Market Summary: January 2020

Coronavirus Impacts Stock Markets Around the World

What happened.

Stock markets around the world fell in January, hurt by news of the spread of the coronavirus. Emerging markets were hit most, closing the month down 4.66 percent (MSCI Emerging Markets Index). It’s worth noting that emerging markets are the riskiest type of stocks, and typically have a small weight in our portfolios. International developed markets were down 2.09 percent, less than half the amount of emerging markets (MSCI EAFE Index). At home, large-cap stocks were down only very slightly, falling 0.04 percent (S&P 500). Small caps, however, fell 3.97 percent (S&P 600). Bonds were a happy spot in the markets, rising as interest rates fell. The Bloomberg Barclays Aggregate Bond Index was up by 1.92 percent. The month was somewhat volatile for U.S. stocks. The S&P 500 moved by more than +/- 1 percent on three days.

Why it happened.

The outbreak of the coronavirus is first and foremost a human tragedy.  As news arrived of its spread across China and neighboring countries, and to other countries around the world, stock markets fell.  Stocks fell first in emerging markets (China is the largest market in the MSCI Emerging Markets Index) but spread to other markets as investors digested the news that the virus might spread beyond the region.  The coronavirus is an unhappy example of how what’s not expected affects markets.  The outbreak of tensions with Iran was another case of unexpected news shaking markets.  At the start of the month, tensions escalated, and stocks fell, but recovered as both sides appeared to back off from a full confrontation.  In contrast, Brexit day on Jan. 31, marking the end of the first phase of the Brexit process, was known in advance and didn’t affect markets.

Regardless of these global events, news about the U.S. economy continued to be largely positive.  Companies started to report earnings for the last quarter of 2019 late in the month.  Once again, most companies have beaten expectations.

What this means for you.

Given the drop in stock prices, your account value would probably have declined in January. Stocks represent a higher level of risk, and the more risk you’re willing to accept, the greater the decline would have been.

At the same time, the portion of your portfolio invested in bonds would have partly offset the fall in stocks. This is a good example of one of the benefits of diversification. As we discuss in this month’s sidebar, you can’t control the ups and downs of the markets. But there are things you can control.

At Financial Engines, we build portfolios that reflect your individual situation and preferences.  Please contact us if you’d like to understand the amount of risk you’re taking, or to make any adjustments.

©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
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Market Summary: December 2019

A strong close to a strong year

What happened.

Stocks rose in December, capping a very strong year. In fact, for the year, all the main asset classes we look at—US stocks, international stocks, and bonds—rose. In December, US large- and small-cap stocks rose by 3.02 percent and 2.99 percent (S&P 500 and 600). Foreign stocks also did well. Developed-market stocks rose by 3.25 percent and emerging-market stocks by 7.46 percent (MSCI EAFE and Emerging Markets indices). Bonds fell slightly, with the Bloomberg Barclays Aggregate Bond index down by 0.07 percent, but overall were up for the year. It was a quiet month for market volatility as there were no days where the S&P 500 moved by more than +/- 1 percent.

The table above shows the impressive gains stock markets made in December. Yet it’s important to note that a very small proportion of stocks often drive these returns. In this month’s side-bar, we examine this and look at why it’s important to diversify across stocks within a given market.

Why it happened.

Once again, trade was a major driver of the market. At the start of the month, news of trade tensions sent stocks lower. In the middle of the month, President Trump indicated that a trade deal with China was close, and markets rose.

In addition to trade, there were other factors at play. The news on the US economy was mostly positive, with growth, wage growth, and factory production all beating expectations. Pending home sales and consumer sentiment also rose over previous months.

Overseas economic news was more mixed, with the manufacturing sector in China expanding, while contracting in Europe. And the impressive returns in emerging-market stocks were driven by Hong Kong markets recovering from their initial fall when protests first began.

What this means for you.

For December, as for the whole of 2019, your portfolio is likely to have seen a positive return. Riskier assets did better than less risky ones, meaning that the higher the risk of your portfolio, the higher your overall return would have been. But it is important to remember that we build your individual portfolio using the information you have provided to us. The New Year is a good time to take a fresh look at your goals and to make sure you are on a path towards reaching them. If you have questions, we’re here to help.

