A New Housing Paradigm

By | 2019, Money Moxie, Newsletter | No Comments

Since the housing crisis and recession of 2008, the American dream of homeownership has changed. Younger generations are weighing the benefits of owning their own home with the freedom that renting provides–flexibility to move for work and to avoid responsibilities and expenses that come with ownership. Plus, they are weighing the additional amenities that can be enjoyed from some rental communities: pool, fitness center, dog park, common use areas, etc.

Aging boomers are also considering changes. They are also interested in reducing responsibility, as well as downsizing their homes. Having someone care for the lawn and shovel the snow is enticing. Not to mention the fun of living among neighbors near their own ages.

5 things to consider before purchasing a home:

(1) Your monthly mortgage payment should not equal more than 28% of your gross monthly income. This includes principal, interest, taxes, and insurance.

(2) Avoid mortgage insurance. It does not benefit you. You can do this by making a down payment of 20 percent or more. If you can’t put down at least 20 percent, then once you have 20 percent equity, check on removing the mortgage insurance.

(3) Plan for extra expenses! If your home is new, this will include window coverings, appliances, and landscaping. If buying an existing home, plan on costs for updating and fixing known and unknown problems.

4) Keep the loan term as short as possible without financially boxing yourself in. A 15-year mortgage should have a lower rate than a 30-year mortgage. Always try paying extra principal each month.

(5) Keep money available for emergencies in a dedicated savings account. Using a credit card or a loan for emergencies will compound your problems.

5 things to know before downsizing:

(1) Ask yourself if your current home can be modified or updated to accommodate your needs as you age. You can always pay for someone to care for the yard.

(2) Increased demand for patio-style homes and planned living communities has driven up the prices. You may find that selling your large home to downsize may not be worth the price.

(3) Determine what you want. Some retirees want to be close to family or need a place to host family. Others are looking to get away or want an adult community.

(4) Understand the additional costs of Home Owners Association (HOA) fees that cover the services, upkeep, and common areas. Get a copy of the HOA contract and consider asking about its current financial condition.

(5) Protect your retirement. Avoid debt. Remember, using savings to purchase a retirement home may create future liquidity problems.

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Don’t Burn Down The House!

By | 2019, Money Moxie, Newsletter | No Comments

A home is the largest asset for American households, surpassing retirement accounts, vehicles, and other assets.(1) For 30 percent of households, their home is their only source of wealth.(2)

Unfortunately, many people don’t have a plan to protect their homes after they pass away. This can leave their home open to probate expenses, creditors, and other issues that may burn down the value of their home. To protect your home and most effectively pass it on to your heirs, consider the following issues and options.

Many people mistakenly think that having a will can protect their home. It helps control who benefits from the house and in what manner. However, even if a person has a will in place, his or her home must still go through probate after they pass away.

For a couple, that process would take place after the second spouse passes away. As the home goes through probate, there can be significant expenses, and the value of the house will be on the public records.

In an attempt to avoid probate, some people will mistakenly add on a child as a third joint tenant. However, this can have devastating tax implications, as the child will be deemed to have been “gifted” the home and inherit the existing cost basis.

For example, if the parent(s) bought the home for $50,000 and it is worth $250,000 at the time of the parents’ passing, the child will have to pay tax (when selling the home) on the gain of $200,000. That would be roughly $40,000 in taxes at a 20 percent long-term capital gains rate. The couple would have been better off to leave the home in their name; then it would at least get a step-up in basis, where the heirs would only pay taxes on any gains above the $250,000 upon selling.

There are two better options to address these issues and still get a step-up in basis.

Transfer On Death Deed (TODD)
The first option is to create a TODD and file it with the county recorder.(3) The TODD has only been an option since May 8, 2018, when Utah enacted the “Utah Uniform Real Property Transfer of Death Act.” Previously, Utahans didn’t have a cost-effective method to transfer a home to their heirs.

Now an individual or couple can list beneficiaries that will inherit the home, thus avoiding probate and keeping the value private. It will allow the inheritors to get a step-up in basis, and to file a deed with the county recorder’s office only costs $40.

However, a TODD has some potential issues:
(1) A home inherited through a TODD cannot be sold for one year unless the personal representative files probate, which negates the original purpose – avoiding probate.
(2) The TODD may violate transfers to minors’ laws, and creditors of the beneficiary can take away the inherited property. Both Salt Lake and Utah County recorders’ offices recommended speaking with an attorney before creating a TODD (reducing the cost-effectiveness).

