Email : jude@upperlinefinancial.comPhone: 504-610-5833
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Financial Rules of Thumb Series: Invest No More Than 10% of your Total Savings in Employer Stock

FocusOnYourEgg [] (1)

This post is part of the Financial Rules of Thumb series. Check out the rest here!

(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)

Some companies offer great deals for employees to invest in their company stock.  While it’s not exactly too good to be true, there are definitely risks you should be aware of.

The Upperline: Diversification is important. Having too much investment tied to the same place your income comes from can be risky.

It’s tempting, I know.  They’ll give you a match or a discount to purchase company stock.  There is nothing wrong with taking advantage of those options.  We strongly recommend that you guard yourself against putting too many of your eggs in one basket.

Single stocks are riskier and even more so if it is your company’s stock.

Single stocks mean you are relying on the performance of one company to earn dividends and interest.  If that same company pays you too, you run the risk of losing your investment and your job.

One day, you will no longer work for that company.

You are going to find another job or retire, they are going to downsize you, or you will die.  You know your job is not going to provide an income for you and your family forever.  You will have to rely on different sources of income at some point which should involve your investments.

If your company goes bankrupt and you’ve invested heavily in their stock you’ve just lost your income and your investments.  That’s not a good one-two punch.  Take the match or the discount, but don’t overload your investments in your own company’s stock.

Make sure you are spreading yourself wide enough that poor performance from any one investment doesn’t derail your financial goals.

How can you take advantage of employer stock benefits and remain diversified?

  • Choose diverse options in your 401(k) plan.  Your company likely offers 20+ investment choices on their retirement plan lineup.  Choose low-cost, well managed options that cover the broader market and fixed income landscape.
  • Diversify away from employer stock as soon as possible.  Every plan I’ve looked at has different timing restrictions on how long you must hold the employer stock.  Familiarize yourself with the rules of your plan and put a reminder in your calendar to move funds from your company stock to your diversified investment choices on a regular basis.

What questions do you have about your personal investments in employer stock?


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Save for Retirement Before Saving for a Child’s College Education

Saving for Retirement and College

This post is part of the Financial Rules of Thumb series.  Check out the rest here!

(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)

This rule of thumb can trigger emotional response. It may seem selfish to begin your retirement savings without putting money toward your kid’s college education first. You want to do right by your children, but it is important to right by yourself too.

The Upperline: If you pay for your child’s college but haven’t saved for retirement, you’ll be depending on them or government care in your golden years. Retiring with dignity should take priority over college savings.

This is a rule of thumb that I agree with.  I want you to be able to save for your child’s college, but you should start your retirement savings first.  Both of these are important reasons to save.  College may seem more urgent since your child isn’t getting any younger and it is easy to delay retirement saving “until later”.  A key to retiring with dignity is taking advantage of the power of compound interest.  The best way to do that is to start saving for retirement as soon as possible.

It is ultimately their responsibility for their education. Your responsibility is your retirement.

Having their parents pay for college isn’t their only option.  Scholarships and grants exists for a reason.  They can work to pay their tuition (did you know that college students that work actually make better grades? See this NYTimes article on a study by Laura Hamilton for more on that topic).  They can also start their education at a community college to get credits for core courses at less expensive tuition rates.

We don’t want to encourage students to go into debt for their education. The number one reason people drop out of college is due to debt, not grades (see this great infographic for other reasons).

One note from Jude: Student loans can be a useful tool, but we have seen clients burdened with what amounts to a mortgage payment for their college educations.  Using debt is always about making smart choices, and it’s important to make good choices bout the potential return one can expect on borrowing money for college.

Doing both is great, if you can afford it.

Let me be clear that your goal should be becoming financially capable of saving for retirement and college.  If you are able, these two should be done concurrently. But while you are working toward that goal, your retirement takes priority over college savings.  Don’t forfeit your retirement in order to be a blessing to your child now only to become dependent on them later.  Refer to our post on how much to save for retirement and if there is more discretionary money to spend then you can begin funding an Education Savings Account (ESA) or 529.

We will cover education saving vehicles in an upcoming series, but be wary of using the following for college savings:

  • Insurance
  • Savings bonds
  • Zero-coupon bonds
  • Pre-paying tuition

These do not provide maximum growth or keep up with inflation well enough to be a good savings vessel especially when ESA and 529 plans exist.

What are your questions about saving for college?  Let us know and we may answer them in a future post!

