Bruce Berno

What Will Your "Next Five" Bring?

Financial planners are focused on the future, but for many people thinking 10, 20 and 30 years or more down the road is hard to do. When things are hard to do, people tend not to do them. So let’s make it easier!

New Resolutions for 2014: Keep It Simple!

'Tis the season for New Year's resolutions!

But first, how did you do with your 2013 resolutions? Oh, you didn't lose weight, exercise more often, spend more time with family and friends, save more money, go to church more often, get organized and become a perfect person? Join the crowd!

What Financial Lessons Are Your Children Learning From You?

Our children are learning financial lessons from us, whether we realize it or not, through our actions, behavior and words. Are they learning useful lessons? Is their learning a positive experience?

The best approach is a proactive one, where they learn lessons from our intentional conversations about personal finances. This starts with a foundation of values and priorities that precede economic decisions. Do they choose their friends by who has the biggest house or the best clothes or the most stuff? Or do they choose their friends by who is the most genuine, honest, humble and caring? Watch for "teachable moments."

A dose of financial reality may come with your child's first paycheck when they ask, "What's FICA?"
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Teaching Kids About Personal Finances

There is no predefined or perfect way to teach children about personal finances. It starts at a young age with simple discussions about self-esteem, personal values and relationships. It can include discussions around presents at birthday parties and at Christmas. It can progress to dealing with cash as they may get allowances or babysitting or lawn-mowing income. The first dose of financial reality may come with your child's first official paycheck when they ask, "What is FICA?"

As the years pass, they will reach the stage when they can have their own bank account with mom or dad, followed by an ATM card or credit/debit card and checkbook. Explain the difference between a debit and credit card. Teach them how to write a check, even if hardly anyone does that anymore. They should understand the principle.

Explain to them how mom and dad make financial decisions. Explain, without lecturing, the sacrifices or trade-offs that are made to achieve personal goals and priorities. There's no harm or guilt trip in dad saying that sending a child to summer camp was more important than buying a new set of golf clubs, if you present it nicely and factually.

Turning 16 opens the doors to financial responsibilities of a car, including insurance and gasoline and maintenance costs. Preparing to go to college will certainly open some discussions about savings, grants, scholarships and loans. Hopefully a foundation of understanding financial principles and the value of a dollar will have been achieved by this point. Early adulthood may introduce buying or leasing a car, renting or buying a house, and the biggest of all debts, a mortgage!

Financial Lessons to Last a Lifetime

Decide for yourself whether you want your children (and grandchildren) to learn about money and personal finances by observation or by using a proactive approach. Either way, these will be lessons that influence them for a lifetime.

In the Spirit of Giving, Consider Your Community Foundation

As the holidays and end of year quickly approach, many people turn to thinking about charitable gifts. The Thanksgiving and Christmas season is a popular time for charitable giving, both for expressions of gratitude and giving as well as income tax deductions for the current calendar year.

The most universal guideline of how much to give to charity is the biblical principle of tithing 10% of your income.
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Develop a Charitable Giving Plan

Ideally, you should first develop a plan for how much to give and to what organizations or causes. Ideally, the amount you give will be commensurate with your income and assets, so the higher your income and assets, the higher your charitable gifts are as a percentage of your income and assets. The most universal guideline of how much of your income to give to charity is the biblical principle of tithing 10% of your income. As always, the best advice is to set a goal and have a plan.

Cash (in reality, money given via checks and credit cards) is the most common form of gifts. (We are addressing financial gifts here, but gifts of time and services are equally important.) If you have appreciated stocks or mutual funds, however, giving appreciated securities has an additional benefit: avoiding capital gains tax. If you give an appreciated investment to a tax-exempt charity, they can sell the investment and convert it to cash without paying any capital gains tax.

Giving appreciated stocks or mutual funds to charity can become administratively difficult if you give to multiple charities during the year. An attractive option is a donor-advised fund (DAF) at a community foundation, such as The Greater Cincinnati Foundation. Many communities have a community foundation. A DAF offers tremendous ease and flexibility. You can make one gift to your DAF at the community foundation and then request that grants be made to your list of charitable organizations. A DAF also allows you to separate the timing of gifts for tax purposes. For example, you can make a gift to your DAF this year for the income tax deduction, and either request grants to your favorite charities this year or in the future. A DAF also allows your stock or mutual fund to be sold and invested in a more diversified portfolio pending future distributions to charities.

Consider a Donor-Advised Fund

We are happy to help you learn more about a donor-advised fund at a community foundation. There are many uses and advantages of a donor-advised fund at a community foundation and we have only highlighted a few of them here. Most important, develop a goal and a plan for your charitable giving—it's the gift that keeps on giving.

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." [Tweet This]

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.