Trust
A trust may bring you the most control while keeping the value private. Like the TODD, a trust allows the property to get a step-up in tax basis. Plus, the trust can hold a property for a minor, protect it from creditors, and provide flexibility to sell immediately. It should be created through an estate-planning attorney, and the home must be re-titled in the name of the trust. This is more expensive than a TODD, but usually costs less than probate. It may also save a lot of headache and heartache.

SFS and its employees do not provide legal services; therefore it is important to coordinate with your attorney regarding your specific situation.
Sources: (1) https://www.nahbclassic.org/fileUpload_details.aspx?contentTypeID=3&contentID=215073&subContentID=533787&channelID=311
(2) https://www.financialsamurai.com/percentage-wealth-outside-primary-residence/
(3) https://accesssaltlake.com/p468/transfer-on-death-deeds-now-provided-under-utah-law/

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Spiking the Punch Bowl

By | 2019, Money Moxie, Newsletter | No Comments

Why Federal Reserve Shouldn’t Lower Rates, But Will Anyway

I don’t remember a time when people have been more worried about a recession than they are now. Even the Federal Reserve has been so cautious that it has painted itself into a corner. It plans to lower interest rates on July 31st even though there is little need to do so.

The Fed cuts rates in order to stimulate greater borrowing and spending. It believes that the economy may have peaked in 2018 and may only be growing by 1.6 percent right now (Federal Reserve Bank of Atlanta). That slowdown has the economists at the Fed worried. They have repeatedly implied they are looking to lower rates. Such action is likely to boost the economy by causing a domino effect in the interest-rate world–affecting everything from savings to mortgage rates.

However, lowering rates now does not seem like the Fed’s “style.” Justin Lahart, a writer for The Wall Street Journal, summed up the current situation with the Fed nicely:

“William McChesney Martin, the Fed chairman in the 1950s and 1960s, quipped that the Fed’s job is ‘to take away the punch bowl just as the party gets going.’ Today’s Fed plans to spike the punch instead.”

However, ignoring expectations of a rate cut after the Fed members have been so vocal in favor of such action could be shocking. So, it is possible that the Fed will make a change in July while emphasizing all the positive things going on. That would communicate to investors that more rate cuts are unlikely unless the data changes.

U.S. Unemployement

The Fed was created in 1913 in order to make this nation’s financial system more stable and more flexible. It seeks steady prices (inflation) and high employment. Right now, we have both. Inflation is currently at 2 percent–a goldilocks number that is neither too hot nor too cold. Unemployment is at 3.7 percent, which is the lowest level since December 1969.

So, what is the Fed so worried about? U.S. manufacturing is going through a slump. According to Morgan Stanley, new orders for U.S. goods are at their worst levels in 5 years, and they are trending down. It should be mentioned that manufacturing represented just 11 percent of the U.S. economy in 2018.

American consumers, we drive nearly 70 percent of the U.S. economy. According to the Commerce Department, our spending jumped by 4.3 percent in the second quarter of 2019. That is being helped by a rise in wages, which just bounced higher. The Federal Reserve Bank of Atlanta estimates that over the last year, wages have risen by 3.9 percent.

There may be some extra gyrations in the stock market as investors try to forecast the Fed. Hang in there. The good news, according to Ned Davis Research, is that if the Fed does lower rates and the economy turns out not to need it, the stock market has historically done well.

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Federal Reserve Is Expecting Winter In July

By | 2019, Executive Message, Money Moxie, Newsletter | No Comments

Last February, St. George, Utah had its biggest snowstorm in 20 years. Nearby, Zions National Park closed. Local schools did a late start. Motorists on the freeway were asked to use snow chains. The storm total? 3.8 inches! So, not that much . . . if one is prepared.

Without a doubt, the greatest risk in such a situation is overconfidence. The same could be said about investing. And even though it is summer, the Federal Reserve is going to start spreading salt on the roads for wintery conditions.

As I write, the Fed is preparing for its 5th meeting of 2019, which will be held July 30th–31st. The overwhelming majority of experts believes the Fed will lower interest rates for the first time in a decade. It would do this to encourage greater borrowing and give the economy a boost.

Celebrating a rate decrease this July is like increasing your speed on a sunny day while the snowplow drivers are starting their engines. Why are the plows heading out?

