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The Top 10 Things Households Won’t Tell You About Their Finances

Sept. 11, 2014
Personal Finance
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By Richard M. Rosso

Learn more about Richard on NerdWallet’s Ask an Advisor

In this age of social media where privacy seems to be a thing of the past, there are several financial topics that remain undiscussed in public circles.

I listen and document them as a financial advisor.

Here are the top 10 things about finances households don’t often share. 

1. Contributing money to charity is not a priority: During a period of strained budgets after the financial crisis, an overwhelming number of households confess they cannot afford cash donations regardless of attractive tax deductions. However, the time they’re contributing to charitable organizations is rising, especially those with a presence close to home – churches, food banks, animal shelters, for example.

2. They favor adjustable-rate mortgages: Financially astute households are realistic; they understand the odds of remaining in their primary residences for 15 or 30 years (the period of popular fixed conventional mortgages) are slim. Adjustable rates are generally lower than fixed rates and payments are locked in for a specific term – six, seven or 10 years.  Lower mortgage payments allow these homeowners to use the additional cash for purposes such as retirement savings or the reduction of unsecured debts. This sample is willing to take the risk that rates may adjust higher at the end of the term. They are aware of the cap on how high interest rates can go but believe the risk is worth taking.

3. It’s the process over product:  Index funds are not a panacea. Fees are important, but this group is convinced that after two devastating bear markets in their investing lifetime, they can no longer afford double-digit portfolio losses. They embrace the attractive fee structure of indexing as long as their advisors assist with a clear, written rebalancing and outright sell strategy to minimize drawdown risk or life-changing loss of capital. In the book “Investing With The Trend: A Rules-Based Approach To Money Management,” Gregory L. Morris shares insights into history the financial services industry.

His research outlined that the market from 1927 to 2012, as represented by the S&P 500, was in the state of drawdown more than 95% of the time; the market made new all-time highs less than 5% of the time. Drawdowns of greater than 20% (bear markets) averaged 1,433 days, or 5.6 years, and 51 months to completely recover. For most investors, the recovery time is longer. When you consider life expectancy or the time required to make up for losses, how many bear markets can you endure in a lifetime?

4. A match made in heaven:  Money-smart households are reluctant to direct all savings to company retirement accounts. They always defer income to fully take advantage of an employer match. After that, investing tax-efficiently or tax free in brokerage accounts is becoming more popular.  Capital gains are taxed favorably over ordinary income even for individuals and couples in the highest marginal tax bracket. In addition, having the ability to gain control over the taxation of income at retirement is becoming a focus; the ability to blend ordinary income distributions from tax-deferred accounts and capital gains from after-tax accounts affords greater flexibility to minimize tax drag throughout retirement.

5. They love their credit cards: Money-smart households seek to aggressively gain reward points for travel and pay off their bills in full on average 10 out of 12 months of the year.  They use cards for every purchase possible. Also, they use credit card itemized statements at the end of the year to monitor spending and turn their focus on areas of improvement.

6. No more than 15% of total net worth in employer stock: I no longer need to coax these households into selling company stock. They are fully on board and have come to the conclusion that too much of their net worth, including their human capital, is tied up in their employer. Many of the households maintain 15% or less in employer shares and are sensitive to overconcentration risk.

7. No to handouts: Growing in popularity are loans to family members looking to begin small businesses. They are legally structured with annual interest rates of 4% to 10%. This group believes in the potential of their children and grandchildren to be successful entrepreneurs. They are willing to take the risk on family and believe formally designed intrafamily loans are a good barometer of the commitment to do what it takes to make a venture successful. Loans are overwhelmingly more popular than monetary gifts.

8. Downsizing is an ongoing objective: I’m impressed by this group’s sensitivity to clutter. More stuff equals more stress. They crave organization and cleared space.  I call it active downsizing where these households take inventory on a regular basis and sell, gift and donate items that don’t fit into their future plans of reducing the size of their primary residences.  They are motivated to reduce fixed expenses and prefer to spend money on experiences, including simple ones such as day trips and home-cooked dinners with family and friends.

9. College is not a sure thing: Households are starting to question the return on investment in traditional higher education as costs continue to increase. They are reluctant to take out loans, sacrifice retirement savings or having their children be overwhelmed with student loans. According to Salllie Mae’s recent report “How America Pays for College 2014,” overall borrowing was at the lowest level in five years.  Four out of every five households I meet are fine if children decide to attend a community college or a vocational school.

10. The desire for holiday gifts is cooling off: Interestingly, this group desires social gatherings with friends and family over receiving or giving gifts. They would rather cook you a dinner than buy you a sweater. The conversation and memories are important to their well-being.

I bet many households share similar views.

Your secrets are safe with me, but it’s time these perspectives and actions become mainstream.