Why it’s Smart to Start a 529 Education Savings Plan

Why it’s Smart to Start a 529 Education Savings Plan

Saving for your child’s future education costs can be one of the most important decisions for parents. The price of tuition alone is staggering, with new increases each year. Imagine being a new parent and what education costs will be in eighteen years when your child would potentially be in their first semester of higher education. The good news is that there are different options you can implement with strategic financial planning

How retirement planning with a financial advisor can help

Over the past twenty years, tuition costs have doubled, taking into account fees, room, and board. Average costs for educational institutions for 2020 are as follows:

• Private School (nonprofit): $49,879
• Public 4-year institution: $21,950
• Out of State: $38,330

Saving for education can be just as important as saving for retirement. There are many options to help you save for your child’s education and prepare for rising costs. There are qualified tax-advantaged plans geared toward each financial situation, and not all options will be appropriate. A good financial planner can help you sort through the choices and select the strategy that is right for your family.

 

The 529 prepaid tuition plan

One of the many qualified state tuition plans is the 529 savings plan. There are two kinds of 529 plans, a prepaid tuition plan, and an education savings plan. Both plans would be considered an asset of the parent, which means you have full control of your child’s education savings.

The most significant advantage of prepaid tuition plans is the ability to permanently “lock” tuition at current rates by purchasing college credits. To do this, you must buy the college credits from a state school. So if you are in California, your child could only attend a California State University (CSU) and not a University of California (UC). The funds in the account will appreciate based on the inflation of tuition costs.

If the account holder wishes to close the account, he/she receives only the principal amount they originally paid. The prepaid tuition plan only covers future tuition costs and does not include other associated education costs.

Some disadvantages include:

  • Credits appreciate by the rate of inflation. One potential downside to prepaid tuition is anticipating the students’ needs in college.
  • The student could receive a scholarship to the university negating the prepaid tuition, which would then be returned interest-free to the account holder.
  • The university may also not have the student’s field of study. The prepaid tuition can only be applied on a per university basis, forcing your child to choose a different major.

The 529 education savings plan

The most common 529 savings plan is the education savings plan. The earnings of this plan grow tax-free so long as you apply the funds for qualifying education expenses (e.g. tuition, books, supplies, room, and board). For the earnings to be tax-free, the student must also be enrolled at least half-time. If these requirements are not met, there is a 10% penalty on the earnings.

 

Anyone can contribute to the plan, regardless of income. Individuals can contribute up to $75,000 a year, and couples who elect gift splitting can contribute up to $150,000. There are no tax consequences associated with these contributions. The plan also allows for annual distributions up to $10,000 to pay for enrollment in elementary or secondary schooling.

 

In 2019, the SECURE Act allowed for a lifetime aggregate distribution of up to $10,000 to pay for student loans. The SECURE Act also allows for annual qualified distributions for apprenticeships registered and certified with Secretary Labor National Apprenticeship Act also up to $10,000.

 

 

Education Planning with Platt Wealth Management

It can feel intimidating, almost impossible, to plan for all of the moving parts within a comprehensive financial plan. Don’t worry — we can help! 

If you are searching for a certified financial planner that you can trust to help plan the next stage in your life, please give us a call. At Platt Wealth Management, our financial advisors put your needs first and provide completely transparent services to best prepare you for all financial milestones. 

Are you ready to take control of your retirement plans? Give us a call at (619) 255-9554 to set up a complimentary review or email us here

 

Estate Planning: Probate and Trusts

Estate Planning: Probate and Trusts

In our last article on estate planning, we explained why estate planning is essential and discussed the basics of wills and powers of attorney. You probably know you want to avoid probate, but you might not know precisely why.. 

Probate

This process proves a decedent’s in court as legal and determines whether the decedent’s intentions have been carried out. Wills can be contested during this process since the probate court is public. The estate of someone who dies intestate (without a will) goes through probate to determine how to handle the assets.

It can take months to years to settle probate, depending on the estate’s size and other issues.

Once someone dies, all their assets (that aren’t jointly owned) are considered part of their estate. Financial assets that have named beneficiaries, such as retirement accounts and life insurance policies, and accounts with a transfer-on-death/payable-on-death designation are exempted from probate, as are trusts.

In California, if set up correctly, houses can be transferred on death, as can vehicles. Bear in mind that the law on transferring houses sunsets 1/1/21.

