July 2011 - Posts - Kahler Financial
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Kahler Financial

July 2011 - Posts

  • Who Are The Poor?

    by Rick Kahler

    A reader recently suggested on Twitter that even though our government borrows almost one dollar for every two we spend, we need to spend even more because 25% of Americans are in poverty.

    That brought up several questions for me: Are 25% of Americans really poor? How do we define poverty? And how does poverty in the U.S. compare with that in other countries?

    I found some answers in a paper, "How Poor are America's Poor?", published in August 2007 by Robert Rector, a senior research fellow with The Heritage Foundation. First, the numbers. Rector cites data from the 2005 Census Bureau showing the U.S. with 37 million poor people or 12.6% of our population, which is about half of my Twitter correspondent's estimate.

    Then the definition. I think of "poor" as being unable to meet basic needs for nutritious food, adequate housing and clothing, medical care, and transportation. In a 2005 poll taken by the Catholic Campaign for Human Development, the overwhelming majority of responses agreed with that definition.

    This perception of poverty certainly squares with that promoted by politicians and others desiring more help for the poor. The Census Bureau, however, defines poverty as a family of four having a household income of less than $22,350 a year.

    Rector summarizes the Census Bureau data this way: "Overall, the typical American defined as poor by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry and he had sufficient funds in the past year to meet his family's essential needs."

    He adds, however, "Of course, the living conditions of the average poor American should not be taken as representing all the poor. There is actually a wide range in living conditions. While the majority of poor households do not experience significant material problems, roughly 30 percent do experience at least one problem, such as overcrowding, temporary hunger, or difficulty getting medical care."

    When you compare our "poor" with the rest of the world, our systemic prosperity as a country becomes astounding. As just one example, the average living space per person in the U.S. is 721 square feet; per poor person, it is 439 square feet. Our poor have more floor space per person than the average person (not the average poor person) living anywhere in the world except Australia, Norway, and Canada.

    A January 2011 New York Times article by Catherine Rampell, "The Haves and the Have-Nots," reports that someone in the bottom 5% of the American income distribution is still richer than 68% of the world’s inhabitants. Even more, Rampell points out that America's poorest are, as a group, about as rich as India’s richest.

    Certainly, the U.S. has real poverty. There are those among us who don’t have enough to eat and live in deplorable conditions. However, in part because of the success of our welfare programs, the data suggests that under 10% of the poor (less than 2% of our population) actually fit the common perception of living in poverty.

    Any time we refer to "the poor," it's important to remember that they, just like anyone else, are real people whose living conditions, needs, life skills, and viewpoints vary widely. It is unreasonable to lump all "the rich" into one category. It's equally unreasonable, as well as disrespectful, to do the same with "the poor."

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • Raising the Debt Ceiling

    by Rick Kahler

    We may have a deal—or not. As I write this column, Congress and the President are still negotiating about raising the debt ceiling ahead of the August 2 deadline. By the time you read it, they may have reached an agreement.

    This year, both the President and Congress have seemed more inclined to raise the roof than raise the ceiling. Both Democrats and Republicans want any bill to increase the debt ceiling to also reduce the deficit. The last-minute arguing over how to accomplish this has resulted in frantic media reports and increasing fear and frustration for the American people.

    Even if a bill passes before this year's deadline, given worldwide economic conditions and the difficulty our representatives have in making tough decisions, we're likely to see a repeat of this same debt-limit drama in the next budget cycle. If Congress should fail to pass a debt-increase bill, the U.S. government wouldn't have enough money to pay all of its bills. If that happens now, or in the future, what should you do?

    1. Expect the stock market to overreact but don't overreact if it does. One possibility is that the markets will fall. Even if prices drop, nothing fundamental will have changed about our economy. The lower prices may actually offer some excellent opportunities to buy. For most investors, my advice would be to sit tight and do nothing. If you are properly diversified with a portfolio of eight to 10 asset classes, some of those classes are likely to increase even if others drop.

