Millennial Careers

We have all heard the phrase before. “Millennials don’t (insert grumpy old man comment) like we used to.” Yes. It’s true. Times change. When Grandpa Reginald was a child, his elders complained to him about how using the telephone has made him lazy and ruined his communication skills. One complaint that I want to look closer at today is, “Millennials have no respect for the companies that hire them. They just move from job to job without any gratitude.” That is true. People switch jobs much more often today than they did 30 years ago. But why do people move jobs so much now? There are a variety of reasons that experts cite for this new change, but I want to focus on one I don’t hear people talk about as much…pensions.

There are two groups of retirement plans; defined benefit plans and defined contribution plans. Pensions are considered defined benefit plans because companies put money in the plan for employees. Defined contribution plans include 401(k) plans, 403(b) plans, and others where the employee is responsible for contributing the majority of the money.

Pensions are great. You work for a company for 35 years until you are ready to retire. Upon retirement, you receive a monthly payment until you pass away. Unless the company or government entity that you worked for goes bankrupt, you are guaranteed that money each month. Some pensions will even pay a portion to your spouse after your death.

So what does that have to do with the millennial generation? Pensions are virtually nonexistent now. It is highly unlikely that your company offers a pension unless you work for the government. Because of the high cost of pensions, most companies have switched to 401(k) plans where the employees are primarily responsible for retirement savings. One aspect of a 401(k) is that you get to keep the money you put in and any vested amount from your employer if you leave the job.

Companies have lost a major perk for employees to stay with them for the long term. Raises and promotions are nice, but a 3% raise doesn’t compare to a possible 10-20% jump if you switch companies and move to a higher position. Plus, you are now able to take your retirement account with you when you leave.

Regardless of your view of this new generation, remember that everyone responds to incentives. Many Millennials have lost the financial incentive to stay at one company for an entire career. So why not try out that new job at a different company, what do they have to lose?

Mike Zeiter, CPA/PFS

Invest in Yourself

What comes to mind when you think about the word Investments? Most people will have words like stocks, bonds, mutual funds, and real estate pop into their head. Now I want to think outside the box a little bit. One of the best investments is something that most people don’t consider; an investment in yourself. And before we get started, this does not include skipping work for a day to go shopping!

What would with$10,000 if I gave it you tomorrow?

Most people could find a way to use the money. It would probably be in the form of some combination of spending, saving, paying off debt, and investing. I hope that spending would be a smaller portion of those decisions, but you can do whatever you want with this money. Why not buy a new motorcycle if that’s what makes you happy? Now, let’s change it up a little bit.

What would you do if I required you to invest that $10,000? I know…how awful. How dare I restrict the free money I just gave you in our imaginary situation. Which investments would you choose? There are thousands of different investment options in the stock market alone. For those of you want to pay off all your credit card debt, I understand that paying off something with 20% interest is the same as investing and earning 20%. That’s not allowed for this situation. Give yourself a minute and think about it.

Hopefully, you started to analyze all the risks and returns between different investments. Did any of those investments involve spending money on furthering your career? This type of investment could change your life.

Everyone has probably heard the phrase “An investment in yourself will pay dividends for the rest of your life.” It makes sense. If you are 18 years old deciding between college and starting a career, going to college will probably allow you to make more money throughout your life than if you immediately started working a full-time job. But it could work if you are 40 years old as well and wanting to expand your career choices. Let’s look at some examples of how you could use $10,000 towards an investment in yourself.

College Degree - $10,000 probably won’t buy you a full degree, but it’s a good start. A combination of community college and online courses may get you close. This could be the start of a four-year degree to start your career, or it could be an MBA to provide you with management possibilities at your current job. The important thing with college degrees is to choose one that accelerates your career and will allow your income to increase. Spending $100,000 on a private college that will allow you to work in a career making $40,000 a year for life is not a good investment.

New opportunities - Are you ready for a career shift? Find out what certifications would be beneficial for the career you desire. Let’s say you would like to get a job in computer programming. There are probably one or two programming systems that all employers will want you to have experience with. Spend the money to get certified in Java or C++. That will make your interviewer realize that you are serious about the career change.

