Crackerjack Greenback Prudent Advice for a Prosperous Future

February 16, 2009

Cheap, Healthy Food: A Wholesome Meal for Under $1/Serving

Filed under: Budgeting,Frugal Recipes,Frugality,Saving Money — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Do you want to eat healthier but you’re afraid it will be too expensive? I have three easy recipes you can combine to make a wholesome meal for less than $1 per serving. And it doesn’t taste like cardboard, either!

       These recipes come from the More-With-Less Cookbook, a collection of Mennonite recipes with a focus on affordable but nutritious meals. It’s also focused on moving away from processed foods and wisely using the world’s resources. I highly recommend you buy a copy if you don’t already have one. It’s a very affordable cookbook ($11.55 on Amazon) and a great value!

Middle Eastern Lentil Soup

Combine in soup kettle:

1 cup lentils
4 cups water
1/2 teaspoon cumin

Cook until the lentils are soft (about 30 minutes), adding water if needed to maintain a soup consistency.

Heat in skillet:

1 tablespoon olive oil

Add and sauté just until yellow:

1 onion, chopped
1 clove garlic, minced

Blend in:

1 tablespoon flour

Cook for a few minutes. Then add the sautéed ingredients to lentils and bring to a boil. After the soup boils, remove from the heat and stir in:

2 tablespoons lemon juice
salt and pepper to taste

Tomato Chutney

Combine in a bowl:

2 cups chopped fresh or canned tomatoes (about two medium tomatoes)
1 medium onion, chopped
3 tablespoons lemon juice
2 tablespoons vinegar
1 tablespoon sugar
salt and pepper to taste

Garnish with fresh cilantro, if available.

Rice

I hope you already know how to make steamed rice… 🙂

Fix up about 5-6 servings (1 1/4 to 1 1/2 cups dry rice).

The Meal

       Serve the Middle Eastern Lentil Soup over rice and top with the Tomato Chutney. This should make about 5-6 servings. Total cost per serving? $0.80! (Assuming you drink water, of course.) You could probably add a vegetable for an additional $0.20-0.30 per serving. You can easily prepare and cook this meal in about 40 minutes. (Rice is easy, and you can fix the chutney while the lentils are boiling.)

The Nutrition

       Lentils are one of the healthiest foods you can eat. They’re high in fiber, folate, molybdenum, manganese, iron, and vitamins B1 and B6. They’ve also been shown to reduce the risk of heart disease. Serving lentils with rice ensures that you get the complementary proteins you need to match the complete proteins available in meats. The lack of meat, however, means that this meal is very low in cholesterol.

Eating Healthy for Less

       I plan to share additional recipes that will provide you with healthy meals at an affordable price. While this isn’t a cooking blog, it is about saving money. Saving money on your food bill shouldn’t come at the expense of your health. These types of recipes help you save money and eat healthier. In general, if you want to eat healthier and save money, follow these tips (from the More-With-Less Cookbook):

   Eat More:

  • Whole Grains- rice, wheat, barley, rye, oats, corn, and millet
  • Legumes – dried beans, soybeans, dried peas, lentils, peanuts
  • Vegetables and Fruits – inexpensive, locally grown, in season or homegrown and preserved
  • Nuts and Seeds – inexpensive, locally grown or homegrown

   Use Carefully:

  • Eggs
  • Milk, Cheese, Yogurt
  • Seafood
  • Poultry
  • Meats

   Avoid:

  • Processed and Convenience Foods
  • Foods Shipped Long Distances
  • Foods Heavy in Refined Sugars and Saturated Fats

February 7, 2009

Frugal Tip: Beware When Buying in Bulk!

Filed under: Frugality,Saving Money,Spending — Paul Williams @ Crackerjack Greenback @ 1:33 pm

Fresh tomato sauce by merci on Flickr       I stopped by the grocery store today while I was in town. I needed to pick up some milk and a few other things. I wanted to get some more tomato sauce to keep my supply well-stocked since I just used some in a recipe for Beef Curry a week ago.