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100 Minus Your Age? – Financial Rules of Thumb Series

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Today’s rule of thumb is:

“100 minus your age equals the allocation you should have to equities in your portfolio”

The Upperline:  It’s far more important to know how much risk you’re comfortable with, than to use this as a guideline.

This rule of thumb is dangerous not because it’s generally untrue, as I think that this is often a reasonably appropriate guideline for many investors.  The problem is, if it’s not right for you, it could have huge consequences.  I often hear from investors that they’re taking more risk in their 401k because they’re younger.  Conversely I hear from investors nearing retirement that they’re moving their entire portfolio into bonds and Certificates of Deposit.

That may be exactly what they should be doing, but the problem is that those strategies don’t have value on their own.  Those strategies only make sense within the context of your personal risk tolerance and your family’s financial goals. Continue Reading…

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Financial Rules of Thumb Series – How Much Should My Car Payment Be?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

I’ve heard the financial rule of thumb:  “All Vehicle Payments should be Less than 15% of your take home pay.”

The Upperline: I don’t think it really matters whether you buy a new or used car, or what percentage of your take home pay it costs.

I think it’s far more important that you know
-How much you’re spending
-What your goals are
-If this spending supports your goals.

This feels like a rather unnecessary rule of thumb to me, and it reminds me of the reason I think people don’t often visit financial planners.

Jude’s theory – People don’t visit financial planners because they think they’re going to be told they can’t spend money on something important to them.

Yet here’s the thing.  It’s YOUR money.  You work hard to earn it, and I think you should spend it on whatever you like, as long as you’re conscious of the choices you’re making and you understand the tradeoffs.

From a pure dollars and cents standpoint, there’s probably some value to the two rules above.  Problem is, I rarely meet people that make purely numbers-driven financial decisions.  If you’ve got your finances well under control, and are saving the amounts you want for your goals, and the car of your dreams is going to cost you 20% of your take home pay, then who is to say you shouldn’t spend that money?

If your car is important to you because you -

a) have a long commute

b) always wanted a nice car

c) any other reason you can think of -

then I think that’s exactly what you should spend your money on, as long as you can afford it within your overall household spending.

Some other things to think about:

  • Once you’re done making the payments on a car (or any other loan), continue paying that money to yourself.  You’ve got the payments built into your budget, so start directing that money towards a new goal.
  • Leasing a car isn’t an inherently bad decision. I can hear some financial planners cringing as I type this.  If you want to try out a new car before you buy it, don’t drive a ton of miles, and like new cars, then leasing has a lot of pluses (including some nice tax features if you own your own business).  I’m particularly fond of lease takeovers, where you can assume a lease from somebody that wants to exit a lease. is a personal favorite.

What financial tips would you give somebody thinking about buying a car?

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Financial Rules of Thumb Series – Is Saving 10% Enough?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Saving 10% of your income is often tossed out as a solid rule of thumb.  Is it a good rule of thumb?

The Upperline: Generally solid advice, but you should run the numbers to see if you need to save more, or if you can afford to save less.

If you’ve started saving at a young age and are spending within your means, 10% may be enough.  Use one of the tools online or contact a fee-only financial planner to help you get some clarity on what it will take to retire the way you want to retire.  Liz Weston suggests what I think may be a better rule of thumb, which is “Save 10% for basics, 15% for comfort, 20% to escape.

Now, some common misconceptions about saving:

I’m saving 10% in my 401(k), so I’m on track.

Saving in your 401(k) or other retirement plan at work is a great step in securing your financial future.  My main concern here is that while having tax-deferred savings is great, you’ll want to have some savings that you can get your hands on before retirement, in an emergency fund or some other investments.  Things happen, and you’ll need to replace your air conditioner, or pay some medical bills at some point, and you can’t (strikethrough) probably don’t want to raid your retirement to pay for that.  Stay on track with your retirement savings, and start setting some money aside in your savings account for a rainy day.

I can’t save that much, so why bother?  I’ll just have to work forever anyway.

It’s natural for us as humans to see a goal that looks far too far away for us to reach, and we get discouraged.  Frustrated by what we feel is a lack of progress, we do nothing.  Even if you can only save 1% of your pay, that’s magnitudes better than 0%.  Then, take a few more steps towards your goal by:- Paying yourself when you pay off other debts.  Have a car loan that you’re close to paying off?  Set up an automatic transfer from your checking to savings once it is paid off, in the amount of the car loan.  You’re used to making that payment, now pay yourself and set that money aside for the future.  When you get raises, set up an automatic deposit into savings  for part of that raise.  Take some to spend and automatically save the balance for your future goals.

