous when it comes to your investments. It is one of many behavioral flaws that can hinder your investment decisions. Prudence says that you should diversify your investments. Familiarity bias leads people to do the opposite. They find safety in holding companies that they know well. This familiarity and false sense of security blinds them to the benefits of diversification. They think, “why would I hold 400 companies I don’t know when I can hold onto a few that I do?”

Familiarity bias can be especially strong when you work at the company that you’re invested in. The temptation only compounds the longer you work there. From the inside, you may think the company will never fail. I don't care how well you resonate with the core values, how good the product is, or how competent the leadership is, no company is immune to failure.

A study conducted by the Kaufman Foundation and Inc. Magazine looked at the 5,000 fastest growing companies in the US over a 5 to 8 year period. What they found surprised them: About two-thirds of these companies had either gone out of business, diminished in size, or sold at a reduced value. This risk isn't limited to small companies. If history has taught us anything, it’s that no company is too big to fail. Did you know that the average life expectancy of a Fortune 500 company has fallen from 75 years to about 15?

## Everyone Else Is Doing It

When investing, we don’t only fight internal pressures, like familiarity bias, we fight external pressures too. I have spoken with many of my clients that have stock options through their employers. Most have mentioned feeling pressure to be heavily invested in their company’s equity. They fear that if they don't, they will be overlooked for promotions and ostracized by leadership. While some of this is only perceived, a lot of it is very real. I have some clients that were flat out told that this was true.

This is peer pressure at its worst. Employees should not be punished for being more risk averse than others. An employer should have no bearing on what an employee's portfolio looks like.

I understand that employers want employees to have a vested interest, but is it worth staking their livelihoods on it?

## Danger, Will Robinson

You don’t have to go straight to Enron comparisons to see the dangers of being heavily invested in a company’s stock. A company doesn't have to go belly up to ruin someone's retirement. Individual companies go through regular periods of significant volatility. Just ask Gary Zabroski. Gary worked for GE for over 40 years and is now looking for a new job when he thought he would be retiring. He, and others like him, have seen the GE stock price go from $29.80 on January 1, 2017 to$11.53 as of September 27, 2018 (that’s over a 60% drop).

## Conclusion

A company stock plan can be a way to increase employee engagement and create a vested interest in the company’s success, but internal and external pressures can lead people to making very unwise investment choices. Most people should not have more than 5 or 10% of their portfolio invested in the stock of their employer. The company that made you could just as easily be the company that breaks you.

How About Now? - The Irrelevant Investor

What GE’s Board Could Have Done Differently - Harvard Business Review

When Workers are Owners - The Economist

The decision on whether to rent or buy a home is a difficult one. There are many factors at play, and not all are financial. When my wife and I bought our home, we had to think hard about our motives. Was it a good financial decision? Were we blinded by our emotions?

Emotions can lead you to make some of the worst financial decisions ever. That's why I love methodologies that set emotions aside and make you take an objective approach. The metric below is one of those strategiess that can help you make an informed decision.

Before I continue, let me deflate some of you right now. I meet with a lot of people who are not ready to buy a home (or second, third, or fourth home) but think they are. Don't even think about buying a home if:

• You don’t have an emergency fund saved up. This should be at least 6 months of household expenses.
• You don’t have money for a down payment. That's on top of your emergency fund folks. 20% is ideal, but there are certain scenarios where less than that is acceptable.
• You can’t afford to take on more debt (See my article on How Much Debt is Too Much?)
• You don’t plan on living there for at least 5 years.
• Your income is unreliable. It’s one thing to get kicked out of a rental if you can’t pay, it’s another to have your house foreclosed on.
• Your primary motivation is one of the following:

“A home is a good investment.” It’s not.

“All my friends are doing it.” Your friends’ situations are different from your own. Plus, you could have dumb friends.

“We need one to start our family.” Your baby won’t know whether you own your place or if you’re leasing it. I promise.

# Price-to-Rent Ratio

## What Is It?

Assuming none of the above apply to you, a great tool to use in your decision is the price-to-rent (P/R) ratio. This ratio is often used in economics to look at trends in the housing market. It can also be useful on a personal level to determine how expensive it is to buy versus rent in your area. It’s a simple three-step calculation. All the data you need can be found on Zillow Data.

1. Look up the median home sale price for a given area.
2. Look up the median rental cost for the same area. For the purposes of this calculation, you’ll need an annual number, so multiply that monthly cost by 12.
3. Calculate:

## How to Use It

So, how do you interpret this number? A high ratio suggests that the cost of ownership will likely be higher than the cost to rent, meaning that it would be better to rent than to buy. The converse is true for a low P/R ratio. A good rule of thumb for interpreting the resulting ratio is:

• If the ratio is under 13 – it’s typically much better to buy than to rent
• If the ratio is between 13 and 16 – the decision could go either way
• If the ratio is above 16 – it’s typically better to rent than to buy

The numbers above can be a helpful guideline, but the situation may differ depending on the area in which you look.

Right before the housing bubble burst in 2008, the average price-to-rent ratio was 24.5! This means that the vast majority of people should have been renting, but most were buying. In hindsight, this was one of many indicators that should have been a warning sign.

## Example

Here’s an example calculation for the areas around where I live (using the March 31, 2018 numbers from Zillow):

This would tell you that LaGrange would be a good place to look for buying opportunities. Conversely, Prospect is an area that renting would likely be better than buying. For Eastern Louisville and Crestwood, the decision would be a bit of a toss-up.