The will is legally verified by the judge, showing that the decedent signed the will in the presence of two witnesses. Then an executor or court-appointed administrator sets out to execute the terms of the will.

Executors get the death certificates to show the decedent is in fact, deceased. They find all the assets and have them appraised and notify creditors. (Note the beneficiaries don’t owe any money as long as they weren’t joint signers on any debt.)

The executor also needs to pay taxes, including income and estate tax, from the estate and make any payments like homeowners’ insurance and utility bills. They notify the beneficiaries named in the will.

After paying all the liabilities and taxes, the remainder or residue is distributed to the beneficiaries. The executor or administrator gets compensated for performing all these duties.
If you have a spouse, on first death, there’s no probate. Your spouse can claim the assets. But the will of the second to die must be probated. Almost all states have a “small estate” exemption, and if the total estate is less than the limit, the will doesn’t need to be probated. In California, the limit is $166,250.

Why you want to avoid probate

There are several reasons why you might want to avoid probate, or at least have as much of your assets bypass the “probate estate” as possible. Trusts are commonly used for any property that doesn’t have a beneficiary or payable-on-death designation, especially in California.

Public

Court records, except in some instances, are available to the public. Anything that’s in the will can be discovered by anyone willing to do the research. The will can be contested in court. If you’re a private person or there are some skeletons in the closet that your family wouldn’t want to be made public, you want to avoid probate as much as you can.
Assets that don’t pass through probate, such as trust and retirement accounts, don’t have these issues.

Length of time

The entire process can easily take years. Some courts are severely backlogged, or there may be provisions in the will that could be difficult to execute. For example, the testator (decedent) might have left small bequests to people whose addresses the executor doesn’t have. However, they must still notify the beneficiaries and distribute the assets.
In California probate takes a minimum of 7-8 months (when there’s no pandemic on) and can go for up to two years.

 

Cost

As noted earlier, this varies by state. Some states have a less lengthy probate process that costs less than others. However, if you live in California, the executor’s fee starts at $4,000 for a $100,000 estate. It reaches $23,000 for $1mm estate up to $163,000 for a $20mm estate.

It’s important to note that for these purposes, the debts don’t reduce the value of the property. For example, if the house is worth $1,500,000 and it has a $1,250,000 mortgage, it’s still valued at $1.5 million.

Also, filing fees range from $60 to several hundred dollars for probate petitions and fees for copies of the death certificate. Notice of the probate hearing must be published in a newspaper, and that can cost $200.

However, there is one instance where it might be preferable to allow the assets to go through probate. That’s if there are a lot of lawsuits or liabilities against the property. 

After the creditor has been notified, there’s a small window – typically six months – where creditors must notify the estate that they’ll file a claim against it. If they don’t make the notification within the window, their claim expires.

Trusts

For probate to be reduced to the minimum possible, people often use trusts to hold their property. Upon death, the assets go by the language of the trust and sit outside the probate estate.

However, it’s not enough to have a trust; the assets must be placed into it. For example, if you want to put your house in a trust (almost always a good idea in California), then the house’s title must name the trust as owner. It’s not enough to write it into the trust.

Most people use a “living” trust to hold their assets. You can put real estate, bank accounts, vehicles, artwork, and other assets into a living trust. It doesn’t make sense to put retirement accounts or transfer-on-death assets into a trust, because they already operate outside probate.

You will be the trustee of the living trust, naming a successor trustee who takes over when you’re gone. Your successor trustee can also act on your behalf if you become incapacitated. They distribute the property as spelled out in the trust once you’re gone, without involving the courts.

These living trusts are usually also revocable so that you can make changes to them during your lifetime. (An irrevocable trust is set in stone.)

Trusts require you to deal with some paperwork while you’re setting them up, and the attorney’s fees to handle it. Yes, there are DIY trust documents out there, but you want to make sure that your trust is air-tight, so it’s worth having a professional do the work for you.

There’s not much ongoing record keeping required, except when you transfer property in or out of the trust. You do need to keep written records of those transfers.

As always, there’s no free lunch. You will pay to have the trust created and assets re-titled. It’s sometimes more challenging to refinance a property that’s held in a trust. If you can’t get over the hurdle by finding another lender who understands trust property, you could always transfer it back to yourself as owner for the refinance. Then transfer it back in afterward.
Creditors can sue the trust because there’s no creditor cutoff window like there is in probate.

