Tag Archives: Spending

Federal Fiscal Deficit vs. National Debt

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Democrats spend money when they don’t raise taxes; and, Republicans cut taxes when they don’t decrease spending. Tax and spending reforms are needed desperately.

“The government has basically three gigantic programs and it’s the US military, Social Security, and Medicare,” Marc Goldwein, a senior policy director at Committee for a Responsible Federal Budget (CRFB) said. As Nobel-Prize-winning economist Paul Krugman once wrote, the US government is “best thought of as a giant insurance company with an army,” and increasing interest payments.

If the government wants to get serious about its fiscal spending and reducing the national debt, all government spending would have to be reduced by 27% to get budgets balanced in the next decade — and, if tax increases, defense spending, Social Security, and Medicare are all off the table, 78% of federal spending would have to be cut, according to CRFB.

The federal deficit vs. Debt — they’re two separate concepts.

  • The deficit is the difference between the money that the government makes and the money it spends during a fiscal year. If the government spends more than it collects in revenues, then it’s running a deficit.
  • The federal debt is the running total of the accumulated deficits.

The combination of spending increases, tax cutsc, and increasing interest expenses on the debt inflates deficits. While the rise in spending tends to be bi-partisan, tax cuts tend to be enacted by Republicans.

Reference:

  1. https://news.yahoo.com/want-balance-budget-without-raising-100000676.html
  2. https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/

Producer Price Index (PPI)

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The Producer Price Index (PPI) came in higher than expected:

  • Expectations: 7.2%
  • Actual: 7.4%

Producer Price Index (PPI) came in above estimates on both headline (7.4% vs 7.2% estimate) and core (6.2% vs 5.9% estimate), comments Liz Young, Chief Investment Officer, SoFi. The Producer Price Index measures inflation at the wholesale level, which acts as kind of a leading indicator.

Inflation remains high, but is trending down, because the main driver of inflation is not interest rates. Instead, the main driver of inflation is excessive fiscal deficit spending and loose monetary policy.

Although, PPI is still falling moderately on a year-over-year basis, but any future upside surprises don’t bode well for upcoming Consumer Price Index (CPI) numbers which will be released next week.

The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.

Take Control of Your Finances

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There are ways to feel more in control of your financial situation–and make the money you have go farther. The key is to take a close look at your current budget and to better manage your cash flow. You can best do this by finding expenses you may be able to pare back or eliminate, and by potentially finding new sources of income.

Smart spending and saving strategies, according to FinTech company SoFi, to follow are:

Create a Budget and Manage Your Cash Flow – Take a close look at your monthly spending to get a full picture of your spending, and start tracking your spending (every cash/debit/credit card transaction and every bill you pay) for a month or so.

Once you understand your average monthly spending, compare it to what’s coming in. You can look at your bank statements for the past few months to get an idea of much after-tax income you are taking in on average per month.

Comparing what is coming in vs. going out will help you know exactly where you stand financially.

Uncovering Places to Save – Once you understand your monthly spending and group your expenses into categories, the next step is to list your expenses in order of priority, starting with the essentials and going down to the “nice to haves.”

Once you’ve established which expenses are the most important, you can start looking for places to cut some of your unnecessary spending. For example, if you are spending a lot on restaurants and take-out, you might consider cooking at home a few more nights a week.

Negotiating with Service Providers – You may be able to negotiate for a lower rate from many of your providers, especially if you’re dealing with a company that’s in a competitive market.

Before you call or email a business or provider, it is important to know exactly how much you’re paying for a service, what you’re getting for your money, and how much the competition is charging for the same or similar service.

It’s also a good idea to make sure you are communicating with someone who actually has the power to lower your rate and, if not, ask to speak with someone who does.

You may also want to let providers know that if they can’t do better, you may decide to switch to another company.

Cutting Back on Bigger Expenses – Look at the big items in your overall budget. For example, if your car payment too high, you could buy a less expensive to cut monthly payments.

If rent is eating up too much of your income, you might want to look into finding a cheaper place to live that’s still nice, taking in a roommate, or moving in with friends.