Current Career – Maybe you love your job and want to stay with your company until you retire. That’s great! Are there any certifications that would help you move within the company? For instance, most accounting firms won’t promote to manager without a CPA license. The Six Sigma program is also a great example of a certification that could allow you more opportunities in your current career. Spend the money to get a certification that will allow you more opportunities in the future. Some companies may even help pay for a certification. However, like a college degree, don’t waste your money on a certification that doesn’t add value to your career.

Most of these investments require a lot of money, time, and hard work. The long-term impact will be worth it. Aside from the obvious benefit of a higher salary, you will have flexibility throughout your career. You may love your job now, but that could change in five years. Investing in yourself could help you in the future from feeling stuck without any options. Now think about that $10,000. What investment in yourself would you make?

Mike Zeiter, CPA/PFS

How Interest Works

Do you have debt? Welcome to the club! Almost everyone in America has debt of some kind. Each piece of debt has a built-in interest rate associated with it. It seems that there are a lot of misconceptions in the world about how interest and debt payments actually work. That’s what I want to focus on today. I want you to understand how important that number is and how it impacts your debt payoff.

This can be confusing, but I will have an example at the end to help explain everything.

When you take out a loan to buy something such as a car or house, you receive an amortization schedule breaking down how each payment will apply to principal and interest. Principal is the debt itself, and interest is based off the rate that you qualified for. Interest is calculated monthly based on the amount of principal that is left. This is something that I don’t think is very well explained by those people selling you the loans.

I hear this phrase all the time, “You pay most of the interest in beginning so it isn’t worth paying extra.” Yes. That is true. But it is only true because the principal balance is larger at the beginning of your loan. Don’t let someone convince you not to pay down debt early because of that argument.

I have one more item to mention before the example. Don’t buy things based on the monthly payment. It happens all the time. People will buy a car as long as the payment is under $400 or whatever number works in their mind. Car salesmen know this, which is why they have started spreading loans over 60 and even 72 months. That’s 5 or 6 years! The average auto loan used to be 3 years. If you have ever sat in the sales room finalizing your purchase, you remember them saying that the tire warranty is only an extra $18/month. Focus on the actual purchase price of items and it will save you a lot of money long term.

Example: Congrats! You just bought a house. The final price was $300,000 and you managed to put 20% down so there is no PMI (Private Mortgage Insurance). The loan amount is $240,000 and you got an interest rate of 3.5%. The monthly payment is $1,427.71. You pay for insurance and property taxes in that payment totaling $350 each month.

The first payment is calculated by taking the total principal of $240,000 times 1/12 of the interest rate (3.5/12). Once interest is calculated, add in your insurance/property taxes. Then whatever is leftover is applied to principal. Let’s break down the first payment.

Interest = $700 ($240,000 x (3.5/12))

Insurance/Property Tax = $350

Principal = $377.71

Total = $1,427.71

You only pay down $377.71 of debt on that first payment! That amount is subtracted to calculate the next payment. Let’s break down the second payment.

Interest = $698.90 ($239,622.29 x 3.5/12)

Insurance/Property Tax = $350

Principal = $378.81

Total = $1,427.71

You get the point. But let’s say you wanted to pay down your house early. What would the effect be if you paid an extra $1,000 with your first payment? That would be directly towards principal. Let’s break down the second payment in this circumstance.

Interest = $695.98 ($238,622.29 x 3.5/12)

Insurance/Property Tax = $350

Principal = $381.73

Total = $1,427.71

This doesn’t seem like a big deal, but you just saved about 3 months of payments! That is $2100 in interest. Even if you were just able to pay $400, that would still be the equivalent of a double mortgage payment.

I hope this helps you understand how debt payments work. Paying off debt early does save money. Don’t let someone convince you to keep a loan around because the interest is deductible or that you’re paying extra interest in the beginning. That guy in the cubicle next to you doesn’t always know what he is talking about.