 

Do you want to talk to us about your estate plan or need a recommendation for a good attorney? Give us a call at 619.255.9554 or send us an email and we’ll be glad to set up an appointment.

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is just one part of your journey to the retirement of your dreams. A Certified Financial PlannerTM can help you navigate the complexities of financial planning. Talk to a Financial Planner>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Why Having a Financial Advisor Team is Important

Why Having a Financial Advisor Team is Important

With the advent of online trading platforms and information available for free on the Internet, many investors have decided to take a do-it-yourself approach to manage their money. Managing your portfolio is perfectly fine, especially those who are just starting, have little money, or have less complicated financial situations.

 

However, once investors begin accumulating wealth and add to their financial complexities by purchasing homes or running their businesses, it’s often a good idea to hire an advisor. There are several reasons people in these situations benefit from hiring an advisor to help them with their investment needs.

 

You don’t know what you don’t know

The world of finance is complex and ever-changing. If you have a full-time job that does not involve investments, it’s unlikely that you have the time, much less the inclination, to keep up with the continual adjustments in the space.

 

You may have a solid grasp of the fundamentals of stocks, bonds, and mutual funds. But do you know what the rules are on employer-sponsored retirement plans and Roth/IRAs and when you qualify for each? Do you understand the difference between HSAs and FSAs, and how to use them as an investment vehicle? Are you clear on whether you should pay down your mortgage, increase your savings, or do something else with your raise?

 

A financial advisor is required to keep up with changes in the marketplace. They understand how things like the CARES and SECURE Acts might affect your finances. They also know what they don’t know when it comes to finance, and will pull in other experts when necessary.

 

  • Help you determine your goals

Most investors understand that they need to save for retirement, given the lack of pensions and the uncertainty around Social Security. But what other goals do you have when it comes to money? Many people have goals that will impact their finances, but they might not know how sizeable it could be.

 

  • Provide a sounding board 

Just as business owners have an advisory board to help them get unstuck when facing issues and provide advice to help them grow, your advisor can provide commentary and guidance when it comes to your money.

 

There are many financial decisions for which there is no objectively correct answer. Whether to invest in a traditional IRA versus a Roth is one example. There are circumstances that better fit one than the other, but because they rely on assumptions about future taxes and earnings, there’s no right answer.

 

Similarly, people often need help thinking through the wisdom of buying into a retirement community or continuing care retirement community. Or even deciding whether to pay down the mortgage or invest some extra funds. Again, there are no objectively correct answers. Bouncing your questions off a third-party who’s knowledgeable about the issues can help you reach a satisfying decision for you and your family.

 

  • Help you stick to your plan

Emotions often get caught up in finances. When tech stocks prices go through the roof or housing finance options are attainable for everyone, it’s easy to be carried away by exuberance. No matter how irrational it might be. 

 

The financial press will cover these types of booms in breathless detail, adding to the perception that everybody’s doing it, and you’ll miss out if you don’t.

 

Similarly, during market volatility, watching your portfolio value decrease every time you look is painful. Many investors soothe the pain by selling out. It’s not a rational response, because it locks in the losses that would otherwise only be on paper. 

 

But at least when all the money is in cash, there are no fluctuations. Of course, leaving it too long exposes the capital to inflation, which eats away at spending power.

 

When other people are selling out, it seems like the smart thing to do to avoid being the last one left holding the bag. The stock market doesn’t work like that, but it’s persuasive messaging since the financial press will have been covering the bust in breathless detail.

 

Having someone who can talk you off the ledge and prevent you from doing long-term damage to your portfolio is priceless.

 

  • Work with your tax & estate planning needs

Once your finances start getting complex, so does your tax situation. Your accountant focuses on reducing this year’s taxes, but that may not be the right thing to do for the portfolio overall. You need someone who understands investments from a taxation point of view.

 

Similarly, as you increase wealth or develop a blended family, your estate planning needs increase too. In California, most people who have accumulated assets need a trust. 

 

If you have children from a previous marriage, you’ll need to protect their inheritance, no matter what happens with your current spouse. Most of these issues are too complicated for people to do it themselves, even though there are plenty of forms online of the unwary. 

 

While your advisor probably doesn’t do estate planning, they’re aware of the different kinds of asset ownership implications. They can often recommend an estate planning professional who will take care of you. 

