For many military families, summertime means moving time. With the approach of a PCS, you may find yourself faced with decisions about what to do with the home you have purchased at your current duty station. Should you sell or should you keep the home as a rental property? What if you are under water on your mortgage or cannot sell the home? Items to consider when making your decision:
Do you want to be a Landlord? Some people really like owning rental property and may have several at prior duty stations. While others hate the idea of someone else living in their house or do not like the stress of dealing with tenants. Think about which category you fall into and factor that into your decision.
What are the terms of your Mortgage? Does your mortgage allow you to use the home as a long term rental unit or does it specify that the owner must occupy the dwelling? Contact your mortgage company, or read your loan papers, to determine what is required in order to rent the home out.
Don’t forget about Insurance. You will need to notify your insurance company regarding the change in status of the home and make sure your policy covers you adequately, not only for damage to the home but also gives you liability coverage in case of an accident or injury to future tenants.
Do you have an Emergency Fund? If an appliance needs to be replaced or something needs to be fixed, the tenant will contact the landlord (you) or the property management company. This will be your responsibility and you will need to have funds set aside to meet these needs. Your renter rightly expects to have everything functioning as intended and as spelled out in the lease.
How will you Manage the Property? You can manage the property yourself or use a property management company. If you decide to manage the property yourself you will need to track all income and expenses, screen potential renters and be familiar with the Landlord rights and responsibilities in the state where the rental unit is located. When deciding to use a property management company get referrals and references. Ask what sort of statements and services the management company provides and look them up on the local Better Business Bureau website for any potential complaints.
A good Contract is key. Whether you manage the rental or use a company, make sure everything is spelled out in the lease agreement, using addenda to the standard lease agreement as necessary. Every state has different legal requirements. Who will be responsible for lawn maintenance; when is the tenant responsible for repairs or pest control; will you allow pets; are there HOA rules or parking regulations that need to be followed; will the rental include access to HOA facilities such as pools? Once you become a landlord this is a business and you will need to treat it as one.
What is the Condition of the Home? Make sure the home is well maintained and all appliances and systems are in working order before you list the property for rent. If there are any items in the home that are costly or sentimental, consider replacing that item with a less expensive alternative while the home is rented. Take photos or video of the home to document the condition it is in prior to renting and make sure to repair any items that need it. You may have tolerated something because it was not important to you, or you “learned to live with it,” but renters will expect everything in functioning condition. Leaving a broken or non-functioning item may also expose you to liability if someone is injured because you did not repair something.
Remember your Taxes. With a rental you will need to file a Form 1040 with Schedule E, where you will deduct the following from the rent you actually receive: mortgage interest, taxes, insurance, HOA fees, lawn maintenance, repairs and any other expenses. Payments on the principal are deducted from income as depreciation, which is the way that the cost of any asset is deducted over the time that it is generating income. To depreciate the property, you will need to know the value of the home and the land. In most cases you will use the purchase price of the home less the value of the land, which should be listed on the initial property tax statement. If the home has decreased in value before it is converted into a rental you will use the value of the home and land on the day it was converted. You will always use the lowest value of the home for depreciation. It can be tempting to skip this part on your tax return, but do not skip it. When you sell the home you will be required to pay capital gains tax at a specific rate on the amount you took, or could have taken, as depreciation. Even if you normally complete your own tax return, the first and last year of having a rental may be the time to see a professional. More information is available in Pub 527-Residential Rental Property and in Pub 534-Depreciation, which can be downloaded at Irs.gov.
What sort of emergency fund would you recommend to a client who wants to be a landlord?
How would you advise a client who does not want to rent a home but cannot sell before a PCS?
Guest Contributor: Cheryl Myrick, AFC®
As President and CEO of the Investor Protection Trust and the Investor Protection Institute, Don Blandin is passionate about investor education and protection. He has worked on programs that address topics including elder fraud and financial exploitation, as well as saving and investing for retirement. This month, take a few minutes to get to know fellow AFCPE® member, Don Blandin. Find out how you can get involved with the When I’m 65 engagement program and help expand and share the important message of saving for a secure retirement.