©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
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Market Update, Q4 2019: A Big Gain to End the Decade

Buoyed by resilient investor sentiment, strong labor markets, and solid corporate earnings, 2019 ended with a bang. Shrugging off the domestic political turmoil, Brexit drama, and international tensions, investors drove equity markets to new all-time highs. Large-cap stocks in the S&P 500 gained an impressive 9.1 percent in the fourth quarter. For the year, the S&P 500 is up 31.5 percent. Stocks of smaller companies, represented by the S&P SmallCap 600, posted similar gains of 8.2 percent for the quarter, and ended up 22.8 percent for the year.

International stock markets also posted big gains, with the MSCI Europe, Australasia, and Far East (EAFE) index rising 8.2 percent in Q4. For the year, international equities were up 22.0 percent. Once again, domestic equities outperformed non-US equities for the year.

With interest rates not moving much, bonds were mostly flat for the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.2 percent for the fourth quarter, bringing its year-to-date performance to a very respectable 8.7 percent.

The Financial Engines perspective.

The fourth quarter demonstrated the power of positive investor sentiment against a backdrop of mostly good economic news. However, it is important not to let recent history create unrealistic expectations for the future. 2019 will go down as a very strong year for world stock markets – well above long-term average returns. But history teaches us that recent performance says little about what the future holds. The coming year may bring below average, typical, or above average returns – but we don’t know which. Markets are inherently tough to predict. Maintaining a diversified portfolio consistent with your time horizon is the key to long-term success. Financial Engines advisors are always here to help.

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©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

Market Summary: November 2019

Positive news boosts stocks.

What happened.

November was a good month for stocks, especially domestic stocks. Large-cap US stocks led the pack, returning 3.63 percent (S&P 500). Small caps were up 3.06 percent (S&P 600). International stock returns were not as impressive. Developed-market stocks rose 1.13 percent, but emerging-market stocks fell by 0.14 percent (MSCI EAFE and Emerging Market indices). Interest rates crept up and so bonds fell slightly. The Bloomberg Barclays Aggregate Bond Index fell 0.05 percent. As for volatility, November was a quiet month with no big swings in US markets. The S&P 500 didn’t move by more than +/-1 percent on any day.

Why it happened.

There were three main factors pushing domestic markets: trade, earnings and economic news. The long-running uncertainty over a U.S./China trade deal continued, but most of the November news suggested an agreement was in the cards. November closed out the third-quarter earnings season (when companies report their financials for the previous quarter) and the news was good: Three-quarters of the companies in the S&P 500 beat their earnings forecasts (Remember, stocks react to new information, not to what’s already expected). Finally, there was positive economic news on job-creation, inflation and sales of new homes among other things. However, the data on consumer confidence and personal income wasn’t as good.

Overseas the news wasn’t so positive. The upheaval in Hong Kong continued, hurting its economy and stocks and pulling down returns on emerging markets. And, although there was some positive economic news from the eurozone, the fall in the value of the euro relative to the dollar (making euro-denominated assets worth less in dollars) weakened the return to U.S. investors.

What this means for you.

At Financial Engines, we build portfolios that are individually built for you. November saw stocks, which are historically riskier than bonds, perform well. If your portfolio has higher risk, because you are far from retirement or have told us you are comfortable with higher risk, your portfolio will probably have risen. If you have a lower-risk portfolio, you will likely not have seen as much growth. It is important to realize that regardless of how the markets behave, your investments should reflect your personal goals and tolerance for risk. Speak with your advisor to ensure that you are on the right path.

©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
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Q&A: Setting Up a Savings Plan for Your Long-Term Goals?

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

A 4-step plan to help you reach your savings goals.

Question: I’m 24 and my wife is 20. We have a few thousand dollars in the bank, but I would like to seriously start saving for our future — for our retirement, for our kids’ college when we have kids, and for a house. I am contributing 4 percent of my paycheck to my 401(k) at work, and my employer matches that. My wife doesn’t have a 401(k) at her job. How should we go about setting up the most effective savings plan for our long-term needs and goals?

Ric: First, you get the applause of the day for asking that question. Many people your age don’t think beyond their immediate needs and wants, but because you’re focusing on your long-term goals I’m sure that you and your wife will be financially successful. Many folks in their 50s and older wish they’d started saving at your age.

Let’s begin with your 401(k). You should increase your contribution to at least 10 percent — and to the maximum as soon as you can. Your wife should open an IRA in her name, where she can contribute $5,500. I would also urge her to consider finding a job with a company that offers a 401(k) and matches contributions like yours does. People often fail to realize that 40 percent of compensation is noncash — benefits like health insurance, paid vacation and retirement plans. If your employer isn’t offering those benefits, move to one that does.