 

No professional wants to recommend someone who isn’t competent, because it reflects poorly on them. A good advisor will only want to recommend the best estate planning attorney and tax professional too.

 

  • Understand your risk tolerance so you can sleep at night

What do the words “aggressive” and “conservative” mean? It depends on the person. For someone very comfortable with investment risk, “conservative” might mean having 20% of the portfolio in cash and bonds. Others with a lower risk tolerance would consider that aggressive.

 

A financial advisor will tailor the risk of your portfolio to the point where you can sleep at night. A portfolio invested entirely in small company assets and international stocks, particularly emerging markets, has demonstrated high performance. But very few investors can stomach the roller coaster ride it takes to get there. 

 

For investors who are very afraid of risk or not very knowledgeable about the market, the advisor may coax them into taking on a little more risk or else the portfolio won’t grow. 

 

Still, a good advisor wants you to be comfortable and able to sleep at night. They’ll try to find the sweet spot where you are relatively comfortable and yet earn some return on your money.

 

  • Objective advice

Have you ever noticed that when your friends come to you for help, you can easily see the problem? You have no problem explaining the consequences and pros and cons of their decision. Yet when it comes to your own life, you don’t even know where to start when a problem arises.

 

Your financial advisor has that objective viewpoint that you need. They see the market as a whole, not just the parts of it that concern you. They can widen out and look at the bigger picture, which is hard for individual investors to do when faced with a decision.

 

Need some objective advice or want a second opinion on your investment portfolio? Feel free to give us a call at 619.255.9554 or email us.

 

Why You Need to Hire the Best Financial Advisor Today

Why You Need to Hire the Best Financial Advisor Today

With the advent of online trading platforms and information available for free on the Internet, many investors have decided to take a do-it-yourself approach to manage their money. Managing your portfolio is perfectly fine, especially those who are just starting, have little money, or have less complicated financial situations.

 

However, once investors begin accumulating wealth and add to their financial complexities by purchasing homes or running their businesses, it’s often a good idea to hire an advisor. There are several reasons people in these situations benefit from hiring an advisor to help them with their investment needs.

You don’t know what you don’t know

 

The world of finance is complex and ever-changing. If you have a full-time job that does not involve investments, it’s unlikely that you have the time, much less the inclination, to keep up with the continual adjustments in the space.

You may have a solid grasp of the fundamentals of stocks, bonds, and mutual funds. But do you know what the rules are on employer-sponsored retirement plans and Roth/IRAs and when you qualify for each? Do you understand the difference between HSAs and FSAs, and how to use them as an investment vehicle? Are you clear on whether you should pay down your mortgage, increase your savings, or do something else with your raise?

A financial advisor is required to keep up with changes in the marketplace. They understand how things like the CARES and SECURE Acts might affect your finances. They also know what they don’t know when it comes to finance, and will pull in other experts when necessary.

 

Goals and guidance: the best financial advisors do more

 

  • Help you determine your goals

Most investors understand that they need to save for retirement, given the lack of pensions and the uncertainty around Social Security. But what other goals do you have when it comes to money? Many people have goals that will impact their finances, but they might not realize how short-term goals can have big impacts on their future retirement plans.

 

  • Provide a sounding board 

Just as business owners have an advisory board to help them get unstuck when facing issues and provide advice to help them grow, your advisor can provide commentary and guidance when it comes to your money.

 

There are many financial decisions for which there is no objectively correct answer. Whether to invest in a traditional IRA versus a Roth is one example. There are circumstances that better fit one than the other, but because they rely on assumptions about future taxes and earnings, there’s no right answer.

 

Similarly, people often need help thinking through the wisdom of buying into a retirement community or continuing care retirement community. Or even deciding whether to pay down the mortgage or invest some extra funds. Again, there are no objectively correct answers. Bouncing your questions off a third-party who’s knowledgeable about the issues can help you reach a satisfying decision for you and your family.

The best financial advisors provide a steady hand

 

Emotions often get caught up in finances. When tech stocks prices go through the roof or housing finance options are attainable for everyone, it’s easy to be carried away by exuberance. No matter how irrational it might be. 

 

The financial press will cover these types of booms in breathless detail, adding to the perception that everybody’s doing it, and you’ll miss out if you don’t.