Tell us a little about your path into the nonprofit sector and the field of personal finance?
Throughout my career, I have been building educational coalitions and partnerships. I’ve worked in and with a wide variety of sectors, including business and industry, nonprofit, academia, philanthropic foundations, and federal, state and local government, both in the U.S. and globally.
What issues are you most passionate about?
The biggest issues that I care about are investor education and protection – educating individuals to be wise and safe investors. Through my work, I’m always connecting investors to independent, unbiased and noncommercial investor education materials, including materials from IPT, IPI and other trusted non-profit organizations.
The financial services industry has several types of investment products that are constantly being put in front of individuals, through advertisements, phone calls, an invitation for a free dinner and so on. It is up to the investor to do the research in deciding what the product actually is and whether it is appropriate for them. I cannot emphasize enough how important it is to be well-informed and cautious about your investments – know where your money is going, how it can grow and who is involved.
Tell us about the When I’m 65 documentary and how AFCPE Members can utilize it as a financial education resource?
The When I’m 65 engagement program has a variety of tools and resources that AFCPE members can utilize in their classrooms, workshops, community meetings and in their personal lives to educate their families and friends. Program materials are tailored to each generational cohort (Millennials, Gen Xers, and Baby Boomers).
You can share screenings of the documentary in your classrooms and workshops to stimulate discussions and utilize online activities to encourage active learning about planning ahead for retirement. The full documentary is available online at www.WI65.org, along with excerpts useful in training workshops, as well as bonus interviews and engagement extras.
Through the program, you can also engage in partnerships with public television stations and state and local community groups to bring retirement saving and investment education to both local communities and individuals across the country. Let us know if you would be interested in participating in a community event (e.g. Investors Town Meeting) and we can connect you to your local public television station and/or State Securities office.
Other tools and resources in development:
- Materials to support multiple workshop topics that can be facilitated by a professional trainer, HR manager, or financial planner in group settings. Want to lead your own virtual workshop? You will have access to a self-guided curriculum with resource materials.
- Lively blog featuring guest commentators and writers
- Newsletter promoting new video, local events, and excerpts from blogs, research, and news about retirement planning.
- Monthly interactive streaming events – widely distributed and embeddable on third party websites – focused on investor education and protection, featuring special guests and educators, and sharing personal stories.
- Marketing kits with digital and print-ready materials.
- Quizzes, worksheets and planning tools
- Social media toolkits, including scripts, reinforcing follow-up messages for workshop participants, direction to video and online resources, texting, etc.
In what ways can AFCPE Members help expand and tailor the reach of this important message?
We want the When I’m 65 program to work for you and meet your needs. Please visit the film’s web page (www.WI65.org) and share your outreach suggestions with us by filling out the survey you find there. Tell us about organizations in your area that you think might be interested in learning about the film and who would be good candidates to sponsor workshops for people in your area. These might include professional organizations around financial planning, administrators of 401(k) plans, community resources that help people with financial literacy, your local library, etc. You can also register to receive educational and promotional materials as well as film updates as they are released.
While the full documentary is available, we encourage you to contact your local PBS station to ask when they plan to air When I’m 65. Don’t know the station? Go to valuepbs.org for an interactive map to locate the stations in your community.
Introduce the Investor Protection Trust (www.investorprotection.org), the Investor Protection Institute (www.iInvest.org) and/or Detroit Public Television (www.dptv.org) to your partners and local organizations that are interested in using When I’m 65 as an educational tool.
We also encourage AFCPE members to promote When I’m 65 via social media. You can share When I’m 65’s posts or create your own including the When I’m 65 handle and #WI65 hashtag.
- When I’m 65 on Twitter: @WI65project (twitter.com/WI65project)
- When I’m 65 on Facebook: facebook.com/WI65project
IPI and IPT regularly share the documentary broadcast dates via social media which AFCPE members can share, particularly when the documentary will be aired in their market. Follow IPI and IPT on Twitter and like IPI and IPT on Facebook:
- IPT on Twitter: @IPT_Info (twitter.com/IPT_Info)
- IPT on Facebook: facebook.com/InvestorProtectionTrust
- IPI on Twitter: @IPI_News (twitter.com/IPI_News)
- IPI on Facebook: facebook.com/InvestorProtectionInstitute
And the question we ask in every Member Spotlight: if you had to choose, what is your favorite personal finance advice?