Step 2 is to eliminate credit card debts if you have any. After you do, move to Step 3: Create cash reserves. I’d want you and your wife to maintain enough cash on hand to cover at least a year’s worth of spending — to tide you over in the event of a job loss or major unforeseen expense. Finally, Step 4 is to start investing in a diversified, long-term portfolio for the house you want and for college for your future children.

That’s the four-step process, but I cannot overstate the importance of saving for retirement first and foremost. That’s often shocking to folks in their 20s, because it’s hard for them to envision their retirement. Their priorities — after they get past Friday night beer — tend to be buying a car, buying a house, having kids and paying for college, usually in that order.

But the most powerful weapon you have for saving for retirement is time. You now have 40 years to save. If you squander some of those years and delay saving until you’re in your 30s, 40s or 50s, you won’t accumulate nearly as much money as you will need. That’s why I consider this Step 1, with the others lined up behind it.

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Buy or Lease Your Next Car?

We look at the eternal question: Is it better to buy or lease your next car?

It’d be easy to tell you to take the bus or keep your junker for another 140,000 miles, but that’s not realistic. Besides, you know all that stuff anyway. So, since you’re going to get a new car no matter what, let’s answer the question: Should you buy or lease that car?

Let’s take the example of a car whose sticker price is $34,000. To buy it, with a 7% four-year loan and a down payment of 20% ($6,800), your payment would be $650 a month. However, if you were to lease instead, you would pay a one-month refundable security deposit and your payment would be $450 a month. Thus, leasing would save you $200 a month, and you would need only $450 down, not $6,800 (plus, in both cases, sales tax). This is why leasing is so popular. And why the eternal question of “should I buy or lease” is not such a simple one.

Why Lease Payments Are So Cheap

Economically speaking, cars consist of three parts: equity (ownership), depreciation (loss in value over time), and interest expense (on the loan, if any). If you finance the purchase of a car, you pay for all three parts, and you will own the vehicle in, say, four years. But if you lease, you are paying only for use of the vehicle.

Therefore, you pay for the car’s depreciation and interest, not the equity, and you return the car at the end of the lease term. This is why monthly lease payments are lower than purchase payments. Leasing, quite simply, is the difference between owning a car and renting one.
Why would a car dealer want you to rent (i.e., lease)? It’s simple: If you lease the car, you pay $450 a month for four years. Then you give the car back, giving the dealer the chance to resell it. In other words, the dealer gets to sell the same car twice!

This means the dealer doesn’t have to charge you (the first buyer) the full $34,000; you pay only the difference between what the car is worth today ($34,000) and what it will be worth four years from now. The second buyer pays the rest at that time.

Say the dealer expects this $34,000 car to be worth $15,200 in four years. He would therefore want you to pay $18,800 and the second buyer to pay $15,200. Thus, your lease payments would be based on just $18,800, whereas your payments to buy would be based on the full $34,000. That’s why your monthly lease payments are $450 instead of $650. When the dealer resells the car in four years, he’ll get the other $15,200.

The Key Factor: Residual Value

Leasing, then, features lower monthly payments because dealers expect the car to retain a certain value. In reality, though, lease rates are not based on what the car’s residual value will be, but on what the dealer pretends it will be. That’s why lease payments often are so attractive. If, according to industry standards, a $40,000 car will be worth only $12,000 in four years, the dealer would have to base your lease on $28,000 worth of depreciation.

That would make the lease payment absurdly high, and no one would take the deal. So, the dealer pretends that the residual value will be $30,000, leading to lower, more attractive, lease payments. This game is dangerous for the dealer, but a bargain for you.

The key to the cost of leasing, then, is the “residual value,” or what the dealer says the car will be worth at the end of the lease. Expensive cars tend to offer better lease deals than cheaper cars, for they retain more of their value, and the higher the residual value, the lower your lease payments.

Three Money-Saving Tips When Leasing

As with most financial transactions, success or failure is found in the fine print. Here are three items to keep in mind:

Money-Saving Tip #1: Make Sure You Have Gap Insurance This is perhaps the single most important — and most overlooked — element of leasing. Say your contract says the car’s residual value at the end of the lease will be $15,200, but the car’s actual value will be only $10,000. If you wreck the car three months before your lease expires, guess how much your insurance company will pay in settlement?