Mike Zeiter, CPA/PFS

Money and Values: Part 2

I received a lot of positive feedback on my last post about defining your values and using money to build a life around them. I wanted to share one story that exemplifies this concept. You may have read this story before in an article or book, but it is one of my favorite examples of how success means something different to each person.

An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellowfin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “Only a little while.” The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “So what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, stroll into the village each evening where I sip wine, and play guitar with my amigos.  I have a full and busy life.” The American scoffed, “I am a Harvard MBA and could help you. You could spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15 – 20 years.”

“But what then?” Asked the Mexican.

The American laughed and said, “That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!”

“Millions – then what?”

The American said, “Then you would retire.  Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

I think you get the point. If all your living needs are met, what else do you want out of life? You can probably live that life with the money you currently make. If your true happiness only comes from climbing into a brand-new car every other year, that’s perfectly fine! Just don’t complain about work every day and how stressed you are. In contrast, if you love your job and don’t want to take on a manager position, that is completely fine as well! Don’t let other people force their life opinions on you. Find what makes you happy and live the life you dream!

Mike Zeiter, CPA/PFS

Money and Values

Someone won $750 Million last night. They don’t need any more money for the rest of their life. Assuming that person isn’t reading my blog, you are probably wishing you had a higher income or more money saved. Shocking! What I want you to do now is think about the reason you want more money. For some people, they want to be able to pay off debt and start an emergency fund. For others, they want to be able to buy a new car/house/boat or all the above. Some families just want stability to pay the next electric bill and still put food on the table. When it comes down to it, money is primarily used to 1) Pay for living needs, and 2) Do things that make you happy. If you had won the lottery yesterday, how would you spend your time each day? Would you be happy doing that for the rest of your life? To answer that, you must identify the values you want to live by.

Making yourself happy seems easy enough. Unfortunately, too many of us spend money on things that don’t truly bring us happiness. We struggle to define our values which in turn leads us to waste money without thinking. That’s why it is important to define your values first, and then focus your finances on make those values a priority. Let’s look at some examples of values and goals.

1) Security: I want to save $1,000 in case of an emergency – This is a great goal! Having an emergency fund will help you get through random expenses such as an auto accident or medical need. The emergency fund reduces your stress when those things happen. Set aside a specific dollar amount out of each paycheck until you hit this goal. You will know exactly how long it will take to establish some security for you and your lifestyle probably won’t change drastically.

2) Adventure: I want to visit Europe next year – This one is common. Many people want to see the world. However, they think that it is impossible because they don’t make enough money. I’m here to tell you that it is possible. Figure out where you want to go, how much it will cost you, and if you can find deals to make it cheaper. Then look through your last three months and see where your money has gone that you would rather have put towards saving for a trip. Every Starbucks and Target run that you eliminate will get you closer to your dream trip. Although, you may value those more than travelling and there is nothing wrong with that.

3) Freedom: I want to quit my job within five years – Here is where it gets interesting. This can be either retirement or quitting your 9-5 desk job to become your own boss. Retirement doesn’t have to be an age if you have enough money to live the life you desire. You don’t need to work a typical office job to survive. If freedom is your most important value, you just need to figure out how much money you need to live the life you want. It may not be possible to quit your job tomorrow, but it is probably more realistic than you imagine.

Think seriously about your life and ask yourself what is truly important. If fitness and health are some of your most important values, then pay extra for the gym membership you want. Why? Because you value it enough to make it a priority in life. A typical gym membership can be paid for by cutting out a few dinners or bar tabs. Not to mention that would probably improve your health as well. Try it in your life. Pick something small that would make your life better based on your values. Figure out how much it would cost, and go find out what you could have cut out of your life to pay for it. You will probably realize that what you spend money on isn’t what truly makes you happy.

I want you to think of money as a tool to create happiness. I know, “Money can’t buy happiness.” You’re correct. You need to make yourself happy first, or no amount of money will help…not even $750 Million. You must define what you value in life so that you know what actually makes you happy.  Once you do that, put your money to work. It won’t buy happiness, but it will fund a wonderful life focused on what is most important to you.

