How to Invest in a Taxable Account

January 04, 2024

Investing in your retirement account can be quite different from investing in a taxable account. Here are some options to consider when investing in a taxable account:

Use it for short term goals. One of the advantages of a taxable account is that you don’t need to worry about any tax penalties on withdrawals. For that reason, it probably makes the most sense to use a taxable account for goals other than retirement and education like an emergency fund, a vacation, or a down payment on a car or home. In that case, you don’t want to take risk so cash is king. To maximize the interest you earn, you can search for high-yielding rewards checking accounts, online savings accounts, and CDs on sites like Deposit Accounts and Bankrate.

Keep it simple for retirement. Just like in a 401(k) or IRA, you can simplify your retirement investing as much as possible with a target date fund that’s fully diversified and automatically becomes more conservative as you get closer to the target retirement date. There are a couple of differences in a taxable account though. The bad news is that you’ll be paying taxes on it each year so you want a fund that doesn’t trade as often. The good news is that you’re not limited to the options in an employer’s plan so you can choose target date funds with low turnover (how often the fund trades and hence generates taxes) like ones composed of passive index funds.

Invest more conservatively for early retirement. If you plan to retire early, a taxable account can be used for income until you’re no longer subject to penalties in your other retirement accounts or to generate less taxable income so you can qualify for bigger subsidies if you plan to purchase health insurance through the Affordable Care Act before qualifying for Medicare at age 65. In either case, you’ll want to invest more conservatively than with your other investments since this money will be used first and possibly depleted over a relatively short period of time. Consider a conservative balanced fund or make your own conservative mix using US savings bonds (which are tax-deferred and don’t fluctuate in value like other bonds do) or tax-free municipal bonds instead of taxable bonds if you’re in a high tax bracket.

Make your overall retirement portfolio more tax-efficient. You can also use a taxable account to complement your other retirement accounts by holding those investments that are most tax-efficient, meaning they lose the least percentage of earnings to taxes. Your best bets here are stocks and stock funds since the gains are taxed at a capital gains rate that’s lower than your ordinary income tax rate as long as you hold them for more than a year. In addition, the volatility of stocks can also be your friend since you can use losses to offset other taxes (as long as you don’t repurchase the same or an identical investment 30 days before or after you sell it). When you pass away, there’s also no tax on the stocks’ gain over your lifetime when your heirs sell them.

In particular, consider individual stocks (which give you the most control over taxes) and stock funds with low turnover like index funds and tax-managed funds. Foreign stocks and funds in taxable accounts are also eligible for a foreign tax credit for any taxes paid to foreign governments. That’s not available when they’re in tax-sheltered accounts so you may want to prioritize them in taxable accounts over US stocks.

For retirement, you’ll probably want to max out any tax-advantaged accounts you’re eligible for first. But if you’re fortunate enough to still have extra savings, there are ways to make the best use of a taxable account. Like all financial decisions, it all depends on your individual situation and goals.

Financial Rules of Thumb: The 50-30-20 Rule

September 20, 2023

One way to measure whether or not a particular expense or goal fits into your spending plan is to measure it against your existing financial goals and commitments. A popular way to look at this is called “The 50-30-20 Rule.”

The 50-30-20 Rule

The rule basically says that one way to achieve financial security is to limit your fixed expenses (or needs) to 50% of your after-tax income, your discretionary expenses to 30%, and setting aside 20% toward your goals. Let’s break that down by type so you can see what we mean.

50% to “needs.”

Examples of things that fit in this category include:

  • Housing
  • Transportation
  • Food
  • Clothing
  • Utilities
  • Healthcare

One part of this rule that’s often debated is how much of these categories are true needs versus wants (or discretionary spending). Let’s take the purchase of a vehicle as an example. How much you spend on a vehicle can vary widely. For many people, having a vehicle is a need. They need it to get to work and earn money to pay bills. On the other hand, plenty of people live in big cities who get by just fine without this “need!” Likewise, we all need food to live and clothing to avoid being arrested in public. However, spending on these two categories very easily bleeds over to wants.

Making trade-offs

So you have to be honest with yourself about whether the things you’re putting in this category are absolutely vital to your life or if part of the expense could be classified as a want. Maybe another way to think of it is as a trade-off — it’s fine to spend more on housing if having a more expensive place is important to you; it just means you’ll need to spend less on a car to make it balance.

30% to “wants.”

Examples here include:

  • Entertainment, including cable
  • Dining out
  • Gym membership
  • Hobbies
  • Personal care beyond the basics
  • Cell phone beyond the basic plan

As you can see, the rules can be tricky, so you have to be honest with yourself. Most of us need regular haircuts to maintain a decent appearance. However, spending on a pricey salon cut goes above and beyond, so it belongs in this category.