       I generally go straight for the generic brand (Shurfine in this area), but there were a couple sales on the bigger cans of tomato sauce. The sale wasn’t on a well-known name brand, but it wasn’t a store or generic brand either. This 29 ounce can of tomato sauce was “on sale” for $1.50. The generic brand (Shurfine) 29 ounce can was $1.19. Not much of a sale if you ask me.

       I was about to grab the big can of generic brand tomato sauce when I saw the smaller cans on the shelf above. These cans were 15 ounces and they cost $0.59 each. Quick math tells you the small cans are a better deal. I can get two small cans (30 ounces) for a total of $1.18, or I can get one big can (29 ounces) for $1.19. So I can choose to pay 3.9¢/ounce or 4.1¢/ounce for the same product. Which size do you think I bought?

       Now, it might not seem like a big deal, and in this case it wasn’t really. But if you watch for this kind of thing over the course of your entire grocery trip, you can save quite a bit of money. Do it every time you shop for groceries and you can significantly reduce your food bill for the year.

       So don’t grab the bigger can, carton, bag, or box because you think it’s a better value. Check the numbers first. It really doesn’t take long if you have a calculator (and most of us do if we carry a cell phone). And don’t automatically grab the smaller size either. It can pay to buy in bulk and store what you don’t need. Just make sure it really is a good deal before you throw it in your cart.

Frugal Tip: Check the price per unit to decide between buying in bulk or buying a smaller size.

       To find the price per unit, divide the total price by the total number of units for the item you’re considering. In the case above, I divided 118¢ by 30 ounces to get 3.9¢/ounce on the smaller cans. Remember: total price / total units = price per unit

January 8, 2009

Simple Ways to Keep More of Your Money in 2009

Filed under: Budgeting,Insurance,Retirement Planning,Saving Money,Taxes — Paul Williams @ Crackerjack Greenback @ 4:00 am

This is a guest post from Trisha Wagner. Please take a minute to check out her bio at the end of this article.

       Did the state of the economy last year leave you wondering what 2009 might have in store for your finances? Are you, like the rest of the world, resolved to make some changes to keep more money safely in your pocket or at least your savings account this year? Here are a few simple, yet successful ways to cut your expenses and save more money in the months ahead.

  • File a new W-4 Form – Are you anticipating a tax refund for 2008? If so, it is time to adjust your withholding to match your tax liability. While it is a natural reaction to look forward to that “lump sum” payment from Uncle Sam, couldn’t you make better use of your money EACH month throughout the year? Locate a withholding calculator online to calculate the correct amount of withholding, and file a new W-4 today.
  • Bump up your retirement contributions – Don’t let the recent months deter you from continuing to contribute to your 401(k) or other tax favorable retirement accounts. 2009 brings increased limits for 401(k) contributions allowing up to $16,500 with an additional $5,500 permitted if you are or will be 50 or older by the end of the year. If you can’t or don’t want to contribute the maximum amount you should contribute at least enough to kick in the employer match.
  • Open an online savings account – With so many banking options available to you today, take a few moments and research the options available online. In some cases you can open a savings account with just $1 with no monthly fees or minimum balance requirements. While you are at it, set up a direct transfer from your checking account so that you don’t even have to “think” about saving money since it will be automatically deducted into your savings account. Remember, if you do an automatic transfer from your bank account you will need to mark the deductions accordingly to avoid mistakes that can lead to costly overdraft fees.
  • Raise your insurance deductibles – This tip is fairly straight forward—raise your deductibles on your auto and home owners insurance and see a reduction in your yearly premium putting money back in your pocket. [Paul says: This is a great tip, but make sure you have enough in savings to cover the increased deductible.]
  • Get a grip on your spending – If you still do not have a budget in place for your household finances, you really have to get on the ball to see savings in the new year. This advice has been told over and over again from all financial mediums, yet I’ve spoken to people who really don’t have any idea how much money they have or where it is going. You simply cannot cut costs if you don’t know where your dollars are going in the first place. Fortunately there are many online tools available that can calculate your spending for you making it easier to see where you can begin to cut back to save some cash.
  • Ditch your debt – This is great advice any time of year, but especially important during a rough economy. Credit card companies are tightening the reins on available credit and increasing the penalties for any transgression such as going over your credit limit or paying late. If you have previously faltered on your goal to reduce your debt now is the time to re-focus and implement an aggressive plan to get out of debt.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

December 6, 2008

Guest Post about Emergency Funds on No Credit Needed

Filed under: Budgeting,Frugality,Random Stuff,Saving Money,The Basics — Paul Williams @ Crackerjack Greenback @ 9:54 am

I have a guest post up today at No Credit Needed. Check it out!

