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Monthly Archives: July 2019

When Paying Down Debts, is Your Mortgage Top Priority?

Debt is a tricky subject because typically, people feel pressure to get rid of it as quickly as possible. And when you think about your large debts, what sorts of things come to mind? Probably your house and vehicle, so it would make sense to pay those off as quickly as possible, right? Not exactly—at least, not when it comes to your mortgage.

For starters, mortgage interest is usually the lowest interest rate debt—not always, but often.

Assuming cash flow allows for the additional annual payment or a lower mortgage term length, such as 15-year mortgage instead of a 30-year mortgage, I would recommend investing the excess money or the payment difference between the 15-year and 30-year mortgages in an appropriate investment for your income, time horizon, risk tolerance, etc.

Be aware: this recommendation is predicated on your comfort level with debt. If you’re absolutely debt averse, we may accelerate—though it’s rare. Your advisor can always run side-by-side comparisons to show the difference between paying down the debt and investing.

Here are some key points to consider:

  1. Potential for higher rate of return in a separate investment.
  2. Investment, such as a brokerage account, is liquid and available to you in the event of an emergency or opportunity. While subject to market risk, this strategy provides greater flexibility.
  3. If invested in a liquid account like a brokerage, you can simply access the monies. If you use the money to pay down the mortgage and need access to cash and don’t have it on hand, you would need to borrow from the equity of the home. This is done after approval from the bank and is subject to prevailing interest rates.

In a nutshell, unless you have a significant cash reserve, a high monthly excess available beyond what you need to meet financial independence and other goals, I would not recommend rushing to pay off your mortgage. And, even if you did have the huge cash reserve and high monthly excess, I would still likely recommend other investment options to help accumulate wealth independent of your home.

As always, each individual investor’s situation is unique and should be evaluated accordingly. Your advisor can help you dig down into the debts you have and help you choose what to focus on paying down.

Do you need advice on which debts make sense to focus on?

Dealing with Debt: Balancing Your Emotions and Logic

We often hear that advisors have more conversations about debt than almost any other topic (except perhaps taxes). These conversations tend to begin with a brief, “There is good debt and there is bad debt,” followed by a summation of why a particular debt meets one of the criteria with examples—for instance, a mortgage with tax benefits or even a low-interest debt with no tax benefits.

However, the financial impact is only one variable in the decision-making process as it relates to debt elimination. The other equally important factor for many of our clients is the emotional impact of carrying the debt. And frankly, not every financial adviser is equipped to have that conversation with a client, and not every client is willing to have that conversation with their financial adviser.

The conversations can be awkward for either party. Feelings are messy; embarrassment, regret, childhood experiences of money, perception of debt as always being bad, etc. are not easy to identify and address with logic so it’s not possible to have conversations about debt without factoring in emotions.

If you can have the conversation with your financial adviser, you’re in a good place to factor in both the financial and emotional. In my experience, once the debt is written down, your financial adviser can create a plan to both reduce or eliminate debt, and save or invest. It is often the unknown or lack of a plan that exacerbates the emotional.

What you ultimately decide will depend on your individual circumstances. However, before you press ahead with a plan, I would encourage you to consider the following in your process.

  • Employer plan: If your employer provides a match for contributions to a 401k, 403b or other employer-sponsored plans, it may be wise to contribute at least the minimum amount required to obtain the full match.
  • Emergency fund: Be sure you have or are contributing some amount toward a reserve fund, so you have cash available for an emergency. If you are eliminating debt and do not have a cash cushion, you may end up adding to your debt and, depending on the type of debt you are eliminating, it could be higher interest consumer debt.
  • Interest rate: Not all debts are created equal. If your debt has a low interest rate, you may want to consider paying the minimum amount due and investing the difference, or at least a hybrid of debt elimination and investment.

Whether you decide to accelerate debt, pay the minimum and invest or some combination of the two approaches, I highly recommend you discuss your situation with a skilled financial adviser. It has been my experience that having someone else review your debts, your cash flow and your investment options through an employer or individually can make a significant difference in the comfort level with and commitment to the plan you choose.