20% to goals

This category obviously includes savings (including what you put into your retirement account at work) and includes debt payments. So if you’re paying $250 per month on a student loan, that counts toward your 20%.

Tying it all together

Remember, this rule is meant to be a guideline, particularly when you’re just getting started and have no idea what you should be spending on things like rent or a car payment. But it can also offer insights into areas where you may need to cut back. For example, if you run your own numbers and find that your needs far exceed 50%, it may be time to think bigger picture about making some changes – do you need to sell your car for a cheaper payment? Think about moving to lower housing or transportation expenses?

This rule can help show you whether or not you can afford to add a new want into your life. If your wants are way beyond 30%, that definitely means that you can’t afford to add a payment for something like a boutique fitness membership, cleaning service, or upgraded cable package to your life at this point.

Taxes, Moving States, and RSUs Granted in The Golden State

May 22, 2023

Many people have moved since the start of COVID and now work remotely, but how does a move like that impact the taxes you pay, and how do taxes work on RSUs that were granted when you lived in California?

Employer Located in Another State – How do my state income taxes work when my employer is located elsewhere?

Generally – the “source” of income from services compensated by W-2 wages is the location where the services are performed, not the location of the employer. For example, I work in Oregon, my company is in California, and I pay Oregon state tax. My job is 100% remote, and I am not choosing to work remotely because taxes are cheaper in Oregon (even though they are).

Convenience Rule – What is the Convenience Rule?

Some states have a “convenience rule” for taxes, in which the employer’s state allows them to collect taxes on income earned from individuals working remotely elsewhere. For example, one may work in Florida remotely as a convenience because there are no state taxes there. Fortunately for me, California is not one of those states using the “Convenience of the Employer” rule [“COE”] (at least not yet). If you do work for an employer using the COE, like in New York, you’ll withhold and file taxes for both states. Currently, you are not double taxed as most states allow a credit for taxes paid to other states on the same income, but this may change in the future.

RSU and California Sourced Income – I was granted RSUs when I lived in California, but I’ve since moved to another state. How will taxes work? 

RSUs present a unique situation. California has an RSU grant “clawback tax” if you choose to move to a different state. This is because California considers unvested grants California-sourced income. As the RSUs vest, you may need to file a non-resident tax return for years after you move because of the RSUs that were granted while you were living in the Golden State.

Typically, California taxes all California-sourced income, and most other states tax income earned as a resident. When I moved to Oregon, I had both California and Oregon withholding from each paycheck. California and Oregon tax your RSU income, and I sought out a credit on my tax return for automatic overpayment from the payroll withholding. California can still tax anything that Oregon has already taxed, but California is only going to receive tax dollars that exceed the credit for the Oregon taxes (if the California tax rate is higher than Oregon’s (which it probably is). 

Resident vs. Domicile – How do my state taxes work if I moved during the year?

When you move to a new state, consider working with a tax professional to figure out your specific situation because it involves both residency and domicile. A good tax expert is worth the expense. Sometimes you can be a resident of both states, but you can only be domiciled in one. Check out this article on How State Income Taxes Work When You Live Or Work In Multiple States.

If you are interested in learning more about financial planning, including investing, consider consulting with a qualified and unbiased financial professional to discuss your options.

Will I Have to Pay Taxes on my Online Payments?

May 01, 2023

The use of third-party online payment platforms to easily transfer cash from one person to another is now universal. After all, a quick Cash App or Venmo transfer is easier than splitting the check at the restaurant. According to Pew research, 76% of those surveyed have used at least one of the four most popular third-party platforms to make a digital payment.

You could almost hear the sighs of relief when the IRS announced a delay in implementing the $600 reporting threshold for third-party payment platforms like Paypal, Venmo, and Cash App. News and social media feeds reflected the fear that implementation would create additional tax forms. Not to mention it could unintentionally cause personal transactions to count as business transactions. According to the December 23rd press release:

“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”

Properly track these transactions in 2023

If you use these apps for personal transactions, check the instructions to ensure your doing it properly. If the app offers the ability to track your personal transactions as personal, it’s a good idea to do so. Looking at my 2022 transactions, I exceeded $600 on several apps. By tracking these properly as personal, I should have avoided receiving the form if there was no delay. This would have saved me time and money on my tax prep.

If you have a business and use these apps, you will want to report your business income as such. Managing business and personal income may become confusing. However, you could simplify by limiting personal transfers to one app and keeping your business transactions limited to another. This could keep you from an IRS dispute on whether something is taxable income if the app mistakenly reports it.

At the time of this blog post, some programs are not obligated to generate a 1099-K. For instance, Zelle® states this on its site. Zelle® states if you receive taxable payments, reporting it is your obligation even if you do not receive a 1099-K.