The Emergency Fund To The Rescue!

December 5, 2008

Cable/Satellite TV Subscriptions Actually Cost Nearly $64,000!

Filed under: Budgeting,Consumerism,Contentment,Frugality,Saving Money,Spending,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Think it sounds ridiculous? Bear with me and I’ll explain how I came up with that number. This obviously isn’t the exact cost for every single person, but it probably isn’t far off. I didn’t include the cost of electricity, purchasing and replacing your television, or the cost of lost opportunities due to the hours wasted watching television. I’m also basing the cost on the amount I pay for satellite TV. Your actual costs may be higher or lower.

The Assumptions

       I assumed a cost of $40/month for the subscription. This is the cost of my basic satellite TV subscription. There’s a good chance most people pay more than this, so my estimate is probably conservative.

       I assumed you started your subscription at age 22 (when most people are out on their own) and you keep it until you die at age 80.

       I assumed an inflation rate of 3.8% and an investment rate of return of 8% (very reasonable over a 59 year time period).

The Results

Television by dailyinvention on Flickr       If you decide to give up your cable or satellite TV subscription and instead invest the money, you’d have over $577,000 at age 80. If we adjust for inflation, that $577,000 would be about $63,900 in today’s dollars (e.g., what costs you $63,900 today will cost you $577,000 in 59 years because of inflation).

       By age 65, you’d have an extra $177,700 because you gave up that cable/satellite TV subscription. This is the same as $34,300 in today’s dollars. That could mean retiring a year earlier! (depending on your income needs in retirement)

What About the Cost of Purchasing a TV?

       If you’re 22 and you decide to save $100 instead of purchasing a TV set, you’ll have an extra $2,955 by age 65—or $570 in today’s dollars. (While the price tag says $100, it’s really costing you $570 because you could have invested that $100.)

       If you save $500, that’s an extra $14,780 by age 65—over $2,850 in today’s dollars.

       If you save $1,000, you’ll have an extra $29,550 by age 65—more than $5,725 in today’s dollars! (That $1,000 big screen TV is really costing you $5,725.)

       And we haven’t even figured in the cost of lost opportunities because you watched so many episodes of Lost…

The $64,000 Question

       If Dish Network, DirectTV, or Comcast told you that subscribing to their service would really cost you $64,000, would you do it? Even with the first month free, I just don’t see how it’s worth it. 😉

       Add in the cost of purchasing a TV (and replacement TVs), the higher medical bills because you sat on your butt so much, and the other reasons you should stop watching TV and you’ll soon find that it’s just not worth it.

TV;        If you’re struggling to get by, TV should be one of the first things you cut. It’s a drain on your finances (a $64,000 drain!), wastes your time, and can get in the way of quality family time. Your time is better spent finding ways to increase your income, cut your expenses, and enjoy your life the way you want (instead of the way the TV tells you to enjoy it).

Disclaimer and Other Stuff

       Even though I know how much television costs, I have not given it up completely. However, I do watch a lot less than I used to and I’m amazed at how much more I can accomplish! Now I tend to only watch a couple shows on Discovery Channel. (I’m a science geek at heart.) I’ll watch in social situations as well, but overall I probably watch less than a couple hours a week on average.

       Not all TV is bad. Like I said, I like to watch Discovery Channel. Educational shows can be a good way to get some entertainment while expanding your mind at the same time. But most TV shows are an absolute waste of time—end of story.