 

Similarly, during market volatility, watching your portfolio value decrease every time you look is painful. Many investors soothe the pain by selling out. It’s not a rational response, because it locks in the losses that would otherwise only be on paper. 

 

But at least when all the money is in cash, there are no fluctuations. Of course, leaving it too long exposes the capital to inflation, which eats away at spending power.

 

When other people are selling out, it seems like the smart thing to do to avoid being the last one left holding the bag. The stock market doesn’t work like that, but it’s persuasive messaging since the financial press will have been covering the bust in breathless detail.

 

Having someone who can talk you off the ledge and prevent you from doing long-term damage to your portfolio is priceless.

 

The best financial team

Once your finances start getting complex, so does your tax situation. Your accountant focuses on reducing this year’s taxes, but that may not be the right thing to do for the portfolio overall. You need someone who understands investments from a taxation point of view.

 

Similarly, as you increase wealth or develop a blended family, your estate planning needs increase too. In California, most people who have accumulated assets need a trust. 

 

If you have children from a previous marriage, you’ll need to protect their inheritance, no matter what happens with your current spouse. Most of these issues are too complicated for people to do it themselves, even though there are plenty of forms online of the unwary. 

 

While your advisor probably doesn’t do estate planning, they’re aware of the different kinds of asset ownership implications. They can often recommend an estate planning professional who will take care of you. 

 

No professional wants to recommend someone who isn’t competent, because it reflects poorly on them. A good advisor will only want to recommend the best estate planning attorney and tax professional too.

Here at Platt Wealth Management we’re working remotely, and we’re happy to answer questions or schedule a virtual meeting. Feel free to call us at 619.255.9554 or email us.

Sleep well at night with the best financial advisor

  • Understand your risk tolerance

What do the words “aggressive” and “conservative” mean? It depends on the person. For someone very comfortable with investment risk, “conservative” might mean having 20% of the portfolio in cash and bonds. Others with a lower risk tolerance would consider that aggressive.

 

A financial advisor will tailor the risk of your portfolio to the point where you can sleep at night. A portfolio invested entirely in small company assets and international stocks, particularly emerging markets, has demonstrated high performance. But very few investors can stomach the roller coaster ride it takes to get there. 

 

For investors who are very afraid of risk or not very knowledgeable about the market, the advisor may coax them into taking on a little more risk or else the portfolio won’t grow. 

 

Still, a good advisor wants you to be comfortable and able to sleep at night. They’ll try to find the sweet spot where you are relatively comfortable and yet earn some return on your money.

 

  • Objective advice

Have you ever noticed that when your friends come to you for help, you can easily see the problem? You have no problem explaining the consequences and pros and cons of their decision. Yet when it comes to your own life, you don’t even know where to start when a problem arises.

 

Your financial advisor has that objective viewpoint that you need. They see the market as a whole, not just the parts of it that concern you. They can widen out and look at the bigger picture, which is hard for individual investors to do when faced with a decision.

Need some objective advice or want a second opinion on your investment portfolio? Feel free to give us a call at 619.255.9554 or email us.

Investing for the Sandwich Generation

Investing for the Sandwich Generation

Our tendency to live longer means that many families are in the unenviable position of supporting elderly parents while preparing for their retirement and trying to send their kids to good colleges. 

It’s impossible to get everything you want without an infinite supply of funds. But there are some reliable guiding principles. July is Sandwich Generation Month, a month dedicated to all the families struggling with this issue.

 

Put on your own oxygen mask first

 

We’ve talked about this principle before, particularly around the idea of self-care. It’s equally important when you’re trying to juggle your financial needs with those of others.

 

Why do the flight attendants tell you to put your oxygen mask on first? Is it because they think your selfish, or they want you to be selfish? Is it because they think you don’t care about the others around you? Do they believe, without even knowing you, that you feel you’re more important than everyone else?

 

It sounds ridiculous when put like that, right? You know why you need to put yours first: because you can’t help other people when you can’t breathe yourself.

 

Your financial needs are no different. If you don’t secure your financial future, how can you help others with theirs? If you drain your resources to help your parents, you cannot help your kids. If you assist your kids, you may put yourself in the position of needing their help in the long run.

 

Hopefully, by looking at the situation this way, you can see that it’s not selfish for you to want to prioritize your financial health before you try to support others with theirs. It’s common sense, not arrogance or unwillingness to help others.