The insurer will pay the dealer (who owns the car) the actual market value, which is $10,000. But your contract says the residual value is $15,200. That means you are responsible for the other $5,200. This “gap” between the lease contract’s stated residual value and the car’s actual value has caused many lessees to incur huge losses due to accidents. The solution: Make sure your lease contract includes “gap insurance” — even if you have to pay extra for it, for being without it is like driving without insurance.

Money-Saving Tip #2: Avoid the Cap Cost Reduction When someone buys a car, the more money he puts down, the less his monthly payments. Similarly, to lower your lease payments, you can make a cap cost reduction, which is a large, one-time payment made at the start of the lease. And as with a down payment, the more you pay in cap (short for capitalized) cost reductions, the lower your monthly payments. However, this is where the similarity ends.

Remember that when leasing, you do not own the car. Thus, if you make a cap cost reduction, you are making a down payment on property that is not yours. Never do that — no matter how much the dealer wants you to, and no matter how much it reduces your monthly payments — for in the long run, you are throwing your money away.

And the run might not be so long, either: Steve leased a $25,000 car and paid $3,000 in cap costs. Two months later, he totaled the car. Since he didn’t own the car, his insurer repaid the dealer $22,000; Steve lost his $3,000.
Paying cap costs is a waste even if you don’t wreck the car. Why? Because the only reason dealers want you to pay it is so they can offer you a monthly payment that sounds really low.

Would you visit a dealer who advertised a $20,000 car for just $199 a month? You bet! But would you get excited about having to pay $263 per month for the same car? Not likely. And that’s why dealers want you to pay a cap cost reduction.
You see, in one recent ad, a car dealer offered a $20,000 car for $199 per month for 24 months with a cap cost reduction of $1,525. But paying $199 per month with $1,525 down is the same as paying $263 per month with no cap cost reduction. If $263 doesn’t sound so hot (and it’s not), then the other deal isn’t so hot, either.

Instead of paying a cap cost reduction to lower your payments, ask the dealer to let you make additional security deposits. This will have the same effect as a cap cost reduction, except you’ll get the deposit back when you return the car.

Money-Saving Tip #3: Never Buy Optional Equipment in a Car You’re Not Buying When leasing, you must keep in mind that you don’t own the car. That means you must be careful when agreeing to options that the dealer offers you. Take Carmen for example. She worked out a fine deal on a car — $250 per month for 36 months, with no cap cost reduction. But then she decided to have the dealer install mats, fancier rims, an iPod adapter, and a navigation system. The cost of all these items came to $1,800, so the dealer added $50 to the monthly payment.

This not only made sense to Carmen, since $50 per month for 36 months is $1,800, she thought it was a heck of a deal — because although she would be paying for the options over three years, the dealer did not add in any interest. It was a deal all right — but for the dealer, not Carmen. When the lease expired three years later, Carmen returned the car — and with it, the mats, rims, iPod adapter, and navigation system. Carmen paid the full cost of owning those items, but she only rented them. Dumb move, Carmen.

What she should have done is incorporated the cost of the options into the overall price of the car, and then negotiated the lease price. That way, she’d be renting the options along with the rest of the car. Remember: When you lease, you are renting the car and everything in it. Don’t pay the costs of ownership when you lease.

Leasing and Taxes
When leasing, you are liable for sales tax even though you do not own the car. If your state levies a personal property tax, you’ll have to pay this, too. But to entice you to lease, many dealers offer to pay the property tax for you. Shop around for the best deal.

To Buy or Lease, That is the Question: Here Is the Answer

To determine whether you should buy or lease, answer these two simple questions:

1. How many miles do you drive per year?

In most leases, you are allowed to drive only 10,000 to 15,000 miles per year, 40,000 to 60,000 miles on a four-year lease. Anything more will cost you up to 25 cents per mile. As a result, unless you are among the relatively small number of people who drive fewer than 10,000 miles a year, it will be cheaper for you to negotiate a more expensive lease with a higher mileage limit than for you to pay 25 cents for every mile over the limit you drive. If you know you’ll drive significantly fewer miles than 10,000 to 15,000 per year, you can negotiate a lower lease payment.

2. How long do you generally keep your car?

Leasing is best for people who keep their cars for four years or less. Remember that when leasing, you never enjoy a payment-free month. At the end of the lease, you must turn in the car and get a new one, with a new lease or purchase contract.
Thus, if you like to keep cars for seven or eight years, you’ll find that, over the long run, leasing is much more expensive than buying.