November 29, 2008

Do It Yourself: Why Your Time Is Not Worth As Much As You Think

Filed under: Earning,Frugality,Saving Money,Spending,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       J.D. Roth at Get Rich Slowly has some good articles on how to figure out your real hourly wage. The first one titled “How to Compute Your REAL Hourly Wage” is a good start to calculating this number, but it leaves out taxes. The second article titled “Beyond “Real Hourly Wage”: How Much Time Does Stuff Actually Cost?” gets closer to a more accurate number, but I personally think you should do it a little differently.

We Still Work by furryscaly on Flickr       J.D. talks about deducting your fixed expenses to calculate your real hourly wage to figure out how many hours things cost in terms of your disposable income. I think this is a good number to keep in mind, but you should also consider your hourly wage in terms of net income as well (income minus work related expenses and taxes). This net income hourly wage can help you see how much of your time is spent paying for your necessities and put those costs in perspective. This is mostly just an interesting experiment, but it can help you realize that your time is worth something and spending money means giving up your time.

       However, what I really want to talk about is the discussion that came up following J.D.’s article about Things It’s Cheaper to Do Yourself. Some commenters contend that if a task would cost less per hour to outsource than you can earn in an hour then you’re better off paying someone else to do it for you. However, this logic is often flawed once you consider reality. This is a topic that’s been on my mind for a while, but J.D.’s article and the discussion prompted me to go ahead with my post.

What Are You Doing Instead?

       When I pay someone to change my oil, what do I do while I wait? I’m usually stuck sitting in a waiting room or browsing through the store (if I’m at Pep Boys or Walmart). I don’t earn any money while I’m waiting, so I can’t say I’m saving money or time by paying someone else to change my oil for me. If I can drop my car off and go do some income-producing activity, then it might be better for me to outsource the oil change. Even then, I need to make sure that my net after-tax hourly rate is going to be large enough to offset the cost of paying someone else to change my oil. If it’s not, then I’m better off changing the oil myself.

       The same can be said of many other activities we outsource. It’s easy to say, “Yeah, I’ll pay Jim $30 to mow my yard because it would take me 3 hours and I can earn $10/hour.” But this logic only works out if we take the time we would have spent mowing the yard and use it to earn money or provide ourselves with some other sort of value. This could mean enjoying a leisure activity or spending time with family. If mowing the yard would have prevented us from those (non-income producing) activities, then paying someone else to mow our yard might make sense depending on how much we value that time.

Sometimes It’s Better to Hire a Professional

Beautiful Tools by geishaboy500 on Flickr       Another exception would be projects that are better completed by a professional. If you do not have the ability to complete a project, then it’s probably best to pay a professional. You’ll save more money by having someone do it right the first time than having to go back and fix the mistakes you made trying to do it yourself. This can also be true if a project requires very specialized tools that we may never use again. This is the same logic we apply when we realize it’s better to rent a bulldozer to dig a hole than to buy it if we’re probably not going to use it again.

       However, it’s sometimes better to do a job yourself because you’ll know the quality of your work. When you hire someone else, you can get unlucky and end up with a “professional” who does shoddy work. With careful research and good referrals, you can usually avoid such misfortune. But if you know how to do a project and can do it well, you’re likely to get better results by doing it yourself than by hiring a “professional”.

What’s It Worth to You?

DoItYourself.com       My point is that most of the time it makes sense to do it yourself. There are a few exceptions where this is not true, but simply valuing our time based on our gross hourly wage is flawed. We have to look at the value of our time spent in the replacement activity (the thing we’re doing instead of the DIY project). If the value of our replacement activity outweighs the cost of outsourcing, then we can safely say it’s better to outsource. This still neglects the benefits of learning new skills and the satisfaction that many people experience when they do something themselves, but that’s a very subjective benefit.

       Just as every other personal finance decision needs to be considered in light of your personal situation, so does weighing the option of doing something yourself or paying someone else to do it. Depending on the value of your time, the activity you’ll do instead of doing it yourself, your skill set, and your desire to do it yourself, it may or may not make sense to outsource a project. Be sure you consider these factors before you say you’re saving yourself money or time by outsourcing.

