Is It Time to Change Your Money Mindset?

Are you a dreamer, procrastinator, perfectionist or a wanderer?

What is your financial mindset?

The 2013 Household Financial Planning Survey and Index, recently released by the Certified Financial Planner Board of Standards and the Consumer Federation of America, divides American consumers into four categories when it comes to their financial behavior.

"90% of Wanderers have no plan in place for specific savings goals."
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Four Categories of Financial Behavior

The four categories are defined by specific financial behaviors: comprehensive financial planning, basic financial planning and credit card debt management. The four categories are:

1. Basic Planners—The Dreamers: 38% of Americans
2. Limited Planners—The Procrastinators: 33% of Americans
3. Comprehensive Planners—The Perfectionists: 19% of Americans
4. Non-Planners—The Wanderers: 10% of Americans

The Dreamers are the largest category. They have some clear goals, but they just haven't worked out all the details. Two-thirds have a household budget but less than half of them write down their budget or store it electronically.

The Procrastinators are the second largest category. They put forth the bare minimum of effort and might get to the rest of planning later. While 31% of them plan for retirement, only 7% save for emergencies. Just 7% save for other goals.

The Perfectionists know the exact route to their financial goals. Two-thirds work with a CERTIFIED FINANCIAL PLANNER™ professional or Registered Investment Advisor. More than half have a household income greater than $100,000.

The Wanderers basically float from bill to bill without any strategic approach to money management. The report reveals that 90% of people in this group have no plan in place for specific savings goals. About 40% have significant credit card debt, but half of them have no plan to pay down that debt.

Planners Save More

Most important, the report concluded that planners exhibit more confidence in financial decision-making and save more money. Their confidence comes from understanding their financial situation. Regardless of income, planners achieved better financial outcomes than non-planners.

What is your financial mindset? While there may be little hope if you are a Wanderer, if you are a Procrastinator or Dreamer, now would be a great time to step up to the next level.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Passive vs. Active Investing: The Battle Rages On

In the active vs. passive investing fight, we’re firmly
on the side of passive investors.

Active versus passive management is a long-raging battle among investment managers. On one side are the active managers, who believe that through careful research and individual stock picking they can beat a stock market index portfolio over time. On the other side are the passive advocates who argue that an investor is best served by buying a low-cost, broadly diversified portfolio that tracks a market index. In case we have to tell you, Berno Financial Management has been in the passive camp for years.

"It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach."
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Gauging a Fund's Performance

Standard & Poor's, publishers of the popular Standard & Poor's 500 Index of U.S. large company stocks, conducts extensive research on fund versus index management performance. S&P recently released its June 30, 2013, report, which is summarized below:

Percentage of U.S. Equity Funds Outperformed by Benchmarks 06/30/13

Fund Category	Comparison Index	One Year %	Three Year %	Five Year %
All Large-Cap Funds	S&P 500	59.58%	85.95%	79.46%
All Mid-Cap Funds	S&P MidCap 400	68.88%	85.78%	81.98%
All Small-Cap Funds	S&P SmallCap 600	64.27%	80.19%	77.88%
All Multi-Cap Funds	S&P Composite 1500	63.41%	84.31%	82.57%

Over five years, roughly 80% of actively managed funds underperform their benchmark. An individual investor has a much higher probability of earning the market return in a passively managed index. They have a great risk (about 80%) of under-performing in an actively managed fund. Why take that risk? Add to this debate that past performance is not a guarantee of future returns (one of the top 20% of funds today has a low probability of staying in the top 20% over the next five years), and you have a very sound argument for passive management.

It's a free country, but don't argue with the facts. It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach. 

Starting School: The Smell of 529 Plans in the Air!

If you have kids, it’s better to start saving for college
sooner rather than later.

Schools seem to start earlier every year. I am of the mind that school shouldn't start until after Labor Day, but I lost that battle long ago! While starting school in August no longer has the scent of autumn in the air, it is a time to think about the future.

"It is never too early to start saving for college, and it can quickly become too late."
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It's Never Too Early to Start Thinking About College

School brings the thought of that ultimate education goal: college! How many times did your parents tell you, and do you tell your kids, "Get good grades so you can get in to college"? Yes, we turn into our parents in more ways than one!

First, set aside the arguments about:

• The high cost of college
• Whether or not attending college increases career earnings
• Whether private schools are worth it or not
• The likelihood of receiving scholarships
• The perils of excessive student loan debt

If college is an ultimate goal for your children or grandchildren, it is prudent to start saving today. Better to have started yesterday, but don't wait until tomorrow. Get it?

Ohio's College 529 Plan

College 529 plans [named after Internal Revenue Code section 529, similar to 401(k) plans, which got their numeric designation the same way] are an attractive tool for college savings.

Why? College 529 plans are sponsored by state governments, so I'll focus on Ohio's plan.

1. State income tax deduction for contributions, with a limitation
2. Tax-free growth and withdrawal of earnings for qualified expenses
3. Low-cost, diversified investment options (Vanguard)
4. Ability to change beneficiaries, which is very nice if you have multiple children or grandchildren

Start saving now, even with only small deposits. Time flies between kindergarten and college. Learn more about Ohio's plan at www.collegeadvantage.com. Contact us if you have questions or need advice. Your children and grandchildren will thank you someday!

Try a Financial Fire Drill: With Your Spouse ... and Your Parents!

Staging a financial fire drill will help you
be prepared for an emergency.