Don’t Lease Beyond the Car’s Warranty
If you choose to lease, don’t lease for a term beyond the car’s warranty. If the car comes with a two-year bumper-to-bumper warranty, for example, get a two-year lease. By opting for a three-year lease, you could be stuck with huge repair bills in year three — on a car you don’t own!

Leasing for Business
Leasing makes great sense for business, regardless of how many miles you drive, because you are allowed to deduct the cost as a business expense. (If you buy a car for business, you must depreciate it instead.)

Since cars are one of the largest purchases you’ll make, talk with your financial advisor before you decide whether to buy or lease, how much to put down, and whether or not you should finance. The right decision can save you thousands!

Originally published in The Truth About Money.
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Q&A: Competing Financial Goals

Using “what-if” scenarios to plan for your financial goals.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: My wife and I have three daughters — ages 7, 6 and 1 — and my question is about competing financial goals. We are both fully funding our retirement plans at work; we have long-term care, disability and life insurance; and we pay for day care for the kids. But after all that, we can’t scrape together very much to put into the kids’ 529 plans. Should we back off our retirement plan contributions and increase our 529 investments a little?

Ric: It’s understandable if you’re feeling guilty and scared about the girls’ education costs. Many parents around the country feel the same way.

In a perfect world, you’d save for everything, of course. But if you can’t afford to do it all, should you save for your kids’ college or your own retirement? Or should you reduce your insurance coverage a bit in order to divert more into college savings?

The answer is to keep doing what you’re doing, because you’re doing it all correctly — and here’s why I say that:

You must save for retirement before you retire. You can’t do so once you’re in retirement. But that’s not the case with college. The girls can get loans and pay them off while working.

The same is true of houses and cars: You can buy a house and live in it while you’re paying the mortgage, and you can make loan payments while driving the car. But retirement must be pre-funded.

So you are correct to emphasize your retirement. Think about these what-if scenarios:

  • What if everything doesn’t go according to plan and you aren’t able to work for 40 years?
  • What if you die sooner than you expect?
  • What if you become disabled?
  • What if any of those things interferes with your income production as a couple?

Thus, you must properly fund your insurance coverage — not only life, disability and long-term care but also health insurance, auto insurance, homeowners insurance and umbrella liability insurance. Insurance is your safety net, which helps protect you in case anything goes wrong with your plan.

Having said that, there is a way to solve your dilemma about college. Fund retirement only to the extent necessary. Occasionally we find that parents are overfunding their retirement, but they aren’t aware of it because they’ve never constructed a financial plan.

So I would encourage you to let us develop a plan for you and verify — based on your goals, your future income need, your current expenses and your ability to save — just how much money you really need to save for retirement and how to invest that money. We might discover that you can reduce the amount you’re earmarking for retirement, freeing up some dollars that you can apply to college costs.

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Your Savings: How Much Is Enough?

Here’s how to tell when you’ve reached that point.

Is saving 20 percent of one’s income sufficient?

The answer, of course, depends on your situation. And in truth, no matter how much you’re saving, you should be saving more. (After all, nobody has ever complained about accumulating too much money, while many have lamented having too little.)

So, how do you know that you’re saving the right amount each month? It hurts.

Say you’re putting aside a portion of every paycheck into your retirement plan at work. You’re also adding to your IRA and stocking away some cash into a bank account. Does it hurt? If not, you’re not saving enough.

What does “hurt” mean? Simple. If your saving isn’t causing you to refrain from spending, you’re not saving enough.

You need to find yourself saying, “I’d really like to buy that item, but I can’t afford it because I’m saving money instead.” So if you haven’t denied yourself some new clothes, a shrimp cocktail or an upgraded seat on a flight, you’re not saving enough.

Pass this advice along to your children and grandchildren to help them enjoy a bright financial future.

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5 cost-saving tips for wedding guests.

We all know that weddings can be expensive. In fact, the average wedding cost more than $33,000 in 2017.1 But the happy couples aren’t the only ones feeling the pinch. A recent study showed that the average wedding guest spent $1,386.22 per wedding.2

Being a wedding guest can really do a number on your budget. However, it’s possible to join the fun without breaking the bank. Here are five ways to celebrate the smart way.