The price-to-rent ratio is also a great tool to use when contemplating a move to a new city. The Get Rich Slowly blog has a great overview of these ratios among different US cities. When you move to a new city, you have the disadvantage of not knowing the area well. The P/R ratio gives you a leg up in your search. You can see which areas are overpriced, as well as areas with good buying opportunities. Here is the graphic from his blog on the ratios for many US cities:

Regardless of whether you're staying in the same area or contemplating a move to a new one, the price-to-rent ratio is a helpful tool to use. The decision to buy or rent is a difficult and complex decision and it helps to have as many tools as possible at your disposal. The price-to-rent ratio is one tool of many that you can use to aid your decision.

# Preparing For A Market Decline

I am not one to predict a stock market crash.

If market history has taught us anything, it's that even so-called “experts” are notoriously poor at predictions. I don’t know when the market will go down, but I know it will at some point.

## History of Corrections and Bull Markets

Industries love their jargon, and finance is no exception. There are 3 common terms that refer to declining markets: a correction, a bear market, and a crash.

A correction is a market decline of 10% or more. A bear market is a market decline of at least 20%. A crash is a general term that refers to a sharp market decline, usually over a short period of time.

Capital Research and Management examined all the corrections and bear markets since 1900. They studied market declines and how often, on average, they occur. Their findings are as follows:

• 5% declines happened about 3 times a year
• 10% declines happened about once per year
• 15% declines happened about once every 2 years
• 20% declines happened about once every 3.5 years

Source: Wealthfront

It can be hard to believe that these types of declines are so common. It is easy to forget when we're in the middle of a market that has been increasing since 2009.

We know that declines have happened and will happen in the future, we just don't know when.

So, how can you prepare?

## What Can You Do?

### 1. Don't Predict

Predictions are tricky things. No one has a magic formula to determine the future movement of the markets. Economists and investment managers alike have pitiful records trying to foresee downturns. Economist Paul Samuelson once said, “The stock market has called nine of the last five recessions.”

If the pros can’t do it, you shouldn’t either.

### 2. Expect It

As you can see above, stock market declines are a regular part of investing. So, it should not come as a surprise when the market inevitably drops (again… and again).

### 3. Stay the Course

People love to gloat about how they got out of the market at the right time. But you hardly ever hear them brag about how they got back in at the right time. You can't just be right once, you have to be right twice- on the way out and on the way in. Both are equally unlikely.

Markets fall, but they have always recovered. Trying to time the market will almost always fail. People (professionals too) who try end up getting out too late, and back in after most of the recovery. They hurt themselves on both ends, rather than staying the course.

A recent DALBAR study found that investors who consistently exit the markets when they drop cost themselves, on average, 4% a year!

Your best protection from a market downturn is a well-diversified and allocated portfolio.

A well-diversified portfolio consists of many types of holdings, companies, and industries. Just because you have a lot of holdings, doesn't mean that you're diversified. Sometimes a single fund can be more diversified than 10.

A well-allocated portfolio is one that reflects your risk tolerance, time horizon, and goals. The closer you are to pulling money from your investments, the more conservative they should be.

These two things won't protect you from losing money in the market, but they will help you mitigate that risk.

The last thing you want is to have a short time horizon and poor diversification and allocation when the market drops.

### 5. Rebalance

One of the most important things that you can do is to rebalance your investments regularly. In a well-diversified portfolio, different asset classes produce different returns. This means that your allocation changes over time. Periodically, you need to bring your investments back to their original allocations. This process ensures that you are not taking on more risk than you should be. It also forces you to sell things that are high in the portfolio and buy things that are low- a core discipline of investing.

There has been a lot of debate and study over how often you should rebalance. I’ll spare you the extensive research and let you in on the consensus:

The average investor should monitor their portfolio at least annually and rebalance any positions that exceed 5% more or less than the original allocation.

# How to Combat Lifestyle Inflation

In a previous post, I introduced a concept called lifestyle inflation. Lifestyle inflation is the process of increasing spending as your income goes up.

This process is problematic because it keeps you from making progress toward your goals. If you upgrade your lifestyle every time your income goes up, you will end up with many nice things, but will be far from the goals most important to you.

So, how can you arm yourself against this destructive tendency? Here are five methods:

## 5 Ways to Combat Lifestyle Inflation

The siren song of lifestyle inflation is that more/better stuff = happiness. Does money buy happiness?

The answer is yes, but only to an extent.

Economist Angus Deaton and psychologist Daniel Kahneman tried to solve this question. Over 450,000 people were surveyed on their well-being (happiness). The survey included questions such as, "How satisfied are you with your life as a whole these days?" Next, they compared these answers with the respondents' incomes to determine if any correlation existed.

Kahneman and Deaton found that a rise in income did indeed bring along with it a rise in well-being, but only up to a household income of $75,000. Happiness essentially flat-lined above that point. This indicated that income above that point no longer brought an increase in happiness. I think that$75,000 is an arbitrary number, especially across different regions of the country and the world. The key point to take from the study is this:

Your peak happiness lies at the point where the needs of yourself and your loved ones are comfortably met.

Anything more is a welcome addition, but does not contribute one iota to your well-being.