Remember – additional debt payments count as savings

If you’re paying off debts on an accelerated schedule, remember to count that money in your savings total.  It’s money that you were going to have to repay anyway, but you’re paying it off sooner than you needed to.  Pat yourself on the back and be sure to credit those extra payments towards your “savings” target.  Just be sure you only count the extra portion not the part you’d have to pay regularly.

(Big thanks to my friend @RussThornton of Wealthcare Capital for giving me a 2nd opinion on this piece)

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6 Tips for Refinancing Your Home – Financial Rules of Thumb Series

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Rules of Thumb for refinancing your mortgage are hard to come by.  The one I’ve heard most often is “Refinance your home when interest rates have dropped by more than 1%”    Interest rates are still hanging around historic lows.  So should you refinance?

The Upperline:  A 1% drop is a good indication that it’s worth considering, but you’ve got to run the numbers, and make some assumptions.

To run the numbers, use any of the great calculators available on the internet (I like’s Mortgage Refinancing Calculator) and input your information.  Don’t assume you’ll get the lowest rate possible, run the numbers assuming a higher rate.  If you get a lower rate, wonderful, but don’t count on it.

6 things to consider when looking at refinancing:

  1. Don’t fall for false comparisons.  If you’ve been in your home for 5 years, don’t compare your current mortgage to a new 30 year mortgage.  You’d be swapping the remaining 25 years of payments into a new 30 year payment plan.   Of course those payments would look smaller.  Don’t extend the time if you can at all help it.
  2. Can you qualify? Your situation may have changed since you got your original mortgage.  Some questions to consider:  Is your credit better or worse than you bought your home?  Has your income situation changed?   What about other debts?  All of these factors (and more) will determine if you can even qualify to refinance.
  3. Do you have more than 20% equity in your home?  Considering price drops around the country, how much equity do you really have?   It’s going to be hard to refinance at the best rates if you’re below that 20% number.  Do a bit of research before you pay for an appraisal on the refinance.  Tools like and can give you an estimate of the value of your home, or a trusted real estate agent can give you a ballpark figure.
  4. How much longer will you be in this home?  If it’s less than 5 years, you’d have to save a lot on the refinance to make the closing costs worthwhile.  (Zillow has a great Closing Cost Calculator to give you an estimate, including amounts from local service providers.)
  5. Don’t extend your mortgage to save money.  Although banks advertise rates on 30 and 15 year mortgages, chances are they’ll issue you an odd-year mortgage (for example, a 27 year mortgage, if you’ve been in your current mortgage for 3 years).  It’s worth asking.  Do whatever you can to not extend the number of years you’ll be paying.  If your bank won’t do this and you’d still like to refinance, take the lower payment and:
  6. Continue paying your current mortgage payment after refinancing.  If you can reduce your mortgage payment by refinancing and you’ve met the above criteria, add some extra debt-liquidation juice on top by making the mortgage payment you’re used to.  You’ll have some extra money going directly towards your principal every month that will help you eliminate that mortgage even sooner.

Are you considering refinancing your mortgage? Have any other tips to share?

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Are Bonds Safe Investments? – Financial Rules of Thumb series

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

“Bonds are safe”.  “You can’t lose money in bonds”.  These and other similar statements are often made about investing in Bonds, but are they true?  Are bonds safe investments?

The Upperline: You can lose money in bonds. They’re not without risk. They have different kinds of risks than stocks, that need to be understood if you’re going to invest in them.

The price of bonds can fluctute up and down. While the prices of bonds may not move as much or as often as stocks, they do still move.  This post explores some of the risks associated with bonds.  While not a list of every risk that bonds face, below are a few basics that should be understood by the general public.

Interest Rates. If I own a bond that is paying 5%, and a similar bond is issued that now pays 6%, who would buy my 5% bond?  Would you rather get paid 5% or 6%?  When interest rates go up, prices on existing bonds tend to go down so that the yield is similar to new bonds.  The opposite is true, too.  If interest rates go down, your existing bond paying a higher interest rate is probably worth more than you initially paid for it.

Default Risk.  When you buy a bond, you’re effectively lending money to a company or government, that they pay you interest on and ultimately they repay the principal to you with the final payment.  If a company (or government) goes bankrupt, they may not be able to repay that principal to you.  Ratings agencies like Fitch and Moody’s asses the risk of a company which then affects the interest rates the company must pay to borrow money (Think of this like a credit score.  If you have a good credit score, you might pay less on your mortgage than somebody with a poor credit score).  The risk right now as interest rates are low, is that some might be tempted to purchase bonds of a lower credit quality to get higher interest payments, when they’re not aware of the extra risk they’re taking.  Risk and return are eternally linked.