Saving and investing is not one-size-fits-all. To be a wise and safe investor, you have to assess your financial situation, investigate before you invest, adjust your plan according to different phases and resources in your life and never stop educating yourself. And, just as important, help others along the way! This is something I’ve seen many AFCPE members do over the years. Let’s continue to build bridges whenever possible.
I will also share IPT and IPI’s five keys to investing success:
Key #1: Make investing a habit
Key #2: Set exciting goals
Key #3: Don’t take unnecessary risks
Key #4: Keep time on your side
Key #5: Diversify
Have questions for Don? Reach out to him at email@example.com.
Interested in connecting with other AFCPE members living in your area or sharing your professional interests? Use the AFCPE Member Search portal: https://my.afcpe.org/member_search.
Preparing for a baby is a challenge. Luckily, there are all types of websites to help guide you on what to expect when you’re about to become a parent. There are resources to advise you on the gadgets you’ll need and where to find the best deal, guidelines on how much money you might need during maternity or paternity leave and articles outlining the financial factors to consider if you want to be a stay-at-home parent.
If you’re already a parent and are expecting another child, you’re probably feeling like a pro at this whole preparation thing. You know what not to buy and what to buy more. You know how to make the grocery budget last longer and when and where to find the best deal on clothes. You may already be calculating if it’s worth going back to work now that you have multiple kids in daycare or if it’s more cost effective to stay at home.
Just when you felt prepared, you experience the expenses that no one told you about. These are the expenses that occur when your baby needs a little extra TLC than most.
Here are four unexpected expenses to consider when you’re expecting:
- Change of Feeding Plans. For those who choose to do so, breastfeeding can be a great financial choice with added health benefits for mom and baby. However, for some, switching to formula is a necessity, and when it’s unexpected, it can bring a huge financial burden. The average 12oz can of formula is about $6, which seems minimal until you realize that you’ll need about 13 cans per month. If your baby requires a specialty formula, that cost will jump significantly. Then you must factor in the cost of bottles. More than likely you will try several different kinds until you find one that baby likes – for both bottles and formula.
- Doctor appointments. Babies who need extra TLC often require additional specialty doctor appointments. Depending on where you live, as well as the type of insurance you have, you may have to travel some distance for these appointments or pay a portion of the visit. Overnight stays for appointments, as well as gas, add up very quickly.
- Child Care for Other Children. If you have other children at home and you have a child who needs extra care, it may become necessary to seek childcare for your other children. From a part-time sitter just so you can go grocery shopping or to doctor appointments to full-time care in instances where multiple therapies or appointments take place weekly. Child care can become a large expense when not originally part of your plan.
- Staying at home – when going back to work isn’t an option. When a baby needs extra care, it may become necessary to have a parent stay home. Some babies require specific care that a parent needs to provide, or the multiple doctor/therapy appointments become too much to work into a busy work schedule. Also, depending on the child’s particular needs, some childcare providers may not be able to care for a child Supporting a family on one income can magnify the additional costs required for a child needing extra care.
But, of course, we will do anything for our bundles of joy. So how can we prepare for unexpected expenses?
- Save! Savings is key to preparing for all of the unexpected changes a new baby throws at you. A savings account will allow for extra travel money if your insurance doesn’t reimburse you for travel beyond a certain distance when seeing a specialist. A savings account will help you try out five different types of bottles before baby decides they finally like one. A savings account will help cover extra expenses while one parent remains at home.
- Outside assistance. Ask your insurance if they assist with travel expenses incurred when traveling for specialty appointments. If you have to switch to formula, check with your doctor’s office to see if they can provide samples so you know which formula your child likes. Also, check with WIC or other local agencies for assistance with formula cost. If your child needs a specialty formula, see if it is covered by your insurance.