This delay does not remove your obligation to report income

This delay in changing the 1099-K threshold does not mean you are not obligated to report taxable income. If you’re selling goods or offering paid services, you don’t want to find yourself in a situation where you can be accused of tax evasion for not properly reporting this income. The consequences of such a charge can be very serious.

If you are unsure what constitutes income, check out this resource from the IRS: What is Taxable and Nontaxable Income? If you have a side hustle or business, it is worth it to consult with a tax preparer to ensure your business has the proper form and you are keeping track of both the income and expenses of the business. Doing so throughout the year can save you a lot of stress come tax time.

While there is no reason to worry about losing the convenience of these electronic cash transfers, take a second look to be sure you are using the right settings to track your personal and business transactions properly. As you know, in today’s environment, you can easily go over $600. You don’t want that to result in a nasty surprise from the IRS.

How FDIC Insurance Keeps Your Bank Deposits Safe 

March 16, 2023

FDIC or NCUA coverage is available when you have money that you need soon or want to keep safe at your bank or credit union. But how do you know that your money is really safe?   

FDIC & NCUA Insurance

Every person with accounts at any bank in the United States has their first $250,000 of deposits federally insured by the Federal Deposit Insurance Corporation (FDIC) if a bank and the National Credit Union Administration (NCUA) if a credit union. It can be even more than that, as different types of accounts for the same depositor get the $250,000 of coverage. So if you have accounts just in your name or where you are the sole beneficiary, those combine for up to $250,000 of FDIC insurance. You can also have joint accounts with a spouse, partner, or family member, and those accounts give you additional protection of up to $250,000 for your portion of those accounts. IRA accounts are also a separate category and have their own $250,000 worth of protection.

The easiest way to determine how much protection you have for your accounts at any given bank is to use the FDIC calculator or NCUA calculator for credit unions.

Over the Limit?

If you do find that you have more in one bank than the FDIC will insure, a best practice is to open additional accounts at another bank(s) as you get full coverage at each bank you have deposited at. Also, certain financial institutions offer FDIC insurance on cash reserve accounts up to a million. These institutions deposit cash reserves, up to $250,000 each, to up to 4 FDIC-insured program banks reducing the need for multiple accounts at multiple institutions. Check with your broker to see if your cash reserve is FDIC insured. Money market funds are not FDIC insured; money market accounts are insured.

Treasury Bills

Another alternative if you exceed FDIC or NCUA limits is to invest in federal Treasury bills (T-bill). Most people do this indirectly by purchasing a federal money market fund. Money market funds are not FDIC insured, but they may offer more protection than having excess, uninsured money in the bank in the extremely rare event of a bank failure. If you have $100,000 or more above your FDIC protection, you can also work with a financial advisor to purchase a portfolio of short-term Treasury bills. You can even do it yourself for less money – though it will take more time – by opening an account with Treasury Direct. Treasury bills are federally guaranteed as long as you hold them to maturity.

Still Nervous?

You may have specific concerns that are causing extra stress in your life. Your employer may offer a Financial Wellness benefit connecting you with a financial coach where you are able to discuss and work through your specific situation. Contact your employment benefits center today.

Financially Preparing for a Recession

March 01, 2023

Recession and inflationary times offer opportunities, and those who prepare can take advantage of them. These opportunities can include higher interest rates on savings accounts and lower prices for market index funds. 

This guide will help you prepare both for an economic recession and show you how to combat inflation with your retirement savings plan. 

Cash Is King: Top Off Your Emergency Fund 

Your emergency fund can give you peace of mind in tough economic times and recession. Ideally, your emergency fund should have the following characteristics: 

Liquidity: How easily can you access your money? 

Strong Interest Rate: Does this savings vehicle offer competitive returns? 

Sufficient Size: Do you have enough money saved to weather difficult situations? 

FDIC Coverage: Does the FDIC insure your deposit? 

Some people may also use other types of assets in their emergency funds, such as money market accounts and CDs. 

A high-yield savings account (HYSA) with a reputable bank can provide easy access to your money in an emergency while maintaining a strong interest rate. 

Clean Up Your Credit Profile 

In an emergency, having access to affordable credit can be the difference between a difficult situation and a dire financial problem. 

The three major credit bureaus, Equifax, Experian, and TransUnion, operate the website AnnualCreditReport.com. This website can help you check your credit history for free. 

Other free credit monitoring tools exist. These tools can also provide you with an estimated credit score. 

Increase Your Retirement Savings Rate 

Inflation erodes the purchasing power of your dollars. If your salary does not increase proportionately to the reported inflation rate, increasing your savings rate can help to defray the effects of inflation on your portfolio. 

You may also consider investing in asset classes with higher returns, such as equities if your investment timeline permits riskier assets. 