Duration.  If you were going to lend somebody money for 10 years, you’d probably want a higher return on your money than if you lent them money for 3 months.  Bonds work the same way.  Bonds that are longer carry higher interest rates, and might be attractive with yields on short-term bonds as low as they are.  The risk here is that we’re near historical lows in the bond market.  It’s at least likely that interest rates will start to rise at some point and longer-term bonds will be affected more than short term bonds.  If you own a bond mutual fund, a measure of portfolio length is “duration”.  The longer the duration, the more risk of price fluctuation inside of that portfolio.

I have add this last paragraph or my friends who are financial planners will lose their mind.  Just because the value of a bond goes up or down doesn’t mean you’ve lost money.  You don’t recognize that loss as long as you don’t sell.  It’s quite possible that you can hold a bond that is trading for less than its face value, and you hold it to maturity and get the entire principal back.  This is certainly true if you own bonds directly, but it’s not as straightforward with bond funds.  If you own a bond fund and interest rates start to rise, the values of the bonds may decline, causing others to sell their shares in the fund.  That fund then may need to sell some of its bonds at lower prices than they might otherwise hope to meet those distribution requests.  It’s not a certainty, but it’s a risk that must be understood.

Want to read more?  Here’s an extensive overview of other Bond Risks from CNNMoney.

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Always Take the Match on Your 401(k)?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

The 401k match is incentive offered by many companies to encourage retirement savings by their employees.  During the latest financial downturn, some companies eliminated their match but they’re coming back as corporate earnings recover.  So should you participate in the 401k and take the match that is offered?

The Upperline: Unless you’re severely in debt or unable to meet your regular bills on a monthly basis, I can’t think of a reason why you wouldn’t want to take the 401k match.

I bet you’d probably like a raise, right?  Here’s the easiest one you’ll ever get.  Save in your company’s 401k, at least to the amount of the match.  Whatever they match is money that your employer is willing to pay you, but you’re just not claiming it.  This is as close to a no-brainer that I can think of when it comes to your money.  This money gets saved, for your benefit, with additional contributions from your employer, automatically from your paycheck, without you having to do anything.  What’s not to like?

When should you not take advantage of this?  

  • Overspending - If you’re spending more than you’re taking in every month leading to rising credit card balances, saving for your retirement isn’t going to do you any favors.  Don’t allow this to continue unchecked.  Get your spending under control so this doesn’t continue forever, and then you should start saving.
  • High interest credit card debt – This is a tough call. If you’ve got some high interest debt, I can understand delaying your savings to put additional funds towards eliminating that debt.  This requires discilpine and focus, so make sure that you’re actually putting those funds towards repaying the debt and not just spending it.
A few other questions I’ve heard from retirement plan particpants:

“I don’t know anything about investing so I’ll probably just make bad choices, so what does it matter?”

I’ve actually heard this statement in 401k enrollment meetings for company retirement plans.  There have never been more resources to help you with this decision, from abundant information online, resources from your plan sponsor, and from outside advisors.  We learn best by doing, and starting with your own money will give you incentive to learn.  Even if you make bad decisions, when you factor in the money from the match it’s tough to come out behind.  Who knows, something good might even happen, like being able to retire one day.

“I don’t think I’ll be at this job for very long, so it might not vest”  

I suppose that’s true.  However, the money you contribute is always your own and I’ve never heard anybody regret saving some of their own money.  Maybe you will get a new job and not leave with any of the employer match (each plan is unique with these rules, so talk to your HR team about what the specifics are at your company).  However, it’s harder to find new jobs in this economy.  For plans that use a vesting schedule, you often get a percentage at the end of your first year so even a short stretch can give your savings a boost.  If a few months stretches into a few years, you’re in the habit of saving as well as benefiting from more and more of your employer’s contributions.

What other questions do you have about 401k plans and matching?

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Emergency Fund – Is 3 Months of Expenses the Right Amount?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

I’m sure you’ve heard the term Emergency Fund in the financial media, but might not be certain what it means.  Here’s a quick definition, and then my take on the topic.

Definition: Emergency Fund – Money that you can get your hands on quickly in the event of an emergency.