How comfortable are you with debt? We can discuss your options and approach together.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.
Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs.=
The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.

Four Ways to Supplement Your Retirement Savings

You’ve maximized your contribution to a 401k or 403b through employee deferral for 2019 (and employer deferral if you have your own plan) and find yourself with excess funds available to invest. Assuming you already have an emergency/opportunity fund, what else can you fund? What options do you have? Fortunately, there are numerous other products you can use to supplement your savings after your employee deferral. Here are some accounts you may want to consider:
  • Deferred Compensation Plan – Many doctors are employed by institutions that offer a type of plan that allows an employee to put away additional dollars annually. While there a variety of deferred compensation plans, the 457b plan is common for physicians at public or non-profit institutions. This plan allows a physician to contribute additional dollars from income on a tax-deferred basis.
  • Roth IRA – For physicians in practice, their income typically won’t not allow a direct contribution into a Roth IRA. However, because the IRS allows anyone to contribute to an IRA and there is no income cap for converting traditional IRA accounts to a Roth IRA, it is possible for anyone without other existing IRAs and with sufficient earned income to contribute to a non-deductible IRA and convert to a Roth IRA annually.
  • Health Savings Account – If your employer offers a health savings account (HSA), this is another place to put away monies on a pre-tax basis. Unlike health reimbursement or flexible spending accounts, the balance of the account can roll over from year to year and can be used later in life for large healthcare expenditures and other goals depending on your situation. The one caveat: An HSA is typically attached to a high-deductible health plan, so your out-of-pocket expenses will be higher annually.
  • Brokerage Account – While it is important to set aside monies for an emergency, retirement and other goals, for many doctors it can also be important to invest in an account that can be accessed without penalty at any point in the future. A brokerage account will experience volatility unlike a cash account so there is more risk involved. If you utilize a brokerage account, it is important to determine when and if you will need the money so you choose a portfolio with the appropriate level of risk.
Financial planning and investment management should be managed based on your specific situation. It is important to coordinate the two together, preferably with one professional who can assess your overall situation, including income, time horizon, risk tolerance, etc., as well as short-, mid- and long-term goals. Again, there is no cookie cutter approach to planning or investing. Be sure your financial professional understands you, your family and your goals.[/vc_column_text][/vc_column][/vc_row]

Do you find yourself with excess investible funds? We’ll work with you to develop a plan.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC. Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs. The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.

“Pay Yourself First” and Other Budgeting Tips

If you want to reach financial independence and achieve other long-term financial goals, I would argue the primary predictor of your success or failure is the way you manage the income jump from training into practice.

Many physicians compare themselves to their peers further along in their careers and assume that they too should buy a huge house, fill it with cool furniture and park two shiny new cars in the driveway to say, “I made it!” Very few clients in my practice went this route. The ones who did had some catching up to do.

For most people—physicians in particular—living on a budget may have negative connotations. It means the end of lattes, no chance at a luxury car, and never any fancy vacations; just paying down student loan debt and investing for some unimaginable future retirement date.

In my practice, that is not how most of my clients live. In fact, I don’t expect my clients to save every penny for the future and miss out on living now; I encourage them to enjoy the above-average income and to spend time doing things they enjoy. Instead, I ask my clients to do one thing: Pay yourself first.

The concept has been around for a long time and it’s simple. Before you spend money on anything else, make a commitment to set aside a percentage of your income or a flat dollar amount. To improve your chance of success, consider the following:

  • Automate your savings. Whatever you choose, percentage or flat amount, set up a monthly draft from your primary checking account to an account or accounts depending on where you plan to save/invest the money.
  • Choose a percentage or amount that will leave extra money in your checking account each month. This is simple psychology: It keeps you from feeling strapped for cash. As your account increases, it has the added benefit of providing additional funds for larger purchases, like a much needed and often overlooked vacation.
  • Reevaluate periodically as income increases or if you receive bonuses for RVU true ups or annual collections. As income increases, most physicians spending increases. Instead, I recommend increasing the percentage or flat dollar amount allocated to saving/investing.

Need help creating a budget that works for you? We can help.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.
Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs.
The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.