1. Don’t procrastinate with your travel plans.

Last-minute booking is a surefire way to break the bank. Wait to make plans, and you may find that you don’t have time to shop, the wedding-rate discount at the hotel has expired, and airfare is increasing every day. Give yourself ample time to book airfare and lodging, and shop around to help make sure you’re getting the best prices. Budget travel sites can help you compare rates.

2. Make your credit card work for you.

Many credit cards offer perks. If you’ve got several weddings in your future, consider a credit card that lets you redeem points for airfare or related travel costs. Similarly, make sure you’ve signed up for airline rewards programs to start building up points for weddings further down the road. Be careful not to rack up too much debt on your card, however. You don’t want to end up getting dinged by high interest rates.

3. Consider alternate accommodations.

Think beyond the hotel. Look for nearby vacation rentals to share with a group of other budget-conscious wedding attendees. The cost to split a vacation rental among a larger group is often cheaper than each person getting their own hotel room. Plus, you’ll have access to a kitchen and can save on meals by dining in. This is a great way to have some fun with friends and family while you’re at it! Another option is to look online for people who are renting out their homes or apartments for short-term stays. These are also often less expensive than a hotel.

4. Make it a vacation!

Maybe Ohio wasn’t on your list of top travel destinations this year, but if you’re flying there to attend a wedding, consider extending your trip by a few days to explore the area. Rather than staying just for the weekend to attend the wedding, roll your summer vacation into the trip to consolidate travel expenses and explore new places.

5. Just say no.

If attending a wedding just isn’t within your budget — especially if it’s out-of-state or a destination wedding — it’s okay to decline the invitation. The couple will understand. And since they’re likely paying per head for food and beverage, you’re probably saving them some money, too! Consider simply sending a gift, card or other message to let them know you’re thinking of them on their big day.

Weddings are wonderful, yet undeniably expensive, celebrations. While it’s worth splurging here and there to partake in the festivities, attending weddings doesn’t need to derail your entire budget. With some planning and creative thinking, you can still toast the couple with your wallet intact.

 

1 Seaver, M.. The National Average Cost of a Wedding Is $33,391. The Knot. Retrieved June 13, 2018, from https://www.theknot.com/content/average-wedding-cost-2017
2 Brown, M. (Oct. 4, 2017). The Average Cost of Going to a Wedding in 2017. LendEDU. Retrieved June 13, 2018, from https://www.lendedu.com/blog/average-cost-of-attending-wedding
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The basics of life insurance.

September is national Life Insurance Awareness Month. And while it’s important to consider life insurance throughout the entire year, this “holiday” can be extra motivation to re-evaluate your current policy — or more importantly, look into buying one if you haven’t already. Here are some basic considerations.

Why do you need life insurance?

It can help cover funeral and burial costs, and can help pay down any debts you owe so your loved ones aren’t left holding the bag. It can also provide a cash cushion for your loved ones to draw from as they adjust to life without you or your income. There are several different types of life insurance you can choose from to best fit your personal situation.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including the size of your family, your financial obligations, your career stage, and your goals. For example, when you’re young, you may not need a large amount of life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance grows too.

Some questions that can help you start thinking about the amount of life insurance you need include:

  • What immediate financial expenses (such as debt repayment or funeral expenses) would your family face upon your death?
  • How much of your salary goes toward paying current expenses and future household needs?
  • How long would your dependents need support if you were to pass away?Do you want to leave money for other uses upon your death? Examples include funding your children’s education, gifts to charities, or inheritances.
  • What other assets or insurance policies do you have?

Who will benefit from your policy?

When you buy life insurance, you’ll name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You can name multiple beneficiaries and specify what percentage of the net benefit each one will receive. If you name your minor child as a beneficiary, you should also designate an adult as the child’s guardian in your will.

Review your coverage.

Once you purchase a life insurance policy, periodically review your coverage. Over time, your needs will change, and you should adjust your coverage accordingly. In addition, keep a close eye on if and when your policy expires. In some cases, if you let your policy lapse, it might cost you more to buy a new policy, even if it has the same amount of coverage.

Anytime is a good time to think about life insurance — but September being National Life Insurance awareness month can be extra motivation to take another look at your current policy or explore buying a policy if you don’t yet have one. Taking these key steps now can go a long way in helping to protect your loved ones in the future.

Disclosure:
Part of this content has been contributed by Broadridge Investor Communication Solutions, Inc.
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