- Build a support group. Whether it’s for financial assistance or mental support, it can be difficult to have a child who needs special attention. A great support group can help you relax and provide some relief that money cannot buy. Although it can be difficult to ask for financial assistance, you may be surprised at how many people are willing to help. Whether it’s a can of formula each month or splitting the cost of daycare, you never know until you ask.
What unexpected expenses did you experience with a new baby?
Guest Contributor: Kara Schulte, AFC ®
Should I get a credit card?
It’s a question our younger clients ask regularly, and it’s one I have received recently from my children. The quick and easy answer might be, “Yes, of course you must obtain a credit card to build your credit!”. And, while establishing credit is a chapter firmly entrenched in the book of surviving consumerism, financial counselors and other professionals who provide financial education, must delineate the risks, as well as the rewards, of starting down the plastic-paved road. Our failure to help our clients illuminate the hazards of abusing debt could impair their ability to successfully achieve their financial goals. Worse yet, poor credit management may ultimately lead to dire life challenges, including insufficient food on the table or the inability to pay for a critical car repair.
With such potentially adverse outcomes on the line, a thorough exploration and analysis are necessary to determine the rewards and risks associated with obtaining a credit account.
Conducting a thorough conversation
This type of dialogue between counselor and client is similar to a risk tolerance questionnaire, which attempts to determine an investor’s stomach for gyrations of “the market.” Likewise, when we are asked if establishing credit is appropriate for a client, we must help the individual see that the temptation to spend without the ability to repay—the risky side of credit—may jeopardize the client’s plan or even their financial health. To do this, we may provide examples, real or hypothetical, about the caustic effects that debt payments have upon cash flow, net worth and the ability to obtain wants or needs. An easy yet powerful dialogue with a client might go as follows:
Imagine that you have received a credit card with a reasonable credit limit. Although you intend to pay the card off in full, an unplanned expense soon occurs and you cannot repay the entire balance. A series of such unfortunate circumstances, or unbudgeted events like the holidays, eventually leads to a maxed-out card. This is temporarily alleviated when the credit union/bank raises the credit limit. However, the credit card balance gradually grows. As time progresses, additional credit is repeatedly offered by the current and then by new creditors, resulting in ominous minimum payments and a possible debt spiral.
Here’s how this scenario might look on a dry erase board or on paper:
Perhaps this looks like a simplistic lesson, but we cannot assume—in the best interest of our clients—that the most basic principles are firmly engrained in the people we help. On the contrary, there can never be too much understanding of the forces that [may] erode our clients’ financial dreams.
Exploring the decision to obtain credit doesn’t have to employ scare tactics. Instead, we can review strategies that clients may use to reduce the likelihood of credit abuse while simultaneously enjoying the benefits of establishing credit. Such techniques include maintaining lower credit limits, using a secured credit card, and creating an ample emergency cash reserve to prevent credit use out of necessity.
Some clients prefer avoiding credit altogether
Part of our credit discussion may also focus on a financial life without obtaining credit, since some consumers wish to avoid getting or using credit altogether. The widespread use of credit scores today requires a strategic, thoughtful approach to shunning credit, and financial educators should be prepared to help these clients face the challenges of such a decision. After all, if their goal is to achieve financial success/independence while circumventing the credit arena, we should provide the appropriate guidance they need.
Credit scores are ubiquitous and arguably the most oft-discussed topic among the many facets of personal finance. In fact, striving for impeccable credit can be downright competitive, as people frequently compare their scores or even credit limits to those of their acquaintances. In other words, establishing credit and developing credit scores is a serious business. Considering the challenges and pitfalls associated with building credit, when our clients ask, “Should I get a credit card?” we should avoid the quick answer and conduct a thorough conversation.
How do you respond when clients ask if they should obtain a credit card?
When a client wishes to avoid establishing credit, what recommendations do you give him/her?