Mike Zeiter, CPA/PFS

Health Savings Accounts

I used to think that taxes were the most complicated thing in our country. That was until I tried to comprehend the bill from my recent ER visit. I had to get four stitches in my leg…simple, right? The bill was ten pages and had about 25 line items on it! I’m glad I didn’t blow my nose, because it probably would have been another $40 for a “Sterilized Nasal Discharge Receptacle”. Thankfully, I had money saved in a Health Savings Account (HSA) that covered the majority of my bill. That’s what I am going to focus on today. I can’t explain half of the healthcare laws in our country, but I can help you understand these accounts.

HSA’s are used in conjunction with High Deductible Health Plans. These plans have deductibles of at least $1,300 for individuals and $2,600 for families. The main benefit of these plans is that the premiums are lower and you can use tax-free money through your HSA to pay for medical expenses. More and more employers are switching to these plans because of the lower cost.

HSA's have two major benefits for tax purposes. First, HSA contributions are deductible in the current year from ordinary income. The deductible amount in 2017 is $3,400 for individuals and $6,750 for families with a $1,000 catch up amount for age 55 or older. If your employer contributes to your HSA, the deduction must be reduced by any amount contributed by the employer.

Example: You participate in a High Deductible Plan through work for your family. Your company contributes $500 to your HSA during the year and you contribute $3,000. You would be able to deduct $3,000 on your tax return. If you contributed the maximum of $6,750 for the year, your deduction would be limited to $6,250 because of the employer contribution.

The second benefit is that the money can be withdrawn tax free in the future if used for qualified medical expenses. Here is where the extra planning comes into play. Most HSA’s allow you to invest in stock or bond mutual funds in the account. If you invest in your HSA, it will grow tax-free as long as it is used on medical expenses when it is withdrawn. In a way, HSA's have the current tax benefit of a traditional IRA, but the future benefit of a Roth IRA if used for medical expenses. Also, you don’t have to be enrolled in a High Deductible Plan when you use the money, it only matters when you contribute to the HSA.

Example: The $3,500 that was contributed to your HSA can be invested in the account. Let’s say the money is invested for the next 20 years. The investment in the account can continue to grow tax free. The investment then grows to $15,000 in the future. You would be able to withdraw that money tax free if it is used for qualified medical expenses.

The double tax benefit that I described above is the main reason to use an HSA to supplement retirement savings. Another benefit is for individuals/couples who have 401(k) plans, or other employer sponsored retirement plans, but make too much money to contribute to a Traditional or Roth IRA. HSA's allow them to put additional retirement savings in a tax-sheltered account instead of a taxable account or non-deductible IRA.

As you can see, HSA’s can be beneficial for both tax savings and retirement planning. Six figure healthcare costs in retirement are a reality right now. HSA investments can be used to reduce the burden that you will incur later in life. Try to contribute enough each year to cover your maximum deductible. With all that being said, I always advise people not to invest in your HSA if you expect to need the money for medical expenses within the next five years. The last thing you want to do is have your investments drop in value right when you need to withdraw the money.

Healthcare is always changing so these benefits may not last forever. If you can maximize your HSA contributions, it will significantly impact your long term financial plan. If you participate in one of these plans, make sure you understand how to maximize your savings based on your current financial position. If you don’t participate in one of these plans right now, bravo for reading this entire post that has little to no impact on your life! Hopefully, you will be better informed if you switch to one of these plans in the future.

Mike Zeiter, CPA/PFS

Finding Your Net Worth

When I ask people about their long-term financial goals, a common response is “I want to become a millionaire!” My follow up question is always, “So what does that look like?” I ask that question because most people respond, “I want to have $1 Million.” Having that much is great, but you still may not hit your goal. I want to focus on the definition of a millionaire. It seems that people have a misconception of the term. A lot of people view a millionaire as someone who has $1 Million or makes $1 Million per year. That’s not necessarily the case. A millionaire is someone whose net worth is greater than $1 Million.