The lower you keep these costs, the easier it will be to live well within a tight budget.

Knocking Down Debt – Having too much debt can hamper your chances of achieving financial security down the line.

That’s because when you’re spending a lot of money on interest each month, it can be harder to pay all of your other expenses on time, not to mention grow your savings.

Reducing debt may seem like a tall mountain to climb, but choosing the right debt reduction strategy may be able to help you chip away and slowly improve your financial situation.

Since credit card debt typically costs the most in interest, you might consider tackling these debts first, and then move on to the debt with the next-highest interest rate, and so on.

Starting an Emergency Fund – Start putting a little bit away into an emergency fund each month a priority: An unexpected expense—like your car breaking down or a visit to an urgent care clinic—could put you over the financial edge.

If you start putting just a small amount aside each month into an emergency fund, it won’t be long before you have a decent financial cushion that could prevent you from having to run up high interest credit debt the next time something unexpected rolls around.

Spending Only Cash for Everyday Expenses – Using plastic that can make it feel like you are not really spending money. Thus, switching to cash (and leaving the credit cards at home) for other expenses can be a great idea when money is tight.

The reason is that using cash places a harder limit on your spending and helps you become more aware of your choices. When you can literally see your money going somewhere, you may find yourself becoming much more intentional in the way you spend it.

Another benefit of cash is that it’s more difficult to get into debt since you can’t spend cash you don’t have.

Starting a Side Gig – Once you’ve done some basic budgeting, it may be clear that additional income could help ease things while money is tight.

Sometimes all it takes is some extra time and energy, but taking on a side hustle, or using your talents to pick up some freelance work can bring in additional income.

Some ideas for generating extra income include:

  • Selling things on eBay or Craigslist
  • Hold a garage sale
  • Creating an Etsy store and selling homemade goods
  • Driving for a rideshare or food delivery service
  • Giving music lessons
  • Renting out a room on Airbnb
  • Walking dogs
  • Cleaning houses
  • Babysitting
  • Handling social media for small businesses
  • Selling writing, photography, or videography services to clients

Start saving and investing, immediately – Your first financial goal should be to create an emergency fund and to establish the discipline for saving by “Paying yourself first”. To take advantage of compound interest, start investing early and regularly.

Takeaways

You can gain control of your finances by calmly sitting down, creating a budget, and determining your cash flow. This entails looking at your monthly income, as well as your average monthly spending, and seeing how it all lines up.

To create a monthly budget, you must allot funds for expenses such as rent and other bills, then sets aside a small amount directly for savings and uses the rest to live off for the month

Once you have a sense of your cash flow, you can take steps to reduce unnecessary spending, negotiate to lower monthly bills, chip away at expensive debt, and even start building a financial cushion.

References:

  1. https://www.sofi.com/learn/content/what-to-do-when-money-is-tight/
  2. https://www.usatoday.com/story/college/2012/04/25/7-steps-to-take-control-of-your-financial-future/37391767/

The National Study of Millionaires

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“Anyone in America can build wealth. The only thing holding you back is you. Get out of debt. Save consistently. Keep your spending in check. Let time and compound interest do their magic. If you’re willing to work hard and keep the long-term goal in mind, you’ll reach the million-dollar milestone.” Chris Hogan

Summary

  • “The National Study of Millionaires” is the largest survey of millionaires ever with 10,000 participants.
  • Eight out of ten millionaires invested in their company’s 401(k) plan.
  • The top five careers for millionaires include engineer, accountant, teacher, management and attorney.
  • 79% of millionaires did not receive any inheritance at all from their parents or other family members.

The National Study of Millionaires by Ramsey Solutions concluded that millionaires successfully accumulated wealth through consistent investing, avoiding debt like the plague, and smart spending. No lottery tickets. No inheritances. No six-figure incomes.

Thus, according to the survey, there is positive news for Americans who may have lost hope that they can ever accumulate wealth. “The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.”