There isn't a clearer analogy for lifestyle inflation than the cell phone. Look at the cell phone you have now and compare it with the first one you ever owned. Each year brings new innovations and ideas to the mobile phone market that makes older models obsolete. This gradual change has made us all expect certain features as "standard." If you don't believe me, try going out and finding a phone without internet access nowadays.

Lifestyle inflation does the same thing in our lives. Things that used to be luxuries are now essentials.

There is a psychological term that helps describe the above process, it's called hedonic adaptation. Hedonic adaptation begins with the acquisition of new things and experiences. When we first acquire something new, we experience initial excitement and happiness. But, as time progresses, these new things become more normal and your happiness reverts to your original baseline.

You need to know how much is enough in your life and be able to recognize the rest as excess. The better you can make these distinctions, the sooner you will be able to reach the goals that matter to you.

### 3. Stop Comparing

This one digs down to the root of the why behind lifestyle inflation. When you compare yourself to others, you will always be able to find someone who has something that you want. Comparison and jealousy are toxic to a happy life. Comparison leads us to buy things we don't need and be in a hurry to afford a life that isn't ours.

### 4. Automate Savings

What's your first impulse when you get that coveted raise?

For most, they picture that item or trip that has always been on the fringe of their reach. They get that nicer car, take that trip to Disney, upgrade their home, or just plain splurge. They may even justify it in their minds, saying "I deserve this." or "I can afford this now."

Now, there's nothing wrong with all those things, but they often get in the way of more important priorities.

Each raise should be automatically saved until you can figure out how to best use it. You may choose to keep it in savings, finally allowing you to have that emergency fund. You may choose to pay off that high-interest rate debt you have. You may use it to increase your retirement savings, or a myriad of other goals.

In the financial footrace to reach your goals, you get there a lot faster if you're running. When you thoughtlessly spend each rise in income, you ensure that you'll always be walking, nay, limping, towards your goals.

### 5. Gratitude

Do you want a cure for your discontentment?

The answer is thankfulness. Your jealousy and covetousness fade away when you spend time being thankful for what you have. When you fix your vision on what you don't have, you perpetually rob yourself of joy, as there will always be more to be had.

I guarantee you'll find it easier to save that pay raise when you're consistently grateful for the things, people, and circumstances in your life.

I'll conclude with a quote from one of the most inspirational people of all time, Dietrich Bonhoeffer:

“It is only with gratitude that life becomes rich”

# Lifestyle Inflation: A Tale of Two Joes

## What Is It?

Lifestyle inflation is the process of increasing spending as income goes up.

The first experience most people have with lifestyle inflation is in the transition from college into their first job. In college, someone will live with several other people to bring the cost of renting down. They will opt for the generic brands of cereals and foods over name brands to keep their grocery bill down (or eat Ramen noodles for every meal). They will share rides back and forth to keep gas costs low.

Then they get that first job. They make a meager income, but compared to their college years, it's a fortune. Suddenly living with other people seems unacceptable. Generic foods have lost their luster, and Ramen has become the food of peasants. Their old car begins to look dingy and run down.

It is easy to see this concept play out in this stage of a person's life, but it doesn't stop there. Lifestyle inflation lasts a lifetime.

## A Tale of Two Joes

To help illustrate lifestyle inflation, let me introduce two people, Average Joe (AJ) and Extraordinary Joe (EJ). They are identical in their lifetime income, but vary in how they spend it. Check out Average Joe in the fancy graph below:

AJ's income goes up at a nice and steady pace throughout his lifetime. Each raise brings an upgraded lifestyle into view. No matter how much income he brings in, it never gets easier to make ends meet. Notice how AJ's "Needs" are in quotation marks. That's because AJ does not have an idea of what he truly needs.

Let's check out Extraordinary Joe (EJ):

EJ has the same exact income and raises throughout his lifetime as AJ. However, EJ takes each raise he gets and automatically saves it until he can figure out how to best use it. Sometimes he uses it to pay off debt. Sometimes he makes more retirement contributions. And sometimes he spends it. Notice that his needs increase throughout his lifetime, but they are not directly correlated with his income, like AJ's was.

## The Take-Away

The vast majority of people are like Average Joe (hence the name). Each raise is accompanied by a corresponding increase in lifestyle. As more income floods in, so do more things, or the same things upgraded. They can never seem to save as much as they need to and financial independence is always a mirage on the horizon. People living like AJ are slaves to ever-increasing want.

On the other hand, an increase in lifestyle is not always a bad thing. Isn't that everyone's goal in making more income? To produce the type of lifestyle they want? Of course it is. The key point is that, when unchecked, a person's spending will always keep pace with their income. People need to be mindful of what their needs, goals, and priorities are. Everything else is excess.

### Resources

Investopedia- Lifestyle Inflation

# Ten Principles of Personal Finance

The following list is adapted from the ten principles of personal finance by Arthur J. Keown in his book, Personal Finance, Turning Money Into Wealth.

## 1. Knowledge is Power

Finding advice is not hard. Finding good advice can be. The world is full of articles, videos, books, self-proclaimed gurus, financial advisers, consultants, representatives, etc. all trying to give you advice on what to do with your money. Every single one of these resources has the potential to be filled with bias, misleading or false information, or just flat out bad advice. So how can you protect yourself from all of this? It all starts with knowledge.