Net worth is probably the most important personal finance number that isn’t talked about enough. Your net worth is equal to your Assets (What you own) minus Liabilities (What you owe, aka debt). This number should be the focus of most of your financial decisions in life.

Net Worth = Assets - Liabilities

Assets include your house, bank accounts, retirement accounts, car, and anything else that can be sold to someone. Liabilities/Debt include mortgages, car loans, student loans, credit cards, and anything else you owe someone.

Two great books about this topic are The Millionaire Next Door and Rich Dad, Poor Dad. They do a great job of explaining the importance of buying assets and reducing your debt. When I read them, I learned that most millionaires are self-made and did not inherit their wealth. The most successful people lived below their means and invested in assets throughout their lives. Another great topic is how to invest in assets such as stocks and real estate that will pay you back over time. Boats and cars don’t pay you back unless you sell them. They also go down in value over time which means that mere ownership decreases your net worth.

This is how people measure when they can retire. Anyone can retire when they can live off their assets for however long they expect to be alive. Retirement doesn’t have to be based on an age that you think will be a good time to stop working. It is based on the ability to pay for your expenses without needing employment.

That’s why I want you to sit down and calculate your net worth. Make it a priority in your life. Think about how your financial choices impact your net worth. If you do that, you will set yourself up for long term success. You can also figure out exactly what your wealth will look like when you become a millionaire.

Mike Zeiter, CPA/PFS

Buy or Rent?

For those non-homeowner’s out there, how many times have you heard the phrase, “Buy a house. You are wasting money on rent.”? I heard it constantly after I graduated college. Was I wasting money? In my opinion, the answer is no. I paid someone each month to put a roof over my head. I don’t consider that a waste of money. Also, I knew exactly how much my home cost was going to be each year. It didn’t cost me extra if the water heater went out or a tree knocked over my fence. However, many people will say that it is always better to buy a home. Let’s take a closer look at buying vs. renting.

In the long run, buying a house will always be a better decision. A house is an asset that will increase in value over time. A $200,000 house could be worth $300,000 by the time the mortgage is paid off. Another reason is that a portion of each mortgage payment is increasing your net worth by reducing your debt. Rent payments do not add value to your net worth. Also, owning a home means that nobody can kick you out of your house when your lease expires.

So that’s that! Right? No. Not everyone should go out and buy a house right now. Here are some things to consider before buying a home.

1) Down Payment and Savings – Do you have enough to put a 20% down payment and still have some savings left over if the A/C breaks? 20% down is important so that you can avoid being forced to pay for private mortgage insurance (PMI). PMI can cost you over $100 a month and is generally a waste of money. I would also encourage you to have some savings left over after the down payment in case of emergencies. There won’t be a landlord to come repair the roof if it starts leaking in your bedroom.

2) How long will you live here? – The general rule is that you don’t want to move within 5 years of buying a home. This is because there are costs associated with buying and selling a home. Don’t force yourself to buy a house if you don’t think you will be living there for a while. If you are the type of person who doesn’t want to stay in one place for a long time, don’t buy a house. That’s okay!

3) You love the house – Too many people get house fever. They decide that they want a house and feel the need to buy one right when they start looking. You never know what can happen that causes you to stay in the house longer than you expect so make sure that you love it before you decide to make an offer.

4) Can you afford the mortgage? – Be reasonable. Buy a house where the mortgage payment doesn’t make the rest of your finances tight each month. A good rule of thumb is not to let your mortgage be more than 25% of your take home pay (after taxes and other payroll deductions). You can always buy a bigger house if you get a big promotion in a couple years.

Go buy a house if you read that and still feel that you are financially and mentally ready to be a homeowner. Being a homeowner changes your life. A home is a much bigger responsibility than just making your mortgage payment. However, if you’re ready, home ownership will help you build wealth over the long term. If you aren’t ready to buy a house yet, don’t let someone make you feel guilty for renting! It’s not going to prevent you from financial success.