The study’s results demonstrated a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

In a nutshell, regular, consistent investing over a long period of time is the reason most of the people in the survey successfully accumulated wealth. And, even when millionaires don’t have to worry about money anymore, they remain careful about their spending. Ninety-four percent of the people studied said they live on less than they make. By staying out of debt and watching expenses, they’re able to build their bank accounts instead of trying to get out of a financial hole every month.

Financial Mindset

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“It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

Financial Mindset

“Change your mindset and attitude, and you can change your life.”

You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

Other examples of beliefs about money and personal finance include:

  • Taking personal responsibility regarding your finances is everything.
  • You shouldn’t buy things you can’t afford.
  • You don’t have to make a ton of money to be financially successful.
  • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
  • Borrowing money from or lending money to your family isn’t recommended.
  • Education can get you a better job, if you get the right education.
  • You should buy life insurance.
  • You have much more to do with being a financial success than you think.

Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

1. Using debt to reach your dreams.

This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

2. Thinking you do not need an emergency fund.

The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

3. Settling for a stressful job to pay off debt.

“The most important thing when paying off your debts is to pay off your debts.”

Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

4. Delaying your retirement savings.

Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

5. Failing to have a backup plan.

The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

Takeaway

Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

References:

  1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
  2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
  3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
  4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
  5. https://www.getrichslowly.org
  6. https://obliviousinvestor.com
  7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

Road to Wealth | American Association of Individual Investors (AAII)

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You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Tax Savings in Retirement

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Tax planning keeps more money in your pocket in retirement.

In retirement, one of your top financial planning priorities is to maintain steady cash flow. One means to achieve steady cash flow is to pay as few taxes as legally possible in retirement. It’s important for you to think about how your retirement planning and cash flow are affected by taxes — both now and by potential increases in the future.

Taxes can be a burden for people on fixed incomes. These include federal, state and local income taxes and property taxes. Long-term tax planning is one of the best things you can do to boost your income and cash flow in retirement, however, it’s often overlooked. One way to change that is when your thinking about tax planning in retirement, you choose to think of it as tax saving instead.

Tax planning is one of the best things you can do to keep more money in your pocket in retirement.  And, you don’t need to be a tax guru to save money on taxes. The truth is that you have the power to lower your taxable income.

The good news is that most states offer some form of tax relief for retirees, whether through levying no tax on sales, income, Social Security or some combination. You might even qualify for a property tax exemption, depending on your age, income and where you live. But since these benefits vary depending on your location, it’s important to make a plan now to avoid an unforeseen tax liability later.

While everyone’s tax situation is different, there are certain steps most taxpayers can take to lower their taxable income.

Save for retirement

Starting small and starting now can make savings add up faster than you’d think.

Contributions to a company sponsored 401(k) or an Individual Retirement Account (IRA) can be a great way to lower your tax bill. The two most popular IRAs are Traditional and Roth, and the difference between them is when your contributions are taxed.

Company sponsored 401(k) plans are the most popular option, since many employers often match employee contributions to their 401(k) plans. Experts recommend contributing either the full amount allowed, annually ($19,500 for 2020 or $26,000 for taxpayers 50 and over), or – at least – the maximum amount that will be matched by your employer.

Traditional IRAs are usually pre-tax contributions, meaning your contributions are placed in your IRA before being taxed, lowering your taxable income for the current tax year. You won’t pay taxes on your contributions until you withdrawal the money.

Roth IRA or Roth 401(k) are tax-exempt accounts which offer tax advantages in the future. Your money is taxed before you contribute to the account, but you can withdraw it tax-free in retirement. Thanks to historically low tax environment right now, many Americans are converting traditional IRAs to Roth IRAs. You’ll pay taxes when converting to a Roth, which is why it may be wise to do a partial conversion. This way you’re only moving as much money as you’re able to pay taxes on this year and moving more money next year.

Contribute to your HSA

Pre-tax contributions to Health Savings Accounts (HSA’s) also reduce your taxable income. The IRS allows you to make HSA contributions until the tax deadline and apply the deductions to the current tax year. This means you can continue lowering your tax bill, even after December 31.

Setup a college savings fund for your kids

Originally created to help families save for college tuition, 529 plans were expanded by the Tax Cuts and Jobs Act of 2017 to cover savings for K-12 public, private, and religious school tuition. You can use up to $10,000 of 529 plan funds per year, per student, to pay qualified educational expenses.