November 26, 2008

Personal Finance in the Bible: Proverbs 21:20

Filed under: Budgeting,Frugality,Investing,Personal Finance in the Bible,Retirement Planning,Saving Money — Paul Williams @ Crackerjack Greenback @ 4:00 am

Bible with Cross Shadow by knowhimonline on Flickr       This week’s Personal Finance Bible Scripture comes from Proverbs 21:20.

   20 In the house of the wise are stores of choice food and oil,
       but a foolish man devours all he has.

Proverbs 21:20 (NIV)

       Same verse but in the New Living Translation:

   20 The wise have wealth and luxury,
       but fools spend whatever they get.

Proverbs 21:20 (NLT)

       I chose two translations this time because I think together they clearly tell us what this verse is saying. The wise save up some of their earnings, but fools spend everything they get.

       When talking about contentment and giving in the Bible, I’ve had people ask me if Christians should even save up money for emergencies or retirement. If we save, aren’t we relying on ourselves or our money instead of God? I think, as with many things, it really depends on the motives in our hearts.

       If we’re saving up because we don’t think God can provide or we don’t trust in God’s provision, then we’re obviously serving money and not God. But God clearly tells us several times in the Bible that the wise save up some of their money. The wise do not spend everything they get, and the wise prepare for trouble they see coming ahead.

       God can take care of us in any situation, but He teaches us that it is wise to save up when we see that we’ll have a need in the future. This is why I don’t think God is against us having emergency funds or saving for a time in our lives when we won’t be able to work for pay. I’m not sure God wants us saving for things that don’t glorify Him, like a retirement where we golf every day or travel around the world purely for pleasure. It’s the same with anything really. If it doesn’t glorify God, there’s probably a good chance we should rethink it.

       The next time you want to spend all of your paycheck or when the money in your pocket catches fire, remember that the wise person saves but the foolish person spends everything.

November 25, 2008

Ripped Off: Can You Trust Your Financial Adviser?

Filed under: Investing,Retirement Planning,Saving Money,Spending,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       The financial services industry is great at making you feel good while ripping you off. They’re also great at confusing you so much that you can’t even figure out how badly you’re getting ripped off. To make smart financial decisions, you need to realize how your “advisers” are getting paid and how their pay structure may affect the advice they give you.

       These advisers can include stock brokers, bankers, realtors, financial planners, insurance agents, lawyers, and accountants. Different compensation methods can create various conflicts of interest—situations where your best interests are not the same as your adviser’s best interests. This is a long article, but what you’ll read here can save you many problems and oceans of money.

Commission-based Advisers

       These advisers get paid a commission when you buy a product. The products they sell can include stocks, bonds, mutual funds, insurance policies, annuities, real estate, mortgages, other loans, and much more. (When you take out a loan, you’re essentially buying a product and the banker typically gets a commission or bonus.)

Chris Gardener by dbking on Flickr       The problem with this compensation structure is that the advisers are influenced to sell you products that give them a higher commission. This could mean selling you inappropriate or sub par products with high fees, telling you that you need permanent life insurance coverage, convincing you to buy the most house you can afford, or encouraging you to take out the biggest loan the bank will let you. You often don’t realize the cost of these decisions because the commissions are rarely disclosed in an honest, upfront, and easy to understand manner. It may seem like you’re getting cheap or free advice, but you end up paying much more in the end because of the commissions that are built into the products you buy.

       Commission-based advisers are also much more likely to persuade you to make many transactions (buying and selling investments many times) because this increases their pay. There are strict rules against “churning” in investment accounts, so be sure to seek help from the government or a lawyer if you believe your account is being churned.

       While there are some commission-based advisers who are trustworthy and do give their clients good advice, you’re best served by steering clear of commission-based advisers whenever possible. If you must work with someone who earns their fees by commissions, make sure you get full disclosure on their compensation and always get a second or third opinion on their advice. Do your homework, and you can avoid getting ripped off by commission-based advisers—but there are often better ways you can get help with your financial decisions.

Fee-based Percentage of Assets Advisers

       Fee-based percentage of assets advisers are paid a percentage of the assets they manage for you. This business model is also called the assets under management (AUM) model. This is generally seen in the investment world, though it can crop up in other areas. The typical fee is about 1% of your assets, but this can vary wildly between advisers. It’s important to keep in mind that this fee is almost always in addition to the fees in the products you purchase.