Guest Contributor: Dave Kershberg, AFC®
The most common reason for large credit card debt, unpaid bills, and lack of savings is the result of overspending, or not living within our means. While this is common knowledge in our society, why is it still such a struggle for so many Americans today? Why are we still seeing so many of our clients mismanaging their finances even after they have sought help? More importantly, what can we as financial counselors and educators do to help our clients understand the importance of living within their means and making it a healthy long term habit?
Is Forgetting that Easy?
I recently spoke with a couple who filed for bankruptcy only two years ago. At the time, the entire experience was emotionally and physically taxing for them. However, only a few years later, those negative emotions have been washed away like footprints in the sand. Over the last two years they continue to accumulate more debt, they struggle to pay those debts monthly and their spending habits have not changed. They are quickly headed in the same direction once again.
Frustrated, I cannot help but wonder what is the root of this problem? The couple understands what they have done wrong and knows what they need to do, so why do they continue to justify overspending? I believe the root cause is addiction to spending money. When it comes to spending money, they suffer from lack of willpower. According to Sternberg (2015, para. 1), the definition of addiction is “…a disease of the brain that causes dependence upon or a persistent, compulsive need to use a habit-forming substance or an irresistible urge to engage in an activity, despite harmful consequences.” Clearly, living beyond one’s means on a regular basis is an addiction for not only this couple, but for many Americans. With that in mind, how can we help our clients overcome this addiction? I believe we can get closer to a solution to this nationwide epidemic by utilizing our tools and resources in the field of financial counseling and education. But, exactly what tool(s) could aid us in this quest to help clients find financial success?
Behavior, Addictions, and Finances
Can behavior, addictions, and finances truly be used in the same sentence? Typically overspending has been categorized in impulse-control and/or obsessive-compulsive disorder models. However, more recently, overspending has been regarded in the behavioral addiction models. Among the medical field overspending is commonly referred to as oniomania, shopaholism, compulsive shopping, compulsive consumption, impulsive buying, compulsive buying, and compulsive spending (Aboujaoude et al., 2005, para. 1). There have been several assessments created to measure these issues. (It is important to note here that overspending is not strictly about the stereotype of buying clothes and shoes, but is much broader. Overspending can be any of the following: spending money on house renovations that are not absolutely necessary nor within budget, going on vacations by using credit cards, entertainment, or simply spending money on things that are more wants than needs on a regular basis.) Should we as financial practitioners utilize screening tools, such as the Bergen Shopping Addiction Scale (to name just one assessment option) with clients that demonstrate high risk factors? Should we even have the authority to do so?
Encouraging Positive Outcomes through Assessments
In certain situations, such as the couple mentioned earlier, I believe clients could benefit from such tools and we should have access to a universal assessment screening used among the field of financial practitioners. Conducting an assessment for high risk clients could prove beneficial for the treatment and ongoing issues of overspending. The clients that do fall into this category should be aware of it, and this is best done through education. Making clients aware of “addictive” spending behaviors can have valuable implications on their future financial success. Clients must learn to identify their spending patterns and understand that just because they were able to turn their finances around once does not mean they won’t be tempted to turn back to old habits. Like any addiction, temptation can be a continual struggle. Being consciously aware of this is the client’s best chance of turning an unhealthy addiction into healthy habits. I strongly believe that using an assessment tool could help many clients with the financial behavioral problems we often address when working with clients.
Please share your thoughts!
- What are your thoughts on categorizing over-spending as an addiction behavior and should professionals use assessments in the diagnosis and treatment of such conditions?
- Do you believe such a tool could help with this epidemic in America?
Guest Contributor: Sabrina Johnson, AFC®
Aboujaoude, E., Andreassen, C.S., Bilder. R. M., Griffitchs, M D., Pallesen, S., Torsheim, T.
(September 2015). The Bergen Shopping Scale: Reliability and validity of a brief screening test. Frontiers in Psychology. Frontiers Research Foundation.
Alic PhD., M., Finley, K., Sternberg PhD., B.S., Willingham PhD., E.J. (2015). Addiction. The
Gale Encyclopedia of Medicine. Ed. Jacqueline L. Longe. 9 vols., 5th ed. Detroit: Gale.