It's unreasonable to expect yourself to be an expert on every area of personal finance, but that doesn't mean that you shouldn't make an effort to be informed. Learning the basics of personal finance will help you to make better decisions and:

• Identify information that applies to you and to ignore information that doesn't. Sometimes the information and advice aren't bad, they just don't apply to you specifically.
• Allow you to partner with professionals in planning for your future, rather than leaving it up to them to do it for you.
• Give you an understanding of the urgency and importance of planning for your future.
• Protect you from incompetent and/or biased financial professionals and information. When you arm yourself with knowledge, you can better identify people and information that may not have your best interest at heart.

## 2. Nothing Happens Without a Plan

People are creatures of defaults. We tend to take the easy path until we are motivated enough, either by fear or desire, to change. For many of us, our default lifestyle would be quite passive, lacking the discipline to exercise and eat healthily. It is only when we have cringed enough looking in the mirror, been motivated by someone else, or seen the poor effects of an unhealthy lifestyle on ourselves or someone we know, that we are motivated to change.

The same logic can be applied to financial planning. No one wakes up one morning and says to themselves, "You know what I want to do today? Delve into the ball of insecurity that is my financial situation and try to make that into an actionable plan for my future goals." Nope. No one. Why? Because it's not our default! Our default is to ignore it because that's easier. We put it out of mind until we experience enough incentive to get us moving, whether positive or negative. Don't let idleness be your default.

## 3. The Time Value of Money

When idleness is your default for long enough you start to miss out on this next important principle, the time value of money.

Time is always working for or against your money. Its is working for you in your investments and against you in your debts. Believe it or not, even that dollar wedged under your mattress is slowly losing value. Don't believe me? Look at the Consumer Price Index over the past 70 years. Everything just keeps getting more expensive, while your mighty mattress dollar gets less and less valuable.

However, time isn't always a drag, it can be exciting as well. For example, if you invested $200 per month for 40 years, growing at a compounded rate of 10% each year, you would have over$1.25 million dollars at the end of that period. You would have only invested $96,000 over that 40 years, the rest of that$1.25 million dollars is compounded interest plus a whole lot of time.

Sounds great, right? So why doesn't everyone do that? This leads to our next principle, risk vs. return.

## 4. Risk vs. Return

There aren't many areas in which the phrase, "nothing ventured, nothing gained" is more applicable than in finance. There is a general relationship between the amount of risk taken and the amount of return on your investment that you will expect. No one in their right mind would take on more risk if there were not more to be gained.

What do we mean when we say risk? There are many types of investment risk. Below are the two main types of investment risk:

• Business Risk- This can also be referred to as company, industry-specific, or unsystematic risk. It is merely the risk that a specific company, or even the company's industry as a whole, will do poorly or fail. This is one type of risk that can be reduced through diversification.
• Market Risk- This is also referred to as systematic risk. It is the risk that is inherent to the market and all the securities in it as a whole. This is one type of risk that cannot be mitigated by diversification. No matter how diversified you are, you cannot completely eliminate the risk associated with investing.

There are many other types of risk to consider, such as credit, inflation, liquidity, social, currency, legislative, etc. In short, with investing comes risk, and every person is different in regard to their tolerance of risk.

## 5. Taxes Matter

You can't just evaluate an investment purely in terms of expected return; you have to keep taxes in mind. A rule of thumb is that, sooner or later, Uncle Sam always gets paid. You should always be mindful of the effect taxes will have on your investment, both now and in the future. It may very well change how or what you invest in.

## 6. Life Happens - The Importance of Liquidity

If financial planning guarantees a single thing, it's that you will be wrong. Even the most meticulously created financial plan will be based upon assumptions that will change given enough time. Does this mean that you shouldn't even try to plan for the future? Of course not! However, you should not plan for your long and intermediate-term goals at the expense of your short-term stability.

Enter the emergency fund. You should always have some of your money available at a moment's notice, a term we refer to as liquidity. A general rule of thumb is that you should have 3 to 6 months in liquid funds available to meet emergencies or unexpected needs, such as a job loss, medical need, car troubles, home repair, etc.

## 7. The Power of Budgeting

"A penny saved is a penny got" (yes, this is the actual quote from Ben Franklin).

This one is simple. Know what you make, and know what you spend. Can you name a Fortune 500 company that isn't aware of their cash inflows and outflows? Set goals for yourself and cultivate the discipline to systematically work towards them.

## 8. Protect Yourself and Others

Insurance. The thing no one is excited to buy, but everyone has. The worst time to worry about your insurance coverage is after a tragedy has occurred. Do yourself and loved ones a favor and evaluate your health, life, disability, property & casualty, and long-term care insurance needs and put a plan in place sooner rather than later. Especially do your homework before someone comes knocking on your door to try to sell you some. Insurance is one of the most necessary aspects of your financial picture, but it is also one of the most abused. This goes back to principle #1: Arm yourself with knowledge and make an educated decision.

## 9. You Are Your Worst Enemy

I just finished a book called, "The Little Book of Behavioral Investing: How not to Be your Own Worst Enemy" by James Monier. If you're interested in exploring this concept more fully, I highly recommend it. The premise of the book is simple: overcoming human instinct and emotion is key to becoming a better investor. The biggest risk to your future financial success is not inflation, pushy salesmen, poor 401(k) investing options, nor taxes. Your biggest risk is yourself.

According to a study done by Dalbar, from 1983 to 2013, the market, as measured by the S&P 500 averaged 11.11% per year, but the average individual investor earned only 3.69%.