 

Get help when you need it

There are a lot of services available for the elderly that your parents can use. You may need to research them. If you can’t spare the time to make all their meals or take them shopping, you’ll probably be able to find a program that will help them. 

 

And even if you do have the time, make sure that you get a break. Caregiving is a wonderful gift that you give to others, and it is also emotionally and mentally draining. All caregivers need to be able to take breaks to recharge

 

It’s not selfish to recharge your batteries. When you let them run down, you have nothing left to give to anyone. Keeping them charged is the best way for you to provide the care that you want your family to have. There are organizations specifically for caregivers that help with the mental and physical resources you need.

 

Years ago, a friend (at the time in her sixties) whose mother had early-onset Alzheimer’s disease was the primary caregiver. Her brother agreed to pay her for the service she provided. 

But because she took her mom to an adult daycare a few days a week, he wouldn’t pay for caregiver relief to come in so that she and her husband could go on vacation. This stress went on for years until her mother died of related complications. A few months later, she realized that she was displaying symptoms of the disease and that she had inherited it. 

 

Imagine spending all those years unable to take a break and enjoy time with your spouse or children due to your caregiving duties. Then you spend more years unable to take a break and enjoy that time because of a disease that prevents you from doing so. 

 

It would help if you took the vacation time that you get at work because rest and breaks are crucial to maintaining productivity, and even more importantly, joy in your life. Also, make sure that you get breaks and rest when you’re caring for a loved one. Renew your energy by spending time with your spouse and children too.

Loans for school, but no loans for retirement

On the other side of the sandwich, many parents feel the need to provide for their kids’ education in the same way that their parents did. Or because they recognize how important education is.

 

You and your kids are in very different phases of life. Your own earnings years are either drawing to a close or decreasing. While your kids either haven’t started yet or just entered the workforce. They have the time to pay off loans that you don’t. Most of the time, when you die, your loans and debts stay live.

 

Which means that you need to make sure you’re saving enough for retirement. You probably are already aware that Social Security is on somewhat shaky financial ground. However, it’s highly unlikely that people who have already paid into the system for decades won’t get anything. Currently, the program is fully solvent until 2035, but after that, it will be able to pay out only 75% of promised benefits.

 

We’ve been here before, most recently in the 1980s, when one solution was to push back the age at which people could take normal retirement, from age 65 to age 67. There are other ways to fix Social Security, including paying the tax on all wages, not just the first $138,000. On the other hand, it’s probably not a wise course to decide that you will depend utterly on Social Security for your retirement either.

 

Few workers have pensions anymore, so your retirement savings will be the bulk of what you live on in old age. If your balance is low, you have less time for the money to compound and you need to beef it up significantly. If you’re in the middle of your prime earning years (your 40s and 50s), you need to sock away as much as you can.

 

That may leave less for your kids’ college educations, but they can take out loans. They can also look into work-study programs. Many families save by enrolling their kids in community college for the first two years, before transferring to a 4-year university. There are a lot of options when you’re not focused on specific institutions or specific degrees. 

 

Be honest with your kids that they’ll need to contribute to their college fund. They might choose to supplement what you can give them with earnings from summer work, or save up birthday and holiday gifts. Get them involved in the future. Not only is it good for your wallet, but it’s better for them too.

 

If you want to discuss how to balance out your sandwich situation, please give us a call at 619.255.9554 or email us for an appointment.

Financial Decision-Making Under Uncertainty

Financial Decision-Making Under Uncertainty

As we discussed earlier (in the post about being productive while working from home), we’re all under a cloud of uncertainty. It’s not clear when people will start going back to work in the office. Or even if that will happen, since many employees likely will be working remotely for some of the time. Not knowing what will happen next makes financial decision making difficult. 

So, how you can optimize your decisions even when the circumstances are unclear? Fortunately, we can implement some reliable strategies that work under any uncertainty, whether it’s COVID-19 or anything else that life throws your way. You can adapt them to both business and personal decisions.

Take a deep breath to help ease anxiety and read on.

 

Recognize the uncertainty to avoid trigger decision-making

 

Sometimes people want to forge ahead with the decision making so they can take action. Humans tend to feel better when they’re doing something. Which is why so many end up selling their stocks when the market drops, because at least they’re doing something to relieve the anxiety of seeing their paper worth drop.

(Remember that your actual portfolio doesn’t drop in value unless you sell and take the loss.)