    2. For retirees, keep a little cash in the bank. If the debt ceiling isn't raised, the treasury would have to prioritize spending. It would have two goals: to make sure the country doesn't default on our debt and incur the consequence of high interest rates, and to get the debt ceiling increased as quickly as possible. As a result, I would expect bond holders to be paid first in order to avoid default. Voters would come second, meaning possible delays in Social Security, pension, and military paychecks. I already recommend that most of my retired clients keep some cash available to avoid having to sell during times when markets are down. Those who rely on Social Security should keep some extra cash in a money market or savings account. If your Social Security checks should be late, you'd still be able to pay your bills.

    3. Any time you're buying a house or negotiating any large loan, keep an eye on interest rates and lock them in early if the economy seems unstable. A budget crisis might lead to the U.S. temporarily losing its AAA credit rating. This could cause interest rates to spike, though market demands should cause them to return to current levels in a short time.

    4. If the markets drop and you want to pick up some bargains, act quickly. The sale won’t last long.

    5. Sleep well. Overall, there's not much point in losing sleep worrying about a "Debt Ceiling Crisis." Markets and interest rates may be affected in the short-term, but they will most likely rebound. Anyone who misses a government paycheck will be reimbursed as soon as the ceiling is lifted.

    It's doubtful that our politicians could ever find it tolerable to delay increasing the debt ceiling for very long. If voters start seeing delays in payments, such as Social Security, members of Congress will hear from the public in very strong terms. Perhaps our best course of action is to hope all the media attention helps encourage all of us to make real progress toward overcoming our addiction to borrowing.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • What Your Real Estate Agent Has to Tell You, But Your Financial Advisor Doesn't

    by Rick Kahler

    When it comes to transparency and understanding who represents whom, the financial service industry could learn a lot from the real estate industry.

    When you are a customer, the salesperson’s job is to sell you a product or a service. While salespeople and their companies have a duty to be honest and fair with you, they don’t have a duty to put your interests ahead of theirs. It’s your job to evaluate their claims and products, then to make an informed decision whether or not to buy.

    A client relationship is much different. In this case, you are typically buying, not a product, but the wisdom and services of an advocate. This is similar to the relationship you have with people in the legal, medical, and mental health professions. It’s the job of the professionals to put your needs above theirs. When professionals call you their "client," it means they have a fiduciary duty to put your best interests first and be your advocate.

    In some cases, like buying or selling a house, you get to choose whether to be a customer or a client. About thirty years ago, the real estate industry was where the financial services industry is today. Many buyers or sellers were unclear, when they retained a real estate agent, as to the agent's fiduciary duty. Even though an agent might show a buyer scores of houses, the agent technically worked for the seller. This was confusing, especially to buyers who often thought of the agent who hauled them around for days showing them houses as "their" agent. It was equally confusing to real estate agents, who often worked "for" the buyer even though their fiduciary duty was to the seller.

    That is no longer the situation in most states today. Real estate agents must give you the choice of having the real estate agent work for you (where you will be the client) or work for the other party (where you will be the customer). In some cases, the agent is allowed to work for both buyer and seller, meaning the agent isn’t working for either party.

    The agents are required to disclose fully whether you are the customer or the client. If you are the customer, you have the opportunity to retain and become the client of your own agent.

    Ironically, despite all the recent public outcry about reforms in the financial service industry, little to no transparency or disclosure is required of financial product salespeople.

    A survey conducted in August 2010 by ORC/Infogroup, as reported by the Dow Jones Newswires, found that many investors are confused about which financial professionals are held to a fiduciary standard. Some 77% of consumers believed "their" financial advisors had a fiduciary duty to put their interests first. In actuality, less than 20% of the advisors were fiduciaries. Most consumers thought they were clients, but they were actually customers. This is especially serious, since most people are left thinking they are getting unbiased financial advice when they are actually getting a sales pitch.

    Why is the financial services industry so far behind the real estate industry when it comes to transparency and disclosure? Probably because the financial services industry is far more consolidated than the real estate industry and has a lot of influence on Capitol Hill.

    For now, the push for transparency is up to consumers. Don't assume you are a client rather than a customer. Ask. Insist on clear answers, and go elsewhere if you fail to get them. Demand the same level of disclosure from a financial services professional that you would get from a real estate professional.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

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