Don't fall victim to overconfidence, fear, media noise, so-called "gurus," emotional decisions, nor the goals of other people.

## 10. Just Do It!

The most difficult step in the entire planning process is implementation. The actual act of getting started and maintaining the course is the biggest obstacle for most. As a perfectionist at heart, I can struggle with this principle in many areas of my life. If I feel that everything is not perfect before I begin, I tend to not even attempt the endeavor. I once spent an entire day trying to formulate the "perfect workout routine," all the while sitting on my couch. Planning is a vital step, but don't get stuck there forever. Eventually, the rubber has to meet the road.

## Resources

Keown, A. J. (2010). Personal finance: turning money into wealth. Boston: Pearson.

# The History of Money

Money has been around for quite some time. From bartering to Bitcoin, we have come a long way.

Below is a fascinating graphic on the history of money created by Mint.com.

Courtesy of: Visual Capitalist

# Small Business Guide to Selecting a Retirement Plan

If you're self-employed or run a small company, it can be overwhelming to try and figure out what retirement plan would be best for you and your company.

Use the graphic below to help you get an idea of which plan may be right for you.

Infographic based on the American Funds question guide

Keep in mind that the graphic above does not include every single option available to employers, nor is it a definitive guide to selecting a retirement plan. The graphic above merely helps you to begin the conversation on choosing a retirement plan with the right questions.

Below is a brief overview of each of the different plans mentioned above. All of the following plans have the same tax status of contributions, meaning that your contributions are tax-deferred (up to certain limits).

## SIMPLE IRA

Eligibility: Any employer with 100 or fewer employees that does not maintain another retirement plan.

Key Advantages: This plan allows for direct salary reductions with less administrative burden. It is also typically one of the least expensive plans to set up and maintain.

Who Contributes and What are the Limits?: Both the employer and the employee contribute to this plan. The employee funds the plan directly through a salary reduction. The employer is required to contribute either: 1) a 100% match of up to 3% of employee salary contributions (match can be reduced to 1% in 2 of 5 years), or 2) a 2% contribution for all eligible employees, whether they contribute to the plan or not.

The maximum contribution for this plan is $12,500 for 2017, plus a$3,000 additional for those that are age 50 and over (2017).

Administration: By doing one of the two required options above, it removes all requirements for costly audits of the plan (top-heavy testing, highly compensated employee identification, etc.). There are also no annual filing requirements from the plan (form 5500) as with a 401(k), which brings down the plan cost and administrative burden of the plan. The employees are always 100% vested in both their contributions as well as the contributions of the employer.

Key Disadvantage(s): The SIMPLE IRA has lower contribution limits when compared to a 401(k) or a SEP IRA for employees of higher income levels ($60,000+). ## SEP IRA Eligibility: Any employer with one or more employees. Key Advantages: This plan is easy to set up and maintain. It is typically a more popular option with sole proprietors due to its higher contribution allowances for those with higher levels of income. Who Contributes and What are the Limits?: The employer is the only one who can contribute to the plan. The employer can contribute the lesser of 25% of employee compensation or$54,000 to the plan (2017). The employer must contribute the same percentage to employee accounts in each year that a contribution is made to their own account.

Administration: There are no annual filing requirements (form 5500) on behalf of the plan. The employees are always 100% vested in both their contributions as well as the contributions of the employer.

Key Disadvantage(s): A disadvantage of the SEP is that only the employer can only contribute to the plan, not the employees. The employer must also contribute the same percentage of contribution for their employees that they do in their own account (ie. if the employer contributes 15% of their own salary to the plan, they must also contribute 15% of each employee's salary to their plan as well).

## Payroll Deduction IRA

Eligibility: Any employer with one or more employees.

Key Advantages: Easy to set up and maintain. No required employer contributions.

Who Contributes and What are the Limits?: The employees are the only ones who can contribute. They contribute via payroll reductions.

Employees can contribute up to a maximum of $5,500 per year, plus an additional$1,000 if they are age 50 or older (2017).

Administration: There are no annual filing requirements for the plan. The only administration of the plan is the payroll deduction.

Key Disadvantage(s): This plan has the lowest contribution limits of all the plans. It also does not allow for employer matching.

## 401(k)

Eligibility: Any employer with one or more employees.

Key Advantages: This plan permits a high level of salary deferrals by employees. This plan also offers the most customization, with many different features (loans, vesting, matching, profit sharing, Roth capability, etc.).

Who Contributes and What are the Limits?: Both the employer and employee can contribute to the plan. The employer is not required to contribute to the plan, but if no safe harbor contributions are made, the plan must undergo annual nondiscrimination testing.