Employ Dollar-Cost Averaging 

Rather than investing large sums of money at one point during the year, you can use a “dollar cost averaging” (DCA) strategy. 

DCA requires you to make fixed purchases of your chosen retirement asset periodically. In other words, you might choose to invest $500 per month. 

You make this investment regardless of market conditions. This allows you to avoid the fluctuations in price associated with your particular asset class. 

This approach can help you stay the course during turbulent economic times and avoid making hasty investment decisions. 

Take Advantage of Your Company’s Retirement Benefits 

Your company may offer retirement benefits as part of your compensation package. Make sure you take advantage of these options if available: 

401(k) Match: Your company may offer matching contributions to your 401(k) plan. 

HSA Contributions: If you qualify for a health savings account (HSA), then contributing to it can function as a backdoor way to save more for retirement. 

Cash Bonuses and Equity Grants: If you receive an end-of-year cash bonus or periodic equity grants, consider using these income sources to secure your financial situation before a recession. 

Strong Passwords: Tips To Keep Your Data Secure

January 27, 2023

According to the FTC, in 2021, reported fraud losses increased by 70% over the previous year to more than $5.8 billion. The internet can be dangerous for sensitive data without strong passwords, and it doesn’t look like it will get any safer soon.

With the constant threat of fraud, scams, and cyberattacks, it’s up to you to protect your personal and financial information. One of the most effective ways to do this is by setting solid passwords. Here are some tips to help create passwords to keep your accounts more secure.

Avoid Personal Information

When creating a strong password, it’s important to avoid using personal information such as your name, birth date, or family name. This information can be easily found on social media and other online platforms, giving scammers what they need to guess your password. A more secure option would be to use a random combination of letters, numbers, and special characters.

Complexity is Key

A strong password should be complex and challenging to guess. Avoid common keyboard combinations or dictionary words, as password-hacking software can easily crack these. Instead, use a mix of various characters to create a unique and secure password.

Make it Long

Longer passwords are more secure than shorter ones. Aim for a minimum of 12 characters, and consider using a passphrase because it will allow you to remember a long string of digits.

Using Passphrases Instead of Passwords

A passphrase is a sequence of words or other text. They are an alternative to traditional passwords and offer several advantages over them. One is that they can be easier to remember than random strings of characters, making them less likely to be written down. Also, because they can be more easily recalled, you can make them more secure by making them longer.

Avoid Reuse

Reusing the same password for multiple accounts can be convenient, which is why it happens so often, but it is one of the biggest mistakes you can make. If a hacker gains access to one of your accounts, they will have access to all of them if you follow this practice. To avoid this, make the password for each of your accounts unique.

Use a Password Manager

One challenge of having a unique password for every account is remembering them all. A password manager can help you keep track of your passwords. These software programs can create strong passwords for your accounts, encrypt each credential, and store them for you. Most password managers offer apps for the most popular operating systems, browsers, and mobile phones, making it easy to keep your passwords secure wherever you need them. With a password manager, you only have to remember one password, which will take care of the rest.

With cyberattacks on the rise, your password could be the only thing keeping a hacker from accessing your sensitive information. So make sure it is secure and unique by using the tips above.

Race and Financial Stress Special Report

October 25, 2022

Executive Summary:

The racial wealth gap in America has garnered much attention as part of the fight against social injustice. It is highly encouraging to see many of our partners that have not only publicly pledged their support in this fight, but are actively searching for ways to make tangible headway within their organization. Many are leaning on their financial wellness benefits to do just that, as they understand that improving the financial wellness of their most vulnerable employees will, over time, drive results in this quest for financial equity amongst the races.

In this special report, we’ll explore:

  • The current racial disparities in financial wellness
  • What role income plays in these disparities
  • How financial wellness is successfully driving improvements to narrow the gap
  • Ideas on how to improve financial wellness disparities within your organization

To read the full Report, download now.

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2021 Financial Wellness Year in Review: A Q&A with Financial Finesse founder and CEO, Liz Davidson

June 20, 2022

Abstract:

This Q&A is designed to provide quotable commentary on Financial Finesse’s 2021 Financial Wellness Year in Review.

To read the full interview, download now.

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2021 Financial Wellness Year in Review

June 20, 2022

Abstract:

Workplace stress has risen steadily for over a decade, and with the help of a global pandemic has reached a tipping point in 2021. Workers are increasingly expecting more support from their employers, and they are willing to change jobs to get it. To compete for talent, employers must shift their approach to benefit design and corporate culture to accommodate the new workforce. This report examines the divergence in financial wellness priorities that is signaling a shift in the employer-employee relationship and offers guidance for how employers can handle this workplace revolution.

To read the full Report, download now.