Here's a scary thought. Your spouse suddenly has a stroke or a serious traffic accident and is in a coma. Among a thousand other things to think about, he or she is the one who pays the bills. What do you do?

Pick up the checkbook and start writing checks? That's so old school!

"Stage a financial fire drill and let your spouse pay the bills for a month."
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Could You Manage the Family Finances on Your Own?

Chances are your bills are delivered electronically via email. Do you know your spouse's email password?

• Your spouse may use your bank website to pay bills. Do you know your bank account username, password and security question answers?
• Some bills may be paid automatically by bank draft or bank bill pay or credit card. Do you know which ones?
• It is no longer realistic to pick up the checkbook and simply start watching the mail.

Stage a financial fire drill and let your spouse pay the bills for a month. Or a week, if that is all you can handle. If nothing else, you should earn more appreciation for a time consuming, thankless job!

Use a Password Management Program

This is where password management programs that we have written about previously can be extraordinarily helpful. At the very least, you should have a list of bank accounts, credit cards, websites and access instructions and the right people should know where to find your list.

But don't stop there. What about your parents? For those of you who are designated as their power of attorney, this is even more important! The same process applies.

Don't wait to smell the smoke. Prepare yourself for an eye-opening experience!

How America Saves 2013

Only 11% of people are contributing the maximum amount to their 401(k).

How does America save for retirement? How does your retirement saving compare?

Defined contribution plans such as 401(k)s are the foundation for retirement savings in America. The private sector (excluding government employees) retirement system covers over 80 million Americans and has total assets in excess of $4 trillion.

The Vanguard Group is one of the leaders in the defined contribution marketplace with more than $500 billion in assets and full-service plans covering 1,600 employers and over 3 million employees. Every year, The Vanguard Group publishes a report entitled "How America Saves" that summarizes participation in the plans they manage.

"7% is the average employee retirement contribution rate as a percentage of pay."
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Survey: 25% People Don't Contribute to Workplace Retirement Plans

Here are some highlights:

• 76% of eligible participants actually contribute to their 401(k)
• 24% of eligible participants contribute 0% (guess when they will retire)
• 7% is the average employee contribution rate as a percentage of pay
• 22% contribute more than 10% of pay
• 11% contribute the maximum dollar amount allowed ($17,000 in 2012)
• 10.5% is average total contribution rate (employee and employer)
• $8,050 is average annual employee and employer contribution total

How Much You Save Matters More than Investment Returns

The amount that you and your employer contribute to your retirement plan is a far more important factor in your retirement security than the investment returns.

Your "savings rate" is one number you should know and grow!

How Does Your Financial Capability Compare?

A recent nationwide study revealed some disturbing
information about the state of people's finances.

The 2012 National Financial Capability Study, sponsored by the FINRA Investor Education Foundation, provides some humbling results that should make you feel a whole lot better about your personal finances. But it should also make us all a lot more worried about the state of our country. 

"The 2012 National Financial Capability Study found that 19% of respondents spend more than they make."
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What the Survey Says
In summary, of the respondents to the survey:

• 19% spend more than they make
• 36% break even
• 41% spend less than they make, thus actually saving money for the future
• 26% have medical debt, with people between 18 and 34 having the most medical debt
• 40% have a rainy day fund to buffer against unexpected financial shocks
• 30% have engaged in non-bank borrowing within the last five years, such as through an auto title loan, tax refund loan, pawn shop or rent-to-own store
• 49% pay their credit cards in full every month
• 34% only pay credit card minimum balance due
• 14% have an underwater mortgage, which means their house is worth less than the mortgage balance
• Among 18-to-34-year-olds with a mortgage, 25% are underwater

Overall, only 39% got four or more questions right on a very basic financial literacy quiz.

You can take the quiz yourself at www.usfinancialcapability.org. 

The Need for Financial Literacy
Clearly, the survey results are reflective of the national economy over the past five years and the dramatic effect of unemployment and underemployment.

The study also demonstrates the need for basic financial literacy in our country.

As with many issues, the best and easiest place to start may be at home. Our "call to action" should be sure to spend some time with our children and grandchildren talking about basic finances, daily money management and the importance of saving for the future. What a great summer project!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Psst... What's Your Password?

Too many people use insecure passwords
for their financial accounts.

I last wrote about computer passwords in January. 

While I don't hold myself out as a computer expert or software consultant, I am in a position to see how people use passwords for financial websites and it is scary.

"Don't let "Fido" be your only password."
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Password Advice from the Pros
Here's the password advice from the pros:

• Use long passwords
• Use passwords with digits and punctuation marks
• Use passwords with no recognizable words
• Use a different password for every website
• Change your password every 30 days

Who do these pros think that we are? What are they smoking?

The reality is many people have one very simple password that they use for everything. That's a bad practice, but one that's easy to change.

Software to the Rescue
I'm not a computer expert, but I know some software programs that can help you better manage your passwords. 

First of all, most Mac and Windows web browsers offer to memorize passwords for you. But the web browsers only work on one machine and aren't password protected.

There are dedicated password memorization programs. They provide one program that stores your passwords and secures them with one password, which you can make the most complicated password you can remember. These programs work on desktops, tablets and phones. (One caveat, no program works in the built-in browser on the iPhone, due to Apple's rules).

Popular dedicated password memorization programs include Dashlane, KeyPass, LastPass, Roboform and 1Password. Check them out, choose one and start using it. Don't let "Fido" be your only password.

People often say, "There has to be a better way..." Well, when it comes to protecting your passwords, there is.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.