The U.S. economy has been growing at just over 2 percent for a decade. Tax cuts provided a short-term bump, but it looks like the growth is headed right back to the 10-year trend. That’s not so bad, but it has the Fed nervous.

If the Fed lowers rates at the end of this month, it is sending a signal to the rest of us that the experts believe there may be some rougher weather ahead. They will be dropping the salt on the roads in anticipation. Only time will tell how the forecast and driving conditions will change.

Are you driving too fast for the conditions with your investments? Stocks and bonds have been wildly positive this year, which has some investors too excited. Most of these gains just brought market prices back to where they were before a negative overreaction last December. That drop has had a lasting impact on how most investors feel. In other words, the market data is neither hot nor cold right now, but investors are too focused on one or the other. So, when it comes to your investments, I recommend going the speed you and your advisor decided on in your last review.

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Get in the Right Lane

By | 2019, Money Matters, Newsletter | No Comments

Missing a freeway exit can be extremely aggravating. Once missed, you are required to drive farther away from your destination. It can happen for many reasons; being in the wrong lane, missing an exit sign, or heavy traffic preventing you from getting over. Once you realize you have missed the exit, you immediately begin making corrections so you can exit at the next opportunity.

Financial success can be like the freeway. You may be headed in the right direction, but are you making the right decisions? Here are some behaviors that may keep you from reaching your financial destination:

  1. Spending more than your planned budget. One of the greatest concerns of retirees is running out of money. The goal of a financial plan is to make sure your money lasts as long as you do, even if you live to 100. If you are depleting your nest egg too quickly, you should change lanes. 

  2. Giving money to kids. When adult children are having financial troubles, giving them money may seem like the right thing to do. That is not the case. In most situations, it just prolongs the problem. If you are bailing out your adult children, you should change lanes.

  3. Paying for things you don’t use. This could be a gym membership, a storage unit to hold more stuff, or the RV and toys that rarely get used. Letting go of these things has financial and psychological benefits. You no longer worry that these items are going unused. You can rent an RV for a vacation if you want, and most of the stuff you are storing is of higher value to you than it may be to your kids. Ask them what they would like to have and get rid of the rest. It’s refreshing! If you are paying for things you don’t need, you should change lanes.

Look at your financial goals. Are you on target to reach your financial destination? If not, I challenge you to make a lane change – make the needed corrections and continue to move forward. Don’t let anything keep you from reaching your financial destination. Having a plan can keep you headed in the right direction and the right lane.

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Women Face Unique Challenges. Good Decisions are Essential.

By | 2019, Executive Message, Money Matters, Newsletter | No Comments

This year marked the 4th anniversary of our Just for Women conference and the launch of Smedley Financial’s Just for Women community. Hooray!

We want to thank the women who have participated in our community. Together, we have created a meaningful experience that engages, empowers, and educates women of all ages and from all social and economic backgrounds.

Women face many unique challenges when it comes to financial security: longer life expectancies; the likelihood that they will be in the driver’s seat, financially speaking; reduced pension payouts and retirement account balances due to periods away from the workforce to raise children or care for an aging parent. This reality makes it even more important that they set precedence regarding finances. Women should become more educated, build financial confidence, and most importantly–make good financial decisions.

Good decision-making will have a more significant impact on financial success than skill and talent combined, regardless of your gender. Dalbar, an independent research firm, has confirmed this. Their 25 years of research has found that investors’ performance has suffered significantly due to poor decision-making. Decisions which have been emotionally based or made in the “heat of the moment” tend to end with poor results.

This issue recaps some of the highlights of our Just for Women conference. If you were not able to attend, please make it a priority to join us next year — mark your calendar for May 8, 2020. Hopefully, our women’s community will help ignite a financial passion in everyone who participates.

If you would like to receive our Just for Women – Money Matters email, send us a request at [email protected] Provide your name and email, and we’ll make sure you receive the next issue.

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Heritage Planning

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What Successful Families Do Differently

We all have loved ones who we want to succeed after we have passed on. How do we prepare them to use our hard-earned savings in a healthy way?

Heritage planning encompasses passing on your “wealth” to your heirs without controlling or enabling them. The process begins by redefining “wealth.”

Your wealth is human, intellectual, and financial capital. It is who you are and what you value. You can improve the life of your loved ones by passing these principles to them along with financial assets.

