Our Role in your Personal Finance Planning

Alan P. Raines, CPA, MBA, JD
Managing Partner, Raines & Fischer, LLP
araines@rainesfischer.com
May 2014

We want to make sure the biggest tax problem you have is how to pay as little as possible on all the money you’ll be making.

Thirty years ago, I was a young CPA-attorney fresh out of law school starting my own practice. A contemporary of mine, an attorney who had a lucrative job with a New York City firm, came to me to have his tax return prepared. In the process of going through his income and expense deductions, he showed me his bank statements and the interest he earned during the prior year. He then asked me whether I did personal financial planning, as well as tax return preparation, such that I could advise him on where to place his money.

I tried to contain my laughter but just could not. I simply said to him, “Are you kidding? You earned $1.32 in interest income and your bank statements show you have $150.00 in the bank.” After we both had a good chuckle, he said to me, “Well, what if I had some money; could you help me then?” “Sure,” I said, “but first you have to follow my advice on how to accumulate money. Because,” I added, “a very wise person once told me, ‘It’s not how much you earn; it’s how much you keep.’” The old adage is that money makes more money, and the rich get richer because they have more money to reinvest and they can seize opportunities.

This same attorney has remained a client all of these years, but the sad thing about his story is that he never got into the habit of prioritizing wealth accumulation in his personal financial plan. Hence, he has no savings, no retirement plan, does not own a home, is currently borrowing to fund his daughter’s college tuition and owes the IRS money, despite having had a six-figure income over the past fifteen years.

And this situation is all too common. How does this happen? It’s usually a combination of several factors, including lack of a good plan and the self-discipline to follow it, living beyond one’s means, impatience, and making investments that seek Alpha beyond one’s greatest expectations. The last example usually results in loss of money due to the assumption of huge risk, analogous to betting double-zero on a roulette wheel. If you read the first fifty pages and grasp the themes presented in the books The Millionaire Next Door and Rich Dad, Poor Dad, you will know what I mean. The first book will tell you that you have to save first in order to invest later. And the second book will convey the wisdom of taking prudent risks. This solid advice can help you successfully accumulate the wealth you desire.

So here is my succinct advice on financial planning and wealth accumulation:

The first $100,000 is the toughest to accumulate. Once you do that, you have reached the first plateau, and you may be able to make some prudent investments. Accumulation of this amount by age 35 is ideal, but it is never too late to get started.

  • No broker or money manager wants to talk to you if you have less than $500,000 to invest and many will not talk to you if you have under $1 million. Why? Because they cannot make any money managing your account in relation to the time they would have to spend on it to do a good job. So what can less affluent people do? They can simply open a brokerage account with a discount broker, invest in their mutual or index funds, and hope that the overall market does well, while continuing to seek professional help. It is in your best interest not to go to a money manager who charges 1½ % to 2% a year to manage your money, because the fees will eat you alive, particularly in the low interest rate and dividend yield environment that exists today.
  • Reinvestment is the most important aspect of wealth accumulation. Over the past 60 years dividends have accounted for 47% of the stock market’s rate of return. So, if you reinvest your dividends into further equity purchases, your wealth compounds over the long run. How many stories have you heard about people who didn’t earn a boatload of dough working during their lives but managed to end up with millions of dollars — much to the surprise of those who inherited their estates? Maybe you were lucky enough to be one of those beneficiaries.
  • Never take a chance on a risky investment unless you have enough money to lose the entire investment. Playing with the “house money” is always better than seeking a rate of return from something by investing your life savings. When you have money to burn, as they say, you are never forced to cash an investment out before it has had a chance to run its cycle. It is sad to hear a client say, “Yeah, I had to sell my Apple stock when it hit $50 because I needed the money to pay off my credit cards…I knew it was going to go higher but…”
  • Before you select an investment advisor or money manager, look into his or her eyes and his or her net worth. If the advisor has not made himself or herself wealthy, what makes you think he or she will make you wealthy? When I was a kid, my dad gave me a little placard to hang in my room that read, “If you’re so damn smart, why ain’t you rich?” It was a very humbling and sobering statement for a young lad of twelve who was starting his first paper route and baseball card business.

So what does this all mean? Well, it means know your advisor before you trust your advisor. Make informed decisions, stay focused on your future and plan for the long run. Set goals and be realistic. We can help that process. We are here with the experience and know-how to help you accumulate the wealth you want — to live the life you deserve.

 

Alan Raines has a Bachelor of Science in Business Administration, magna cum laude, from Boston University, a Master of Business Administration in Taxation from New York University, and a Juris Doctor from Fordham University.

Alan is a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He is also an active member of his community serving as an officer and director of various not-for-profit organizations.