       The first conflict of interest with fee-based AUM advisers is the fact that they get more money when they manage more of your assets. They’ll often encourage you to transfer more of your assets to them and justify the advice with some compelling reasons. However, it isn’t always best for you to move your assets to an AUM adviser. Additionally, when you take money out of your account the adviser’s fee goes down. If you’re weighing the decision to pay off a loan with money the adviser is managing, how likely do you think it is that he will tell you to pay off the loan? If you pay off the loan, the adviser gets a pay cut.

Business Meeting by llawliet on Flickr       The next problem with fee-based AUM advisers is cost. When you pay 1% of your assets in management fees every year, the total cost can really add up. Let’s assume the adviser takes a 1% fee at the beginning of each year and your investment returns are 8%. Over 25 years, you’d pay $62,527 in fees for every $100,000 you had invested at the beginning of the 25 year period. Over a 65 year period, you’d pay $1,104,280 in fees for every $100,000 you initially invested. Most advisers will justify this cost by saying that you wouldn’t have received 8% investment returns if they hadn’t been there to advise you along the way. While this may be true, you can duplicate their results if you educate yourself enough about the long-term history of the markets and learn how to avoid stupid mistakes. You can also look into using an hourly or flat-fee adviser for a better deal without having to learn everything on your own.

       During retirement, these costs can be especially hazardous. My research has shown that a 5% withdrawal rate is probably safe for most people. If you have to pay an investment adviser a 1% fee to manage your assets, your safe withdrawal rate goes down to 4%. This means a $1,000,000 would only provide you with a $40,000/year income if you’re paying an investment adviser. Alternatively, you could have a $50,000/year income if you didn’t have to pay 1% of your assets to the adviser every year.

       The AUM model also isn’t very fair to the clients. If Bob has $100,000 and Joe has $200,000, Bob only has to pay $1,000/year but Joe has to pay $2,000/year. Why does Joe pay more? It’s only because he has more money. How is this fair for the clients? Having worked in the investment industry, I can personally tell you that not much more work goes into managing Joe’s $200,000 portfolio versus Bob’s $100,000 portfolio. Why should Joe have to pay twice as much for the exact same services? He shouldn’t, and that’s another reason why I am not too fond of the AUM model. Fee-based AUM advisers will try to justify this problem with different arguments, but there’s rarely a legitimate argument that would hold up when viewed by an unbiased party.

       Finally, fee-based AUM advisers are generally restricted to working only with wealthier clients. It’s much more profitable to spend 10 hours working with someone who has $1,000,000 than to spend 10 hours working with someone who has $100,000. This means young people and late starters with little money saved up are going to have a hard time getting a fee-based AUM adviser to work with them.

       Fee-based AUM advisers usually give much more appropriate advice to their clients than commission-based advisers, but there are still many conflicts of interest and problems with this compensation structure. Advisers using the AUM model like to advertise that their compensation structure eliminates many conflicts of interest present in the industry, but you should be aware that it does not eliminate all possible conflicts—no compensation structure can do that.

Fixed-fee Advisers

Good Advice by Gary J. Wood on Flickr       Fixed-fee advisers are paid a flat fee to provide certain services you agree upon. There are few of these advisers around, but their fee structure can eliminate many of the problems with commission-based and fee-based AUM advisers. You may also hear this fee arrangement referred to as a “retainer”.

       You’ll want to ensure that the flat fee you pay fixed-fee advisers is the sole source of their compensation. If the adviser still receives commissions for any products you may buy, then they will still have a conflict of interest in selling you the highest-paying products.

       You’ll also want to make sure you do not pay for more services than you really need with a fixed-fee adviser. Because these advisers are charging a flat fee, you can end up overpaying if you do not fully utilize the services and time included in the package. This is especially true for those who have a simple situation or for those who have the biggest areas of their financial plan implemented already. Since fixed-fee advisers often charge upwards of $1,500 or $2,000/year, it may not make sense to use them if you do not need much help.