Administration: Form 5500 must be filed annually once the plan exceeds $250,000 in assets. Key Disadvantage(s): Comparatively, these plans are typically more expensive for individuals looking to set up a retirement plan up for only themselves. In short, there are many retirement options available to small businesses. It can be overwhelming trying to navigate the decision by yourself. It is worth taking the time and effort to evaluate your options and choosing a plan that fits your company like a glove. Doing so can save you a significant amount of money and headaches down the road. ## Need help selecting a retirement plan for your small business, or evaluating an existing one? Let us know! We can benchmark your plan with comparable ones on the market, as well as determine if your current plan is the right solution for you. ## Resources: IRS Small Business Retirement Plan Resources DOL Guide to Choosing a Retirement Plan for Your Small Business # Money Resolutions for 2017 The New Year is a time in which people feel that they can start fresh with their lives. They try and put the events and the bad habits of the previous year behind them, setting new goals to improve their life in the year ahead. So what are the most common New Year's resolutions? Here's a chart of the most popular resolutions: ## Top New Year's Resolutions Source: Nielsen The bulk of resolutions tend to be about self-improvement or health-related goals, but it's interesting that 34% of resolutions are related to money and finances; that's over a third of resolutions (Statistic Brain). With money being top of mind heading into the New Year, what are some good goals to shoot for? Here are 4 of my favorites below: # 1. Spend Less Than You Make This may sound so simple and you may be tempted to skip this one. Don't. You may think you are shelling out less dough than you're bringing in, you may even be pretty sure, but do you KNOW? The most common financial issue I see in individuals and couples is living beyond their means. Their bank account is like a tub full of water that they draw from, not being cognizant of what is going in, nor how much is going out. The only thing they pay attention to is the water line, or their account balance, only changing their behavior when the water drops too low. The time to change your activity and spending is not after your bank account gets shallow, but before. 2017 is the year to start tracking your spending. I don't care if you're young and you've never seen a comma in your bank account balance or if you're well-established with$80,000 in your checking account, you need to be tracking your spending. As you make more money, your need to track spending doesn't diminish, it actually grows. Your bad spending habits may just take longer to notice, and the longer it takes you to notice, the more ingrained you will be in your habits. You can never out-earn your desire to spend.

There are plenty of ways to track your spending. You can use pen and paper, a computer spreadsheet, checkbooks, or my personal favorite, software. I use Mint as a tool to see my spending habits and to get a clear picture of my cash inflows vs outflows. Whatever tool you use, make sure it's something you will stick with.

# 2. Get Out of Debt

Many times poor spending leads to poor financial commitments in the form of excessive debt. Feeling like you spent too much money last month is one form of stress, but drowning in debt that you feel you can't afford is a whole different level of anxiety. The only thing that makes that anxiety worse is not having a plan.

To make a plan for aggressively tackling your debt problem requires a bit of planning. To make a plan, you need to start with goal #1, tracking your spending. To know how much money you can throw at your debts, you have to know what your fixed expenses are. You can't just ignore your rent, mortgage, utility bills, food, minimum payments, etc. Know what your fixed expenses are and whatever is left is discretionary. People underestimate the amount of discipline it takes to dig yourself out of debt. Don't take it lightly. You will almost certainly have to cut back in areas in order to more aggressively pay off your debt, but it's worth it.

Pay at least the minimum payment on every debt. From there, rank your debts by their interest rate (highest to lowest). Focus all your additional money on the highest interest rate debts FIRST. In doing this, you can make sure that you are paying the least amount in interest over the life of your debts.

71% of Americans say that they do not have enough saved for retirement (Experian).

The amount you will have for retirement depends on 3 main factors:

1. How much you save
2. How long it is invested for

You really only have complete control at any given time over one of these factors: how much you are saving. Yes, you can start saving as soon as possible, but you cannot go back and make up for lost time, and outside of your investment allocation, you really can't control your rate of return.

The common thread of all the goals so far is discipline. Saving for the future is a lot like taking vitamins; you don't really see the need now, but you know that your future health depends largely on the right balance of nutrients in your body.

Poor management of your money and resources doesn't just impact you. It impacts the things you value as well. Billy Graham once said, "Give me five minutes with a person's checkbook, and I will tell you where their heart is."

Spending more than you make? Drowning in debt? Penny-pinching because you didn't save enough for retirement? All of these impact your financial generosity towards the people and causes you care about. Take 2017 and re-evaluate how serious you are about your giving to your church, supporting the causes you care about, and most of all, your friends and family.

Happy New Year and as always, feel free to reach out with any questions or comments.

# A Comparison of College Savings Options

After a child is born, they progress through an infinite number of “firsts.” First breath. First cry. First laugh. First tooth. First steps. What about first investment?

Many parents wish to invest for their child’s future college costs and understand how much of a burden that could be years down the road. They’ve made the decision to save, but what they really want to know is how. There are many different options for saving/investing for a child’s post-secondary education and these options can be confusing. To complicate matters even more, advice on what the best option is often comes from a company representative that may not have the parent’s nor the child’s best interest at heart.

The goal of this post is to give parents information on the most popular college savings options available to help them in their decision on what is best for their individual situation. Options can vary from placing money under a mattress each month, to intricate trusts, but the focus of this post will be on the most popular options used today. I’ll begin with a brief introduction for each, followed by a table comparing the various options.

## College Savings Options

### 529 College Savings Plans

A 529 plan is a state or institution-sponsored education savings plan. It is named after section 529 of the Internal Revenue Code, which outlined the creation of these types of plans. Although these plans are state-sponsored, a person can use any state’s 529 plan. Certain states provide state-level tax incentives for using the plan of the resident’s state. Here is a map and calculator to see if your state provides such incentives, and if so, how much it is worth. For example, my home state of Kentucky does not provide any sort of tax incentives for using the in-state 529 plan, therefore residents are free to use whichever state’s plan they would like. Not all state 529 plans are created equally, some being better than others. You can use this tool to research some of the best plans in the nation, but keep in mind, past performance is no guarantee of what it will be in the future. It’s also important to note that there is a such thing as a 529 Prepaid Tuition Plan, which will not be discussed in this post. 529 plans are by far the most popular, and growing, education savings plans.