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Money Management Strategies during Inflationary Times

February 22, 2022

The inflation reading from January 2021 – January 2022 was a whopping 7.5%.  As a result, inflation worries are now a leading cause of financial anxiety for many households. Everything from groceries, gas, furniture, and used cars has spiked in cost.  However, there are strategies you can implement right now to lessen the financial bite straining your day-to-day finances. 

Here are some tips to help you alleviate the cash flow crunch you might be experiencing during these inflationary times. 

Household Expense Strategies 

Ease the budget pinch on the goods you buy by seeking lower-cost alternatives. Often time generic brands carry the same or very similar ingredients and quality than brand names. Be discerning about the value you are getting for the price of any product. You can find a great list of ideas, here. 

Use an expense worksheet to organize your expenses. Or, if you are more of a technophile, MINT, YNAB, and PocketGuard are good places to start. Then one by one, seek out an alternative, comparison shop, or take an opportunity to eliminate something you don’t need. You can use some of these examples to get you started. 

Put subscriptions in check. Run a check on your subscriptions to eliminate the ones you rarely use. Apps like Truebill, AskTrim, Pocketguard(Also a budget app), and MINT (Comprehensive budgeting app) are popular amongst subscription trackers. You can check out a list with reviews, here.  

Implement these 3 meal hacks: 
  1. Cooking 2-3 vegetarian meals per week. This can save you over $60 a month and can yield amazing health benefits.  
  1. Consider buying cheaper cuts of meat – they can provide great quality and often better flavor! There is very little a slow cooker or multicooker can’t do! We recently switched to making more boneless skinless chicken thighs versus breasts for the savings and for the flavor. If you are buying non-organic that’s a $3.72 vs ~$2.40 per lb. cost difference, similar savings for organic as well. That can save you over ~$50 bucks or more per month depending on how much you buy. 
  1. Minimize food waste. The average American household of 4 wastes over $151 of food per month! Meal planning can go a long way, as well as freezing and/or properly storing food. Finding alternate uses for fruit and veggies that are near expiration dates helps as well. Here are some more actionable ideas to help reduce food waste and save! 

Hold off on larger purchases that are being impacted by supply chain issues. Things like new cars, kitchen, living room, and dining room furniture have inflated in price. Wait for these to level out and keep an eye out for discounts as supply bottlenecks start to ease! 

Financial Expense Strategies 

Adjust debt repayments: If you are making larger than minimum payments, consider temporarily reducing these. If you are already there and need more help, consider reaching out to lenders to adjust minimum payments or to explore deferment options. This can give you some breathing room while you work on the other areas of your expenses to help address shortfalls and get back into a positive cash flow. Here are some tips to guide you there. 

Reduce 401k contributions: If you’ve tried strategies to improve your cash flow and still find yourself struggling to make ends meet – consider temporarily pausing your 401k contributions – try setting a reminder in your calendar for a time to revisit the decision possibly 6 months down the line. Keep in mind that taking this action can negatively impact your retirement planning goals. You can run a retirement estimate like this one to help determine the potential longer-term impact. 

Adjust withholdings: If you are accustomed to receiving a tax refund – it would work to your advantage to reduce withholdings and receive more in your paycheck to address any cashflow crunch issues, plus you aren’t giving the IRS a free loan on your money. Here is a W-4 form guide you might helpful.  

Increase deductibles on your insurance policies and comparison shop: Explore increasing the deductibles on your insurance policies like auto, homeowners, renters, etc. Taking on extra financial risk via a higher deductible will turn into immediately lower premiums. Just make sure you have enough in savings to cover the higher deductible if something does happen. While you are at it – comparison shop to see if you can get even lower premiums from your current insurance company or get them to match lower offers – and explore bundling insurances with the same provider to get steeper discounts!  

Longer-Term Inflation Resilience 

Take meaningful action and invest in yourself and your career. Warrant Buffet has stated that your own career can be the best way to protect against rising prices. It’s not only about what you earn now, but what you can earn in the future. Consider taking free courses or low-cost online courses. You can also work with a mentor to bump up your skill set or learn a new high value skill set. I discussed how this can be the most profitable investment you can make further, here.  

Putting all together 

Inflation won’t last forever, but it can stick around long enough to cause stress that can impact our short- and long-term decisions. Use these tips to help alleviate any immediate financial stress and set you up for the future. If you are having trouble controlling your impulses, or need someone to talk through how to prioritize and apply these tips to your situation, please reach out to a qualified financial planning professional or a financial coach through your employer’s financial wellness program for help! 

Choosing A Top 2% Financial Planner

February 10, 2022

Are you looking for a financial planner to help you sort out all the volatility in the stock market? Not to mention the constant discussion of potential tax law changes? Don’t worry. This is not a sales pitch.