  • The contributions you make to a 529 plan are not tax-deductible at the federal level, but part or all of them may be tax-deductible at the state level (the rules vary by state).
  • The earnings from a 529 account are not subject to federal tax, and the distributions are not taxed as long as they are used to pay for qualified educational expenses for the student named as the beneficiary of the plan.
  • Another option under the 529 program is use a pre-paid college tuition plan for a qualified in-state public institution. This allows you to lock in current tuition rates no matter how old your child is.

Make charitable contributions

Making charitable contributions is another great way to reduce your tax bill. Donating cash, toys, household items, appreciated stocks and your volunteer efforts to qualifying charitable organizations can provide big tax savings.

  • Time spent volunteering isn’t tax deductible, but expenses incurred while doing volunteer work may be deductible, such as the cost of ingredients for a donated dish and certain travel expenses when attending a charitable event (14 cents per mile in 2020.)
  • Your donations are only tax deductible if the organization you’re donating to is a qualified nonprofit organization.
  • You must itemize your tax deductions in order for charitable contributions to lower your tax bill.

Except that for 2020 you can deduct up to $300 per tax return of qualified cash contributions if you take the standard deduction. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses.

Harvest investment losses

Taxable accounts include your brokerage and savings accounts. You are taxed on the interest you earn and on any dividends or gains. Investment accounts are an important part of your overall financial plan, especially during your working years as you grow and accumulate your savings for retirement.

Reporting losses on capital investments can also reduce your tax bill. “Loss harvesting” is considered to be a key year-end strategy. This is when you sell your investments to “realize” a loss(the act of selling at a loss). These losses can be used to offset capital gains taxes, dollar for dollar, reducing your overall tax liability.

  • When you have more losses than gains, you can use up to $3,000 of excess losses to offset ordinary income.
  • The remainder of the losses (in excess of the $3,000 allowed each year) can be carried forward year after year.
  • Keep in mind that the IRS doesn’t allow use of losses from a “wash sale”; when you purchase the same or “substantially similar” investment within 30 days before or after the loss.

Claim Tax Credits

When you claim tax credits, you reduce your tax bill by the dollar amount of the tax credit. For example, if you have a child under 17, you may qualify for the $2,000 child tax credit. That’s an instant $2,000 tax savings.

Take advantage of tax credits

There are many tax credits available, and it is essential to claim all the benefits you are entitled to. Credits are usually better than deductions because they can reduce the tax you owe, not just your taxable income.

For example, suppose you have $50,000 taxable income and $10,000 in tax deductions. These deductions reduce your taxable income to $40,000.

  • $50,000 taxable income – $10,000 tax deductions = $40,000 taxable income

In your tax bracket, that $10,000 of taxable income would have been taxed at a rate of 12%. As a result of your deductions, you would save $1,200 on your tax bill.

  • $10,000 taxable income x .12 tax rate = $1,200

Because tax credits reduce the amount of tax you owe, dollar for dollar, $10,000 in tax credits would mean $10,000 in tax savings instead of $1,200.

Some of the most popular tax credits are:

Maximize your small business expenses

Usually, small business owners and self-employed taxpayers are able to use a much wider range of tax reduction strategies than individual taxpayers because of tax deductible small business expenses. Some common small business tax deductions include,

  • Office rent,
  • Home office expenses,
  • Cost of acquiring and maintaining a vehicle for the business, and
  • Inventory.

The lower your net profit, the lower your self-employment tax will be, so writing off as many expenses as possible can help reduce your tax bill.  Claiming small business tax deductions can also lower both your income taxes and self-employment taxes, and you can deduct a portion of your self-employment tax payments on your personal tax return.

Countless retirees miss out on thousands of dollars in tax savings by not realizing how many expenses they can write off. With the proper tax advice, you can literally convert your personal expenses into small business expenses. The tax code is written for small business owners and investors to prosper, don’t let these savings escape your pockets.