### Coverdell Education Savings Accounts (ESA)

This account was previously known as the Education IRA prior to 2002. These accounts are similar to 529 plans in many ways, with several exceptions. Some of which are that the ESAs have an annual contribution limit (see table blow), they can be used for K-12 qualified education expenses, and they have income phase-out restrictions. These types of accounts are often used by those sending their children to private elementary or high school institutions because of the unique K-12 rules of this type of account.

### UGMA/UTMA Account

The Uniform Gift to Minors Act (UGMA), and a slight variation of it, the The Uniform Transfer to Minors Act (UTMA), were established to give people a means to transfer investment assets to minors without the need of an attorney to establish a formal trust. In this account, a custodian holds possession of the assets until the child reaches the age of majority for that particular state; the account is managed by the trustee (typically the parent of the child) until that point. The important differences between this account and the other above is that all assets placed into the UTMA constitute a legal gift to the minor and therefore are included in the assets of the minor, which may not sound like a big deal, but for financial aid considerations in the college application process, it can make a big difference.

### Savings Bonds

There are 2 types of savings bonds available today. The difference between them is in the way in which they accumulate interest. Series EE Bonds are purchased at face value and have a guarantee from the government to at least double over the initial term of the bond (typically 20 years). Series I Bonds do not come with any guarantees to double over the term of the bond, but they do come with a fixed interest rate and an additional inflation adjusted rate of return. These bonds have certain limitations and income restrictions, but the interest earned is tax-free if used for qualifying education expenses. These bonds are often used by those that have a high desire for a conservative rate of return, backed by the full faith of the U.S. government.

529 Plan ESA (Coverdell) UTMA/UGMA Savings Bond
Who Owns It? Parent/Contributor Parent/Contributor Custodian until child reaches age of majority Parent/Contributor
Other than tuition, what can it be used for? Books, computers and equipment, supplies, etc. Books, computers and equipment, supplies, etc., certain Kindergarten - 12th grade expenses No restrictions Books, computers and equipment, supplies, etc.; Contributions to 529s and ESAs
What happens if I spend it on something that's not covered? Withdrawn earnings subject to Federal tax and 10% penalty Withdrawn earnings subject to Federal tax and 10% penalty Funds must be used for the benefit of the minor Interest is taxed as income
Contribution Limit Varies by plan. Generally $250,000+$2,000 per beneficiary per year from all sources No limit No limit
Age Limit None Contributions made before beneficiary reaches 18; use of the account until age 30 When minor reaches age of majority they have legal control over the account Owner must be at least 24 before bond's issue
Federal Tax Advantages Non-deductible contributions, but earnings withdrawn for Qualified Education expenses are tax-free Non-deductible contributions, but earnings withdrawn for Qualified Education expenses are tax-free; K-12 expenses also included Earnings and gains taxed to beneficiary (see special tax rates for minors) Interest grows tax-deferred and is tax-free if used for qualified education expenses
State Tax Advantages Varies by state None None Interest is usually exempt from state and local taxes
Income Phase-Out None No contributions if MAGI is $110,000 or more ($220,000 joint) (2016) None MAGI of less than $77,200 ($115,751 joint) for full interest exclusion (2016)
Financial Aid Impact Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as student's asset Counted as asset of parent if owner is parent or dependent student
Investment Choices Menu of choices provided by program No restrictions No restrictions Savings bonds
Ability to Change Beneficiary Yes, to another family member Yes, to another family member No Yes

There are many options available, and some fit people better than others. It’s important to weigh the pros and cons of each option available and to decide on one that best fits your goals for yourself and your child.

# How Much Debt Is Too Much?

The premise of debt is simple: it is a promise by one person to pay another a certain amount, usually under specified conditions.

People generally don't have any problems understanding what debt is, however, most people struggle to know how much is too much.

The first step in determining where to draw the line on debt is setting your own limits.

When my wife and I went out to get approved for our loan on our home, I was quite surprised to see the amount of money we were "qualified" to borrow on our relatively modest incomes. If I had not gone about calculating some of the ratios below, we would have been tempted to borrow beyond our means. The siren song of a bigger home, in a better neighborhood, with the ability to "wow" our friends and family, is a tough one to ignore.

You need to set aside time and effort to set your own limits, rather than trusting those given to you by a lender. One of the cornerstones of sound financial advice is objectivity, and relying on the very entity that you are trying to borrow from can be a quick path to a poor decision.

# How to Know Your Limits

So, how do you go about knowing what your limits should be? The short answer is to simply live well within your means. The longer answer involves a small amount of math.

### Housing Ratio #1

This is also referred to as the front-end ratio. This ratio can be used to determine what percentage of your gross income that goes towards housing costs. The formula is as follows:

$=&space;\frac{Total&space;\quad&space;Housing&space;\quad&space;Costs}{Gross&space;\quad&space;Monthly&space;\quad&space;Income}$

Total housing costs include your principal, interest, taxes, and insurance (PITI). So, basically your mortgage payment plus the taxes and insurance on your home.  Generally, you want this percentage to be under 28%. Leading up to the housing crisis in 2008 and 2009, more and more people had higher front-end ratios, meaning that a mass amount of people had mortgages that they really couldn't afford. This is one reason that the government started to scrutinize these types of ratios in loans to consumers.