In fact, as workplace financial educators, we often get asked if we provide financial planning and coaching directly for individuals. Unfortunately, we have to turn them down since we only work with employees through financial wellness benefits their employer provides. Financial Finesse strives to have the most impressive team of financial planners that anyone would recommend to a friend or family member.

So how did we find them? The answer is a rigorous series of interviews and auditions from which only the top 2% are hired. While you can’t duplicate the process exactly, there are many aspects that can be applied to your search.

Follow the money

Before we even begin looking at resumes, we make it very clear that we are not hiring commissioned salespeople. In fact, our planners have to give up any sales licenses upon being hired. After all, even the most honest planners can talk themselves into believing something that their paycheck is dependent upon.

To avoid these types of biases, look for planners that don’t sell financial products. Look for planners that charge a fee. However, be aware that “fee-based” planners usually charge a fee and collect a commission. Instead, you want a “fee-only” planner that doesn’t accept commissions at all.

One resource is the National Association of Personal Financial Advisors or NAPFA, which is an organization of fee-only financial advisors. Many of them charge fees based on a percentage of the assets they manage. They also typically require a minimum level of assets to work with them. However, some charge fixed annual, monthly, or hourly fees instead. I find this to be the most unbiased approach and usually the most cost-effective as well.

Know your ABCs and CFPs

You wouldn’t go to a doctor without an MD or a lawyer without a law degree, would you? Doctors and lawyers are legally required to have certain designations in order to practice, but not so for financial planners. They must simply pass two tests. One on securities law to sell or provide advice on investments and another on insurance law to sell insurance.

To fill the gap, an alphabet soup of designations has arisen that planners can purchase with the hope of buying some credibility. It’s essentially just another form of marketing. This has led to a lot of confusion for people looking for expertise.

While there are many respected financial planning credentials, all of our planners are required to have the CFP® mark. The CFP® mark has long been the most widely recognized designation in the profession. To become CFP® certified, a financial planner must attain a certain level of financial education, pass a comprehensive financial planning exam, have at least three years of full-time experience, and undergo a background check. To stay in good standing, planners must continue taking continuing education courses and maintain high ethical standards. While no screening process is perfect, it can weed out a lot of people you don’t want handling your money. Other worthy designations include the ChFC and PFS (which is only available to a CPA, which is another trustworthy credential).

Experience matters

While you must have three years of experience to gain a CFP® certification, Financial Finesse requires at least ten years. Research has shown that it takes about 10,000 hours of deliberate practice to master a skill, including financial planning. This is especially important in the financial industry. Many financial planners enter the profession with no financial background then set loose after little more than sales training.

For example, I started my financial career right out of college largely based on having done well selling cutlery. Needless to say, I’m a much better planner now than I was then. I wasn’t the only one without any real financial experience though. Most of my colleagues were in the same boat, and many decided to switch careers within the first few years, forcing their clients to find a new planner.

Ten years also usually gives financial planners exposure to a full market cycle. That’s important because there many hard-learned lessons at each stage of the cycle. It’s probably best if a planner isn’t learning those lessons with your life savings.

Personality matters too

Once we screen resumes for credentials and experience, we conduct a series of interviews and auditions. These interviews test the candidate’s financial knowledge, ability to provide education and guidance, and whether they’re a good cultural fit. Likewise, once you’ve narrowed your search, interview at least three to determine the one most personally compatible with you. Are they easy to talk with? Do they seem to listen and really understand you? Do they come across as trustworthy?

Trust but verify

Before we hire anyone, we check their references and credit report. Ask your prospective planner if they have any clients similar to you that you can call for a reference. Almost anyone can find someone to provide a good reference so you’ll want to do your own research too. You can find information on the Investment Advisor Public Disclosure website if the planner is an investment broker or advisor.

It may seem like a lot to do, but choosing a financial planner is a big decision. This can be a lifelong relationship with someone that can help you achieve some of your most important goals. Don’t you want them to be in the top 2%?

Expense The Unexpected: The Emergency Fund

September 28, 2021

Finances are different for everyone, and so are the life events we all go through. An emergency fund is your financial line of defense against life’s lemons. Although there are many financial rules of thumb, there is no “normal” way to handle your emergency fund. However, there are some answers to common questions to help you financially prepare for unexpected expenses.

What is the reason for my emergency fund?

The emergency fund is your safety net to avoid getting into a difficult financial situation due to loss of income and significant, unexpected, one-time expenses. Having one in place can reduce stress, anxiety, and other emotions that could make handling the non-financial aspects of an emergency much more difficult.