Key Points:

  • Maximize your tax-advantaged accounts
  • Roth contributions to retirement accounts are post taxed
  • Traditional contributions to retirement accounts are pre-taxed

References:

  1. https://www.kiplinger.com/taxes/tax-planning/602272/5-strategies-for-tax-planning-now-and-in-retirement
  2. https://www.cofieldadvisors.com/post/5-financial-tips-for-small-business-owners
  3. https://www.kiplinger.com/taxes/tax-planning/602505/good-planning-can-reduce-the-chances-of-taxes-hurting-your-retirement
  4. https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/7-best-tips-to-lower-your-tax-bill-from-turbotax-tax-experts/L0frRUUVL
  5. https://www.kiplinger.com/retirement/602564/questions-retirees-often-get-wrong-about-taxes-in-retirement

Financial Wellness

Aside

Financial Wellness: Time to tune up your financial goals, plan and strategy.

Tax season is upon us meaning that the 2020 filing season officially opens on February 12, 2021, and the final deadline is April 15, unless the IRS announces changes. For that reason, it is the time to assess your financial health, gather your tax documents and get your personal finance in order.

Knowing where you stand financially before the tax filing deadline gives you time to adjust your current tax withholding and also figure out what you can contribute to accounts like traditional IRAs, Roth IRAs, and health savings accounts, based on your modified adjusted income and your overall financial picture.

“People focus on the negative. They don’t like locating all the files, math is scary, and there’s this need to be very precise,” says Andy Reed, PhD, Fidelity’s vice president for behavioral economics. “The beginning of the year is a good trigger for taking stock of your financial situation, which is good to do once a year.”

https://twitter.com/raininstantpay/status/1359117351124430853?s=21

Financial wellness

Knowing where you stand is a critical to financial wellness. “Financial Wellness” relates to thinking about and paying attention to your financial well-being. And, there is no better time than now to hit the refresh button and create a path towards financial wellness. Thus, having your financial plan and strategy in place can not only mean a great deal to you in the long term, but it may provide you some comfort in the short term.

The first thing to do is to do a financial year in review by calculating your personal net worth (assets – liabilities) and assessing your cash flow (income – expenses). Once you know where you stand financially, you can plot out how you achieve your financial goals, according to Charles Schwab financial advisors. Consequently, thinking about what you really want financially, your goals, is the first step toward getting it.

“Saving and investing wisely helps you work toward a more secure future, it also gives you freedom to focus on you.”

Your primary financial focus should be earning and saving money, managing spending and debt, and setting up an emergency fund. Cash flow is financial oxygen of financial wellness, explained Berna Anat, a financial literacy educator and creator of financial education website Hey Berna. “Once you can breathe better, you can plan better.”

To achieve a sense of financial wellness means having your financial plan, strategy and goals in place. Financial wellness can not only mean a great deal to you in the long term, but it may provide you some comfort in the short term.

References:

  1. https://www.fidelity.com/viewpoints/personal-finance/getting-started-on-tax-returns
  2. https://www.become.co/blog/january-financial-wellness-month
  3. https://www.cnbc.com/2021/01/21/12-month-roadmap-to-financial-wellness.html
  4. https://equitable.com/goals/financial-security/basics/invest-for-retirement

 

Chinese Stocks are Risky

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Recently Luckin Coffee (LK) issued a press release admitting that their chief operating officer had fabricated a significant amount of sales from the second quarter through the fourth quarter of 2019.  This caused Luckin Coffee share price to fall 82% in U.S. trading and leaving investor with little recourse.

Luckin, a rival of Starbucks in China, happen to be a fairly new public company that opened its initial public offering (IPO) in May 2019.  In the case of Luckin, investors needed to exercise caution when a company goes from zero to a $3 billion market capitalization valuation in less than two years.  Furthermore, it is important to understand that what occurred with Luckin Coffee can occur with other Chinese companies with stocks listed on U.S. equity market exchanges since they are not required to comply with Security and Exchange Commission’s (SEC) strict disclosure and transparency requirements.