### Housing Ratio #2

This is often referred to as the back-end ratio. This ratio measures your ability to pay your debts by showing what portion of your income goes towards debt payments. The formula is as follows:

$=&space;\frac{Total&space;\quad&space;Monthly&space;\quad&space;Debt&space;\quad&space;Expense}{Gross&space;\quad&space;Monthly&space;\quad&space;Income}$

This ratio is essentially a personal debt service ratio. Generally, you want the ratio listed above to be less than 36%. This ratio, I would argue, is the most important ratio of the two for planning purposes because it accounts for ALL your debt. Going by this ratio, you can assure that your total level of debt stays manageable. If you have more debt in one area, you know that you can afford less debt in other areas.

Lenders use both ratios above when approving borrowers for loans, but BEWARE, just because a lender approves you for a loan, that doesn't mean that you can afford it! Lenders will often use percentages much higher than the ones listed above in their criterion for approving borrowers.

The ratios above are not targets to shoot for, but rather upper limits to stay under.

# What If You've Exceeded Your Limit?

If you are currently living beyond your means, you have two options: 1.) Earn more, or 2.) Spend less. Since option #1 isn't usually an option for most people, option #2 is likely the solution. It's a simple solution with some seriously hard decisions.

If you meet one of the following debt danger signs, it may be time to seek some professional help:

• You struggle to make the minimum payments on your debts, possibly juggling which debt you even pay at all each month.
• You've been tempted to take, or have taken, a cash advance or a payday loan to meet your debt obligations.
• You have to cash out retirement savings to pay debts.
• You consistently lose sleep over your indebtedness.

Too many people look for financial gurus, books, and podcasts for easy solutions to their money problems while ignoring the hard truth that they are living beyond their means. Debt can easily consume your life if you are not mindful of it.

My son, don’t make yourself responsible for the debts of others. Don’t make such deals with friends or strangers. If you do, your words will trap you. You will be under the power of other people, so you must go and free yourself. Beg them to free you from that debt. Don’t wait to rest or sleep. Escape from that trap like a deer running from a hunter. Free yourself like a bird flying from a trap.

-Proverbs 6:1-5 (ERV)

# Investing in the Wake of a Divisive Election

The market doesn't like surprises and it sure got one on November 8th with the election of Donald Trump. Immediately after the election results came in, we knew the market was headed for some dramatics ups and downs, a term we call volatility. People have varying degrees of responses to volatile markets. Some want to sell everything and wait until things calm down, others see it as an opportunity to invest more. Which camp do you fall into?

## Is This Year Historically Significant?

In one sense yes, but in another sense no. According to data by Dow Jones, the average change on the day after Election Day is negative 0.9%. The top declines are listed below:

 Election Winner Election Day % change day after Election Day Barack Obama (D) 11/4/2008 -5.27 Harry S. Truman (D) 11/2/1948 -4.61 Franklin D. Roosevelt (D) 11/8/1932 -4.42 Franklin D. Roosevelt (D) 11/5/1940 -3.32 Barack Obama (D) 11/6/2012 -2.37 George W. Bush (R) 11/7/2000 -1.58 Jimmy Carter (D) 11/2/1976 -1.14 Dwight D. Eisenhower (R) 11/6/1956 -1.03 Ronald Reagan (R) 11/6/1984 -0.73 Bill Clinton (D) 11/3/1992 -0.67

### Where Do We Go From Here?

Jonathan Lemco, Ph.D., a senior strategist at Vanguard Investment Strategy Group and former professor of political science at Johns Hopkins University stated, "The markets don't like uncertainty, and presidential elections, by definition, add another layer of uncertainty."

According to research by Vanguard, it typically takes about 100 to 200 days after a presidential election for the resulting volatility to largely subside. After that, tracing back to 1853, history has shown that market returns are virtually identical regardless of which party controls the White House.

## So What Can You Do?

1. Remain Calm: You're going to hear a lot of noise. News outlets will (and have already) release stories with loaded language and outrageous predictions designed solely to garner your attention. Media outlets love to describe the market as "plummeting," "surging," "booming," "crashing," etc. Why? Because they get paid in attention: clicks, views, and papers sold. Calm doesn't sell— panic and greed do. Tune out all of the noise and focus on the long-term.
2. Make A Plan and Stick to it: The biggest investment mistakes are not typically made based on careful, methodical planning based on historical data. Rather, they are usually made when an investor makes a knee-jerk reaction. Your biggest enemy of your investments isn't the presidential candidate of the opposite party, it's you. Too many people end up chasing goals that are not their own. The majority of world news and market events have no impact on your personal goals. Your plan should include allocating your money in a way that is in line with your goals and your tolerance for risk.
3. Expect Volatility: Returns can never be guaranteed in investing. They can be expected, based on reasonable historical data and projections, but never guaranteed. One thing that can be guaranteed is volatility. If you are an investor in any capacity, you should mentally prepare yourself for the inevitable ups and downs of investing. If you can't seem to stomach the risk even after educating yourself, maybe it's time to change how your investments are allocated. If your investments will reach your goals on paper, but you're losing sleep at night, maybe something needs to change. Not in a reactionary, panicked way, but rather a planned and methodical shift.

### Resources

How the stock market performs on, and after, Election Day

Worried about the election's impact on your portfolio? Markets are nonpartisan long-term

Stick with your plan...even when the market gets scary

Six strategies for volatile markets