Disability Awareness: What You Don’t Know Can Cost You

May was "Disability Awareness Month." In case you missed it, here are a few noteworthy facts, courtesy of "The 2012 Council for Disability Awareness Long-Term Disability Claims Review," which is a survey of disability claims at major insurance companies. Key Facts About Disability Here are some key facts about disability that you may not know:

  • Three out of 10 workers will have a disability that lasts 90 days or more.
  • Fifty-seven percent of disability claims were made by women.
  • Forty-five percent of new claims were for people under age 50.
  • Over 20% of claims were for people under 40.
  • Thirty-five percent of claims were for people age 50 to 59—peak career-earning years and critical years for saving for retirement.
  • More than 95% of disability claims were not work-related; therefore, fewer than 5% of disability cases were eligible for worker’s compensation benefits.
  • Only 69% of individuals receiving group long-term disability benefits also qualified for Social Security disability benefits.
  • Social Security disability benefit qualification is difficult. Only 36% of new Social Security claims resulted in benefit payments awarded.
  • Nearly all Social Security disability benefit payments are less than $1,500 per month.

"Three out of 10 workers will have a disability that lasts 90 days or more." [Tweet This]

Top Disability Causes  Here is a list of the top causes of disability, based on existing claim diagnosis categories:

  1. Musculoskeletal/connectivity tissue: 30%
  2. Nervous system-related: 14%
  3. Cardiovascular/circulatory: 12%
  4. Cancer and neoplasms: 9%
  5. Mental disorders: 8%
  6. Injury and poisoning: 8%

Protect Yourself with Disability Insurance Individual disability policies remain in force when you change jobs or get laid off, as long as you continue to pay premiums.

Disability insurance is much less expensive at a young age. Future increase options are critical.

New college graduates, take note!

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.

Human Capital: The Foundation of Your Economic Value

Allow us to offer a few short and sweet thoughts to consider about "human capital." Economic value and wealth are created using labor, land and capital.

Human capital is one’s ability to apply your labor (physical and/or mental capability) to create value and wealth. This is usually reflected in the form of compensation or a pay check, but it can also be volunteer work or service that provides intangible benefits beyond compensation.

"Economic value and wealth are created using labor, land and capital." [Tweet This]

Don’t Squander Your Greatest Asset Human capital is your greatest asset!

Develop, nurture, maintain and increase it!

Never stop learning.

Resist the temptation to "coast" in the final years of your career. It may set you up for an early lay off or job elimination.

Resist the temptation to "vegetate" in retirement, lest you become a vegetable!

Continue learning well beyond your formal retirement date. It will keep your mind sharp and your body healthy.

What did you learn today?

Celebrate and enjoy!

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.

Betting Against the House

It's New Year's Day 2012. In addition to overdosing on televised college football, you're spending part of the holiday working on the family finances. Armed with a laptop and various online financial tools, you're on the hunt for appealing stock market opportunities. To prune the list of candidates to a manageable size, you decide to focus on firms that are leaders in their respective industries and exhibit above-average scores on various measures of financial strength. As you work your way through the alphabet, you come to the "P" stocks, and another candidate appears. It's a prominent player in a major industry (good), but operates in a notoriously cyclical industry (not so good), pays no dividend, and has a junk-bond credit rating of BB-minus. Next! You push the "delete" key and move on. Congratulations. You just passed up the best-performing stock in the entire S&P 500 Index for 2012.

Stock Prices Are Forward-Looking

Shares of Pulte Group, a Michigan-based homebuilder with a 60-year history, jumped 187.8% last year amid strong performance for the entire industry. For the year ending December 31, 2012, all 13 homebuilding firms listed on the New York Stock Exchange outperformed the S&P 500 Index by a wide margin, with total returns ranging from 34.1% for NVR to 382.8% for Hovnanian Enterprises. The Standard & Poor's Super Composite Homebuilding Sub-Index rose 84.1% in 2012 compared to 13.4% for the S&P 500 Index.

The point? For those seeking to outperform the market through stock selection, underweighting the market's biggest winners can be just as painful as overweighting the biggest losers. Investors are often caught flat-footed by stocks that do much better or much worse than the broad market, and the problem is not limited to individuals. Not one of the 10 seasoned professionals participating in Barron's annual Roundtable stock-picking panel in early January 2012 mentioned homebuilding stocks or any housing-related firms.

The recent surge in housing shares also serves as a reminder that stock prices are forward-looking and tend to rise or fall well in advance of clear changes in company fundamentals.

"There is an easy way to own the best performing stocks in the S&P 500. Own all of them!"
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Waiting for Evidence of Healthy Profits Can Lead to Frustration

Investors who insist on waiting for evidence of healthy profits before investing are often frustrated to find that a firm's stock price has appreciated dramatically by the time the firm begins to report cherry financial results. Shares of Hovnanian Enterprises, for example, rose 580% between October 7, 2011, and December 31, 2012, even though the firm continued to report losses. Similarly, it is not unusual for a firm's stock price to decline long before signs of trouble become obvious.

Many observers in recent years predicated that a recovery in the housing industry would be agonizingly slow, and they were right. Many investors in recent years have avoided housing stocks as a consequence, and they've been wrong: Housing stocks have outperformed the broad U.S. stock market by a healthy margin from the market low in March 2009 to the present day.

BOTTOM LINE: Markets have 101 ways to remind us of Nobel laureate Merton Miller's observation—diversification is the investor's best friend.

Source: DFA Fund Advisors

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.