Mike Zeiter, CPA/PFS

Finding Your Slight Edge

I just finished reading a magnificent book called The Slight Edge by Jeff Olson. I highly recommend it. The idea of the book is simple. Do something small every day that will make you better off in the long run. For instance, if you decide to go to the gym today, you probably won’t have a six pack afterwards. At the same time, you most likely won’t have a heart attack today if you don’t go. But if you start working out, even if it is just 15 minutes a day, eventually you will be a lot stronger and healthier than you are today. Let’s take that concept and apply it to our finances.

You have all heard the example, “Just cut out that $5 daily latte and you will be set financially.” Is that true? Well…kind of. Let’s say you are one of those Starbucks addicts that stops by on the way to work every day and spends $5. You would save almost $2,000 over the course of a year by cutting out Starbucks. Of course, if you are anything like me, you would probably be arrested for assault before too long… but you get the point. Look at your lifestyle and find something little that you could cut out to save $20 or $30 a week. Start adding that to your savings instead.

Let’s try another example that would be even easier. Log onto your 401k at work and increase your contribution by 1%. If you don’t have a 401k, open an IRA and set up direct deposit of 1% to come out of your paycheck. I don’t want to hear the excuse that you can’t afford to contribute an extra 1%. If you make $40,000 a year, 1% is only $400 spread out over a year. You can handle it. Each year, increase your percentage by another percent. I promise that you will retire with dignity if you stick to this plan throughout your career.

These are just a couple examples but I challenge you to find your own financial “slight edge” for 2017. Do it now! Make it the one New Year’s Resolution that you won’t break by January 31st. Think of one small change that you can make in your life that won’t affect you right now, but it will set you up for long term success. You can do it! There is nothing stopping you from starting your path to financial freedom.

Happy New Year!

Mike Zeiter, CPA/PFS

$1,000 Decision

Congratulations! You have an extra $1,000 in your account at the end of the month. Maybe you got some Christmas money, maybe it’s an inheritance from an uncle, or maybe you worked hard and saved it up. The question that many people face at this moment is, “What do I do with this money?”

So how do you decide what to do with that money? Assuming you haven’t decided to spend it already, there are many places to put the money. I am going to break down the three most common options. You could 1) Keep it in the bank, 2) Pay off debt, or 3) Put it towards retirement. The good news is, there is no right answer. The bad news is, there is no right answer. Some financial experts will swear by one choice and call you an IDIOT for doing anything else. However, unless you decide to take that money and go to the mall for that new wardrobe, you are not an idiot. I am going to make the case for each of these options based on some example situations.

Save it – You live paycheck to paycheck. Every month is a struggle as to whether you will be able to make that next rent/mortgage payment. Put this money in a savings account and pretend it isn’t there. It’s always nice to have some money to fall back on if something goes wrong. Another argument for saving it is if you want to save money for a big purchase coming up; a new car, a vacation, or a home. If it is a home, I would suggest taking the time to build up enough savings for a 20% down payment.

Pay off debt – Let’s say you are an average person with credit card debt, an auto loan, student debt, and a mortgage. You should pay off your credit cards. Credit cards normally have outrageous interest rates and you will be better off getting them out of your life. If you don’t have credit cards, maybe your student loans or auto loan has an interest rate over 5%. Debt can be a major burden on your life, so take the opportunity to pay off extra when you can.

Save for Retirement – You are debt free or very little debt with low interest rates. You are saving a little each month, but don’t have any major expenses planned soon. This is a great opportunity to add to your retirement. Use this money to open up or contribute to an IRA. The money you save early will grow over time to earn much more than if you wait 5 or 10 years. In the words of Albert Einstein, “Compound Interest is the 8th wonder of the world. He who understands it, earns it ... he who doesn't ... pays it”.

The important thing is to make the decision that your are comfortable with. Any one of these decisions could be best for you. Maybe you want to split the money between two options. That's fine! It’s similar to hitting a traffic jam and deciding to stay or take a different route. When you arrive at your destination, do you actually know if you chose the fastest route? No, but you made it to your destination and you were comfortable with your decision. The important thing now is to think about it so you have a plan when this happens to you in the future.

If you have questions or need help, feel free to reach out.


Mike Zeiter, CPA/PFS