The Upperline:  An Emergency Fund is one of the best things you can create, financially speaking.  It sets a solid financial foundation and protects you from using high-interest debt.  The question is, how much?

Your Emergency Fund can be in a savings account, money market, extra money in your checking account, whatever works for you. The important thing is that you have money available in case the transmission falls out of your car, the AC for your home goes out, or your home is temporarily damaged by a natural disaster. (But that probably won’t ever happen, right?)

If you don’t have money that you can access easily when bad things happen, you’ll have to

a) rely on friends/family/strangers


b) spend on credit cards or lines of credit.

If you’ve got these resources it’s not the end of the world if you rely on them in your time of need, but better for you if you can take care of the problem in advance by having sufficient cash. As I’ve said before, Cash is King not because it’s a great investment, but because it allows you to take advantage of opportunity or survive a small or large catastrophe.

“How much should I have in an emergency fund?”  That’s up to you. This has more to do with you and your comfort with risk than anything else. If you have a stable, steady income and prospects don’t seem to be changing, then 2 to 3 months of expenses might make sense. If you have an income that can fluctuate, own a business, or are generally more conservative, then having 6 months or more of expenses makes sense.

“It’s going to be hard to save that much money.”  Just because it’s hard doesn’t mean it isn’t the right thing to do.   Set aside what you can every month, and create a visual tracking aid (like the thermometer that United Way uses) to chart progress towards your goal.  Find a way to celebrate when you reach your goal.

If you don’t find a way to save small, regular amounts then you’ll never reach your goal without a big windfall of some kind.

But when that windfall comes, there’s another chance to do the right thing. Set aside some money for fun things, and use a big chunk to get closer to (or meet) your emergency fund goal.

With your emergency fund, you’ll have a resource that you can use, without high interest charges to pay for that new air conditioner.  Then, you can then repay yourself rather than your credit cards.

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Buying vs Renting a Home? – Financial Rules of Thumb Series

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

It’s not uncommon to hear statements like “Renting is throwing your money away” or “A home is your best investment” but are those statements true?  The decision of buying vs renting a home has many factors that should be explored.

The Upperline:  There are lots of reasons to rent rather than buy.  Buying can be a great deal, but only if you plan to stay in the home for quite a while.

Like most financial decisions, this one isn’t really about the money.  It’s more about personal preferences like:

  • How long do you plan to live in this home?  (If less than 5 years, it’s hard to overcome the initial costs of purchasing and early years of financing)
  • How do you feel about renting?  Do you feel like you’re wasting your money?  Do you feel like you need to be able to make permanent changes to the structure or yard?
  • How do you feel about borrowing a large sum of money?  How do you feel about debt in general?
  • Is stability, knowing that you’ll be in once place for a long stretch, important to you?

Now that you’ve checked in with your feelings, here’s a short list of factors you should weigh when considering buying vs renting a home:

  • Costs of buying and selling – There are several expenses that happen with most home sales and purchases.  There are Filing fees (with the banks and local governments), Real Estate Commissions, Title fees, Appraisal Fees, etc.  All of these costs take a bite out of the proceeds of the sale (or add on to the purchase price if you’re the buyer).
  • Financing costs – Most homes in the US are purchased with a traditional 30 year mortgage.  If we assume a $200,000 mortgage and a 5% interest rate, at the end of 5 years you would have paid just over $16,000 in principal and $48,000 in interest.
  • Taxes & Insurance – Typically, the cost of renting is lower than the cost of owning a similar home.  That’s partially due to insurance (renter’s insurance is less expensive than homeowner’s insurance) and property taxes.  Be sure you get a good estimate of the annual property tax bill you’ll need to pay in your new home, and account for that on a monthly basis.
  • Maintenance – This is the hidden cost of home ownership.  Cleaning the gutters, painting the house, and cutting the grass are just a few of the things you’re responsible for as a homeowner.  There’s a financial cost, as well as a time cost to taking care of these chores.
  • Lack of flexibility – This is another hidden cost of ownership.  Once you buy, you’re locked in, and your money is locked in.  Banks are requiring higher down payments than in recent years (which is probably a good thing) but that also means you’ll have to save a healthy sum, and then see that money get swapped for equity in your home limiting your access to it.

Home ownership can still be a great deal, but the math isn’t as clear these days as it has been in the past.  Be sure to have some good conversations about what your home means to you, run the numbers, and make the best decision you can.

I hope this is helpful!  Please let me know if you have any follow-up questions or tips for things I left out in the comments below.

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