Chinese stocks and emerging-markets stocks

China is the world’s second-largest economy and is still growing as an emerging market. Investing in young Chinese companies can be extremely risky.  Although the growth available in China is clearly appealing, there are a number of inherent risks for investors.  The risks include currency manipulation, ineffectual securities reporting standards, the draconian influence of China’s communist government, and the potential for financial fraud.

Recent economic and equity market history are rife with financial frauds and illegal activity related to Chinese companies listed on U.S. equity exchanges.  Many seasoned U.S. investors advise that Americans should avoid investing in Chinese stocks. They even recommend avoiding the few larger Chinese companies with established histories and strong management track records.

Delisting Chinese Stocks

To avoid future Luckin Coffee frauds perpetrated on unsuspecting American investors, “Chinese companies should be delisted from American exchanges if they don’t follow U.S. securities laws”, according to Senator Marco Rubio.  Senator Rubio believes that increase oversight is vitally required for Chinese and other foreign companies listed on American stock exchanges. In fact, he and colleagues have offered legislation that calls for delisting firms that are out of compliance with U.S. regulators for a period of three years.

Bottomline, it is difficult to trust the financial statements coming out of some high-flying companies based there. Fundamentals don’t matter if you can’t be sure the numbers are real and it is difficult to invest in Chinese companies that might be trying to deceive investors.

References:

  1. https://finance.yahoo.com/news/luckin-coffee-chairman-defaults-loan-152735017.html
  2. https://www.msn.com/en-us/finance/topstocks/investing-lessons-from-the-luckin-coffee-accounting-fraud-debacle/ar-BB12eas4
  3. https://www.cnbc.com/2019/10/08/marco-rubio-chinese-firms-should-be-delisted-in-us-if-they-dont-follow-laws.html

Conspicuous Spending and Skyrocketing Debt

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“The hard truth is: the amount of money we earn is not always directly proportional to the amount of money we save because, more often than not, the more money we make, the more we spend.” David Bach, author “The Automatic Millionaire”

Let’s face financial reality and an inconvenient truth. Whether on Main Street, Wall Street or Pennsylvania Avenue, Americans continue to have and have long had a spending problem. Government statistics and other studies show that Americans’ spending has generally risen in the years since the 2008 – 2009 Great Recession. This trend is reflected in Americans’ general pattern of consumer spending and reflected in the rising levels of consumer, corporate and public debt which has topped a whopping $75.3 trillion in 2019 according to the stats coming out of the Federal Reserve.

Moreover, Gallup found in an April 2018 poll that people “…want see themselves as fiscally responsible, to some degree.” Even Americans who admit that they are spending more than they earn over the past several months are more likely to claim this is only temporary, rather than their normal. Those who say they are spending less believe it is permanent, despite what the numbers reveal.

And Americans’ have a predilection to say that they enjoy saving more than spending, which rose dramatically between the period before and the period just after the recession, has remained in place, even as the economy has improved.

Positive Cash Flow

Asked about their spending habits, Gallup results show that Americans are as likely to say they are spending the same amount as they used to (35%) as to say they are spending less (35%). Slightly fewer, 30%, report spending more. The takeaway is that Americans’ conspicuous spending habits will not change unless they first acknowledge it as a problem.

On the other hand, most wealthy people understand and stress the importance of spending much less than their means. Spending less gives them financial freedom which then translates into various opportunities such as career mobility, flexibility to venture into activities outside of work, and of course the ability to increase their wealth.

On the other hand, if Americans are spending more than what they earn, then even with a big six-figure income, they will be excessively reliant on each of their paycheck. It is very important that they are financially independent before the time comes when they decide to become self-employed or to retire. So it’s important to start saving, investing and accumulating wealth.

Simply spending less than we earn, eliminating bad debt, managing taxes and fees, paying ourselves first, starting to save early, automatically saving and investing for the long-term, and developing smart financial habits and positive financial mindset will result in huge results over a long period of time.

References:

  1. https://www.federalreserve.gov/releases/z1/20190307/z1.pdf
  2. https://usdebtclock.org
  3. https://news.gallup.com/poll/209432/americans-say-saving-spending.aspx
  4. https://www.bea.gov/news/glance