It may seem a little obvious that an emergency fund is for emergencies. However, one of the challenging aspects of an emergency fund is knowing what expenses qualify as an emergency. This fund’s sole purpose is to prepare you for costs that you cannot or would not typically plan out. For example, oil changes and new tires are vehicle expenses you know you will have at some point. However, you wouldn’t typically plan for vehicle costs that could vary widely depending on the situation. Examples of this are towing costs, medical care, and insurance deductibles you might pay in a car accident, something you would not plan to happen.

How much do I need?

How much would a new furnace cost? If you could not work, how much would you need to cover essential expenses until you could? Asking yourself these kinds of questions will help you set a goal amount for your emergency fund. The Expense Tracker can help you add those expenses up, or you can use your online banking to crunch the numbers. That exercise can also help you figure out how much you can afford to save each month as you work up to your goal amount.

The general rule of thumb is three to six months of your expenses. However, you can always start with a goal you find achievable. Say, for example, $1,000. Once you reach that goal, aim for three months of rent, then three months of the following essential expense, and so on.

How do I save that much?

Start small – If you have not started your fund, consider putting $25 from every paycheck into a savings account. You can use the Daily Savings Calculator to see the impact that even a few dollars will make in the long run. Then, check your budget or spending plan to see how much you can save after you’ve paid essential expenses and before budgeting for discretionary spending.

Keep it separate, saver – Open a separate savings account to help you resist the temptation to dip into it. Remember, this account is for emergencies, so keep it away from your daily spending accounts and separate it from vacation and holiday savings. This method will help you stay organized, visualize your progress, and provide you peace of mind.

Automate your savings: Set up a direct deposit or automatic monthly transfer to your separate savings account. Your employer may be able to take money directly out of your check and deposit it for you. Otherwise, set up an automatic transfer from checking to savings on payday. This method will help you avoid adding a manual transfer to your list of to-do’s that you may end up not getting around to doing.

Will I ever need to change the amount?

As your life changes, the amount you need in your emergency fund will change as well. It’s a good idea to revisit your emergency fund plan every six months or any time you experience a life event that impacts your income. Marriage, starting or adding to your family, buying a home, and divorce are just a few examples of when you may need to increase your emergency fund. A good savings plan can roll with the punches right alongside you!

How do I prioritize emergency savings against debt and other goals?

Deciding whether you should pay down debt, increase cash savings, or invest is all about the big picture. Since everyone has different financials, that picture will not be the same for everyone. What is going to impact you the most financially? Paying down debt and saving money long term or having a plan B that allows you to keep making minimum payments if you lose income? There is no right or wrong answer. Perhaps a good compromise is to have one month’s worth of minimum credit card and loan payments before you start to pay down debt or invest aggressively. You will have peace of mind knowing that you won’t fall further into debt or face collection action, and you will have started your path to being debt-free!

Your emergency fund is there to help you expense the unexpected. So make a plan and use the above suggestions to be ready for whatever comes your way!

What Is An HSA And Why Should I Participate?

September 10, 2021

An HSA is a type of tax-deferred account designed to help you save for your health care costs for current and future years. An HSA essentially works like an IRA for medical expenses. However, it differs from a Flexible Spending Account (FSA) in that money not spent in a calendar year can remain in the account to be used in future years – or retirement.

HSAs are only available to you if you have coverage through a qualifying high-deductible major medical health plan, referred to as an HDHP. If you can participate in an HSA, you should know these facts:

  • You can fund HSAs with pre-tax income up to $3,600 for an individual and $7,200 for a family in 2021. There is an additional catch-up contribution of $1,000 for those ages 55 and older. You can withdraw the money tax-free for medical care as well as prescription drugs.
  • You can also make contributions directly to an HSA via deposit for the prior tax year until the tax filing deadline (generally April 15th).
  • The minimum HDHP deductible for 2021 is $1,400 for an individual and $2,800 for family coverage. You may not contribute to an HSA if a low deductible insurance policy covers you.
  • The amount of your HSA contribution directly reduces your taxable income. This is done so that you will pay tax on less income overall.
  • Any money not spent in the year contributed grows tax-deferred in the investment account you choose from those available under your plan.
  • If withdrawn for non-medical purposes before age 65, the money will be taxed as ordinary income and will incur a 20% penalty as well. However, once you turn 65, you may withdraw the funds for any non-medical purpose without this penalty.
  • If you change employers, you can transfer HSA accounts, similar to a rollover from one 401(k) to another.

ACTION ITEMS:

1. Consider participating in an HSA if you want to choose your doctor and control your medical costs.

2. Be aware that an HSA with a high-deductible health plan may not be the best option for those who have ongoing medical conditions and treatments.

3. If you plan to defer much of your HSA balance until retirement, make sure to invest for the long term among the investment options available to you.

