“Don’t be afraid to ask dumb questions. They’re more easily handled than dumb mistakes.”
– William Wister Haines
When I first started in the financial services industry, I was over 40 years old and knew a whopping nothing about investing or managing money. I began studying for the Series 7 securities exam and marveled at my lack of knowledge. I didn’t know what a bond was, had only a vague idea of how stocks worked, and options trading? That was way over my head.
About a month into my study program I had this epiphany: I realized, I now understand how a money market fund works, and how the maturity of a bond impacts its price. Holy crap, Batman! I can learn about money!
Why did I think I should know how to manage money when I had never been taught? Not a single course in school ever addressed basic issues like understanding credit cards, mortgage amortization, interest rates and retirement plans. When you think about it, that’s just crazy,!
Of course many parents either think their children will emulate their wise money skills, or pray they are not paying attention and will have the good fortune to marry someone who will pull them out of the cycle of debt and consumption experienced by their ancestors. Frankly, parents have difficulty teaching money skills because they either do it so easily they can’t break it down into steps, or they are completely clueless.
I want you to finish reading this blog post knowing two things:
- You CAN learn to understand money. You just need the right teacher.
- There are no dumb questions.
I am going to give you permission for this whole week to ask questions you think you should already know the answers to, but don’t. Just try it. My guess is that at the end of the week you will not only feel smarter, but you will also learn that you are not alone.
Here are the answers to five questions I am regularly asked, questions that are often prefaced by “I know this is a dumb question but…”
1. What is a Roth IRA and why do I need one?
What is it? A Roth IRA (individual retirement account) is the only account type that will be 100% tax free when taken out at retirement (after age 59 ½). The maximum you can put in each year is $5000, with an extra $1000 if you are over 50, assuming you either earned as much as you plan to contribute OR you are married to someone who earned that much. This is one of the very best places to put your money! And you can invest into stocks, bonds, mutual funds, CDs, exchange traded funds…. you name it!
Why do I need a Roth? Because having a bucket of money that will never get taxed is a huge help in retirement, especially since many of us will have the majority of our money in retirement accounts (401ks, pensions, traditional IRAs, annuities, 403bs) that are 100% taxable at distribution. So the $100,000 you have in your 401k is actually only $75,000 or less, depending on your tax bracket.
You need a Roth if you are earning income. Due to some rule changes, everyone can fund one, regardless of income level. (There are just a few hoops to jump if you make over a certain amount.)
2. Do I really need an estate plan? Isn’t that for rich people? I guess I don’t even know what it is.
When you die, anything you own or have a right to is called your estate. You don’t have to be rich to have one. An estate plan deals with death, incapacity and medical issues.
If you love your family and friends, you will create an estate plan, otherwise they will be left to figure out what you would have wanted, and that’s no picnic!
Estate plans are comprised of the following components:
- Will: a set of instructions you give about the distribution of your assets. It’s a public document (anyone can look at it once you die), and the state in which you reside oversees its administration. That’s called probate. Within a will you can also designate guardians for children, which is very important!
- Power of Attorney: temporary authority to manage your finances while you are incapacitated or out of the country.
- Advanced Healthcare Directive (Living Will): a set of instructions to doctors about your end-of-life wishes. This is also where you appoint a medical representative.
- Living Trust: a private contract between you and your beneficiaries. It includes a will, power of attorney and advanced directive, including language about disability planning, and the distribution of assets upon your death. It does not go through probate because it’s private rather than public.
3. Why should I own stocks? My parents just kept their money at the bank and they did okay
The short answer? Because even in the past ten years, over the long haul, stocks outperform cash. Annual inflation historically averages 3% or more, so if you have only cash your money will lose value over time. Obviously this is a complex question and unique to each individual, but it’s worth addressing for your own specific situation.
4. Why should I separate my business income and expenses from my personal money?
Here are some good reasons to separate your business and personal money by using a separate checking account and a credit card designated only for business expenses:
- It saves you time and money at tax time.
- The IRS will take you seriously if you take yourself seriously.
- You will be better able to evaluate how your business is operating if everything is not merged together in one huge mess.
- It helps you to legitimize expenses that might otherwise easily look like personal bills.
5. Do I really need to read my brokerage statements? I can’t understand them anyway, so why bother?
Most people don’t open and read their statements for two reasons. Either they don’t like bad news or they don’t understand what they are reading. What I will tell you is that people who have built their own financial freedom have done so by paying attention and regularly saving more than spending.
Here is a way to make your brokerage accounts more readable and useful:
With a highlighter in hand, look at your first account and highlight the Current Balance. Next, look at Activity. Circle that word and as you read each item make a check next to it with your marker. Highlight anything that doesn’t make sense to you. Then call your adviser, or a financially savvy friend, and ask them to help you understand what you are reading.
Once you understand to look for Current Value and Activity you’ll be able to quickly review your statement and then file it.
I recommend keeping retirement statements for six months, and non-retirement account statements and trade confirms for at least two years.