Many people are curious about how to start heritage planning with their families. These are six steps to focus on:

  1. Redefine wealth as financial capital, human capital, and intellectual capital.
  2. Use a 7th generation mentality.
  3. Pass on your values through stories.
    (Above is the word cloud of values from our participants.)
  4. Teach your children to give.
  5. Teach your children how to manage financial risks.
  6. Focus on the qualitative and not on the quantitative.

Please call us if you would like to schedule an appointment to discuss how we can help you get started with heritage planning in your family.

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This Is What We Recommend In an Old Bull Market

By | 2019, Newsletter, Viewpoint | No Comments

Economies fluctuate. They always have. They probably always will. These cycles are imperfect and a little chaotic. That’s what makes them so difficult to predict.

Most people would say we are currently in a bull market and we have been in it since March of 2009. That makes it over 10 years old and the longest bull market ever.

Bull markets don’t die of old age. However, some of the current data is positive, and some is negative. That means a recession in the next twelve months is unlikely, but we should expect a rough road ahead.

What should we be doing ten years into an economic expansion? We should get our finances in order. That means more than just our investment portfolios. We should take a good look at all of our savings and spending as well.

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2019 Outlook: Patience Will Pay Off

By | 2019, Newsletter | No Comments

“The stock market is a device for transferring money from the impatient to the patient.”

This statement by Warren Buffett is educational and relevant today. When markets move downward, investors become uncomfortable. But during recessionary times, investors may panic. Companies pull back, people lose jobs, and stock declines can become sharp.

The U.S. is now late in that cycle, meaning we are coming closer to the end of a growth period. But if we look at the big picture, how damaging are recessions? How often do they occur? And how should investors handle them?

Since 1950, the average expansion lasted 67 months (5.6 years) and had an average GDP growth of 24 percent. The current expansionary period is one of the longest in history, currently 10 years in length. But it has also had one of the slowest average growth rates and is still far from the largest in total growth. Capital Group believes this has prevented the major imbalances that cause recessions from materializing. However, they do admit that the risk of recession will continue to grow until its inevitable arrival.

The average recession has lasted only 11 months and had a GDP decline of 1.8 percent. The contrast, as you can see in the graph provided, is immense. Yet the fear that those relatively small declines bring is often greater than their positive counterpart. The truth is, opportunities are developing in declining markets, and the strongest rallies are generally found right after a recession.

The general rule is this: Stay invested. Those who deviate from their financial plans are those who Warren Buffett calls “impatient investors.” If you stick with your plan, the odds of success will greatly be in your favor and the money transferring from the impatient will be to you, the patient investor.

Presented by Max McQuiston (American Funds) at the Just for Women conference. Recap by Jordan R. Hadfield.

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Is Your Brain Risking Your Financial Success?

By | 2019, Newsletter | No Comments

The world is full of information, yet our brains are only capable of processing a certain amount. If we had to analyze every aspect of every situation or decision, we would never get anything done. In order to cope, our brains have created shortcuts to help us make sense of things. These cognitive shortcuts – known as heuristics – are rules of thumb or educated guesses. In many cases, being approximately right is good enough. However, there are times when these shortcuts are not good. Recognizing when they are creeping into our decision-making will help us determine if they are helpful or hurtful in our current situation. This is critical when it comes to your money.

Overconfidence

While confidence is good, overconfidence exaggerates our abilities and can cause us to underestimate the risk of being wrong. For example, you may pick a stock that is growing. If the stock price continues to go up, you conclude that you have a good strategy or a natural talent. However, when the stock plummets, you distance yourself from the truth, believing it was just bad luck. An overconfident person may even repeat the same mistake over and over again.

Framing

When we have already made up our minds, we place our existing perspective on all new information that comes our way. For example, expecting a drop in the stock market, you put a negative spin on any good news. People who frame eventually get a big surprise when they find out the cost of being wrong.

Anchoring

Every one of us has experiences that form our opinions. When we anchor ourselves to these opinions, we ignore anything that doesn’t fit our views. If you lost money investing in a recession, you might conclude that the stock market is too risky. Even when presented with a better perspective of its potential growth, you may still feel like there is too much risk.

Herding

Have you ever found yourself doing something you would not do on your own? Going along with what a larger group is doing, whether those actions are rational or not, even in the face of unfavorable outcomes is known as herding. You hear that investors are selling, so you sell, or you hear they are buying, so you buy more without considering how it impacts your financial plan.

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