       Since fixed-fee advisers are paid a flat fee, it is to their benefit to spend as little time as possible on any one client as this maximizes their hourly rate. While this is short-sighted, it is still a possible downfall of using fixed-fee advisers. If you feel your fixed-fee adviser is not providing the level of service you agreed upon, you should confront him or her to get an explanation. If you’re not happy with the service, you may want to change advisers.

       The major benefit of fixed-fee advisers is that they will not be tempted to advise that you purchase high-fee products or to put more money under their management. Since their compensation structure is separated from your assets, they are able to focus on your best interests when they provide advice. You’ll still want to make sure you’re not paying for more than you receive, and you should carefully consider any personal finance decision no matter where your advice comes from.

Fee-based Hourly Advisers

Good Advice by rick on Flickr       Fee-based hourly advisers get paid an hourly rate for the time they spend working on your situation. This time could include meetings with you, researching your situation, completing paperwork for you, or meetings with your other advisers. Most accountants and lawyers work under this compensation method, but you will hardly find this fee model in the investment, insurance, banking, or real estate industries. Fee-based hourly advisers eliminate many of the conflicts of interest present in commission-based and fee-based AUM models, but they are not without their issues.

       Because fee-based hourly advisers are paid for their time, they may try to give you complex advice to justify their fees and keep you dependent on meeting with them. If you feel like your fee-based hourly adviser is giving you the runaround, be upfront and let him or her know that you need a better explanation of why the advice is so complicated. If the adviser does not try to educate you, it’s probably time to seek another adviser. Any adviser should be more than willing to educate you about what is going on in your financial situation. If not, they could be hiding something or trying to keep you dependent on their advice.

       You may need to be more involved with your finances if you use a fee-based hourly adviser. Since you are paying the adviser by the hour, your costs will be lower if you can do as much as possible yourself. The fee-based hourly adviser should be willing to provide you with any instructions you need to complete simple tasks on your own. This could include setting up accounts, transferring assets between accounts, placing trades, purchasing products, or meeting with other professionals as needed. If you need help, you can always ask the adviser to assist you but your costs will be much lower if you do most of the grunt work yourself.

       With a fee-based hourly adviser, all clients are treated the same because they all pay the same amount per hour of the adviser’s work. These advisers can work with people who have few assets or people with a high net worth. As long as they only receive their compensation from you, they won’t be tempted to advise that you purchase high fee investments. On the contrary, they are likely to give you the best advice possible for your situation because they know that exceptional advice and education is the only thing that can really keep you coming back for their help.

Other Things to Keep in Mind

Good Advice by cornflakegirl on Flickr       You might find an adviser who uses some combination of these fee structures. Proceed with caution! The more complicated the adviser’s compensation the harder it is for you to understand exactly how he is getting paid. With any type of adviser, make sure you get full disclosure of their compensation in writing.

       Never be afraid to get a second opinion on your adviser’s recommendations. You can easily go to a fee-based hourly adviser for a one-time project when you’re making a major decision. For a few hundred dollars, you can get this second opinion and avoid a much more costly mistake. Even better, you could do substantial research on your own so you learn in the process and understand the situation better.

       Always remember that your advisers should be teaching and educating you throughout the process. If the adviser is reluctant to explain his recommendations, I would be very wary of trusting him. By finding an adviser who is a true teacher at heart, you can be more confident that the adviser is honest and trustworthy. The best adviser should be working to make himself completely unnecessary at some point!

       Don’t fall for slick marketing, a round of golf, free dinners, or nice gifts! Advisers who spend a lot of money in these types of “client appreciation” or advertising areas are simply using the money you pay them to give you “free” stuff just to make you feel good about getting ripped off. You should remember that the adviser is not going to give you so much “free” stuff that they don’t make a profit. While it may feel good to get that “free” round of golf or gift card to your favorite restaurant, you should never forget that you’ve already paid for it when you paid the adviser’s fee. Don’t fall for the illusion that it feels good to get ripped off! If you really want those things, pay for them yourself and stop paying through the nose to get it from your advisers.

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