By acknowledging that you don’t (and can’t) have all the facts, you’re not resisting the logical part of you that knows this. If you don’t accept the situation, the side of your brain that understands you don’t have all the facts will be fighting every decision you make!

“My lesson… is to start every meeting at my trading boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.” – Nassim Taleb, author of Fooled by Randomness, Antifragile and The Black Swan

 

Examine all the options before financial decision-making

 

You may already have some thoughts about which way you want to decide. But make sure that you’ve explored every possibility, no matter how remote. Sometimes just taking a contrarian viewpoint helps you understand the possible negative consequences of your preferred course of action. And the positives of taking a different route, so that you arrive at a better-informed decision.

 

The best way to make sure you’re looking at all the alternatives is to involve other people. Have you ever seen contests with jars filled with some candy or other treats, and there’s a prize for guessing how many are in the jar? Any individual guess is highly unlikely to be right, but the average usually ends up extremely close to the actual number when they’re all combined. 

 

Use the wisdom of crowds. Invite others to hash out the options with you. If it’s a business decision, get your colleagues involved. If it’s personal, friends, and family. If it’s a financial decision, talk to your financial advisor. When possible, include people that you know have differing viewpoints so that you can understand why they have a particular perspective, which could change your view of the matter.

 

Spread out the risk

As you know from investing, the more risk, the more opportunity from return. If you can take more chances, you’ll increase the likelihood that you’re right. Give yourself a higher probability of one of your choices being the right one.

You can see this in the NFL. Research showed that over 14 years, the teams that ended up with two “lesser” draft picks performed better than those who had one high pick. They gave themselves more opportunities to do well with two players, rather than relying on just the one to carry them through.

Talk to your financial advisor about how your portfolio is designed for risk. Your advisor should be able to explain the financial decision-making behind your investment allocations and selected funds in your portfolio. 

Know you’ll be wrong and stay involved

 

 

We’re all human, which, by definition, means imperfection. Therefore, make your life less stressful from the get-go by understanding that you’re not going to be right all the time. It doesn’t happen. Sure, you can make better estimates and better guesses about the future as you go along.

Absent a crystal ball, you have no way of knowing whether you’re going to be right or not. If you expect that you’ll be wrong, it’s much easier to deal with when it happens.

When you play it safe because you’re afraid of being wrong, you miss out on opportunities. Make room for error in your process, even as you do your best to reduce systematic ones.

Venture capitalists know that three-fourths of the companies that they invest in will fail. So they often get involved with the management of the companies they buy. They help coach the founders and staff through the obstacles that arise. This involvement helps them mitigate the failure and learn what mistakes not to make in the future, even as they understand some of their portfolio won’t make it to the next round of funding.

 

 

Decide to learn for better financial decision-making

 

There are a couple of ways that you can use learning to make better decisions. 

One is to reflect on the decisions you’ve previously made. Include the ones that came out poorly, and the ones that came out well. 

Sometimes the result isn’t tied to the decision. You can make the right decision that doesn’t turn out well for various reasons, including luck. Or you make a decision that had a high probability of succeeding, but end up on the low end of the probability. Even good decisions aren’t guaranteed to come out well 100% of the time.

Review your decision-making process separate from the result. Did you make the best decision you could under the circumstances? If not, why not? What did you learn from the experience?

The second way to make better decisions is to run small tests or experiments before launching a full-scale version. 

For example, rather than ramping up your entire production line for an untested product, run some online experiments to determine if your customers would be interested in such a product. And, importantly: what they would be willing to pay for it. If they’re willing to pay, but the price point is too low to be profitable, you can scrap the idea. Or tweak it into something that people would buy that would still be profitable to you. With modern technology, it’s easy to do this kind of testing.

Or maybe you have a hobby that you’re considering monetizing. Instead of going full-bore on creating an entire line, make some prototypes and shop them around to make sure there’s interest in your items first.

Ideally, of course, you use both techniques. Tests and experiments begin to help you make a decision, and then reflection afterward to pick up on any lessons you need to learn for next time.

If you want to dive deeper into this topic, we highly recommend Annie Duke’s “Thinking in Bets.” This book allows you a peek into the thought process of one of the world’s most renowned poker players.

 

Would you like Platt WM to help you crowdsource a decision? We’re happy to help our clients think through their business and financial options. Give us a call at 619.255.9554 or email us.

 

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