Why You Should Max Out Your HSA Before Your 401(k)

September 10, 2021

Considering that most employers are offering a high-deductible HSA-eligible health insurance plan these days, chances are that you’ve at least heard of health saving accounts (“HSAs”) even if you’re not already enrolled in one. People who are used to more robust coverage under HMO or PPO plans may be hesitant to sign up for insurance that puts the first couple thousand dollars or more of health care expenses on them, but as the plans gain in popularity in the benefits world, more and more people are realizing the benefit of selecting an HSA plan over a PPO or other higher premium, lower deductible options.

For people with very low health costs, HSAs are almost a no-brainer, especially in situations where their employer contributes to their account to help offset the deductible (like mine does). If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B or long-term care insurance premiums.

Not just for super healthy people

But HSAs can still be a great deal even if you have higher health costs. I reached the out-of-pocket maximum in my healthcare plan last year, and yet I continue to choose the high-deductible plan solely because I want the ability to max out the HSA contribution. Higher income participants looking for any way to reduce taxable income appreciate the ability to exclude up to $7,200 per year from taxes for family coverage (plus another $1,000 if turning age 55 or older), even if they end up spending the entire amount each year. It beats the much lower FSA (flexible spending account) limit of $2,750 even if out-of-pocket costs may be higher.

Even more tax benefits than your 401(k)

Because HSA rules allow funds to carryover indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free for qualified medical expenses, I have yet to find a reason that someone wouldn’t choose to max out their HSA before funding their 401(k) or other retirement account beyond their employer’s match. Health care costs are one of the biggest uncertainties both while working and when it comes to retirement planning.

A large medical expense for people without adequate emergency savings often leads to 401(k) loans or even worse, early withdrawals, incurring additional tax and early withdrawal penalties to add to the financial woes. Directing that savings instead to an HSA helps ensure that not only are funds available when such expenses come up, but participants actually save on taxes rather than cause additional tax burdens.

Heading off future medical expenses

The same consideration goes for healthcare costs in retirement. Having tax-free funds available to pay those costs rather than requiring a taxable 401(k) or IRA distribution can make a huge difference to retirees with limited funds. Should you find yourself robustly healthy in your later years with little need for healthcare-specific savings, HSA funds are also accessible for distribution for any purpose without penalty once the owner reaches age 65. Non-qualified withdrawals are taxable, but so are withdrawals from pre-tax retirement accounts, making the HSA a fantastic alternative to saving for retirement.

Making the most of all your savings options

To summarize, when prioritizing long-term savings while enrolled in HSA-eligible healthcare plans, I would strongly suggest that the order of dollars should go as follows:

  1. Contribute enough to any workplace retirement plan to earn your maximum match.
  2. Then max out your HSA. (For 2021, the maximum annual contribution, including employer contributions, is $3,600 for single coverage and $7,200 for family coverage, plus a $1,000 catch-up contribution for HSA holders age 55 and older.)
  3. Finally, go back and fund other retirement savings like a Roth IRA (if you’re eligible) or your workplace plan.

Contributing via payroll versus lump sum deposits

Remember that HSA contributions can be made via payroll deduction if your plan is through your employer, and contributions can be changed at any time. You can also make contributions via lump sum through your HSA provider, although funds deposited that way do not save you the 7.65% FICA tax as they would when depositing via payroll.

The bottom line is that when deciding between HSA healthcare plans and other plans, there’s more to consider than just current healthcare costs. An HSA can be an important part of your long-term retirement savings and have a big impact on your lifetime income tax bill. Ignore it at your peril.

2020 Financial Wellness Year in Review

May 25, 2021

Abstract:

The state of financial wellness of the U.S. workforce improved in 2020 despite the economic challenges created by the COVID-19 pandemic. The greatest improvement occurred in the areas of cash flow, debt management, and homebuying. Employees that maintained a handle on cash flow and an emergency fund prior to 2020 fared best during the pandemic, leading many employers to add financial resiliency to their list of key focus areas in 2021. As concern for racial financial equity and equality grows, we expect to see more emphasis on diversity and inclusion (D&I) in workplace financial wellness initiatives in the coming years.

To read the full Report, download now.

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How To Become A Millionaire In Just 15 Minutes

January 21, 2021

I was recently speaking with my colleague Doug Spencer about how many people joke about winning the lottery and he asked me: “What are your odds of winning a lottery?” I know the odds are always outrageous, so I’ve never played the lottery, but I decided to look up those odds and give Mr. Spencer a smart answer. I searched the Internet and found that, according to the lottery mathematics page in Wikipedia, the odds of winning a standard lottery (picking six numbers correct numbers out of 49) are 1 in 13.98 million. It doesn’t matter how many people play. Those are just the odds of picking those numbers. By comparison, you have better odds of becoming an astronaut, giving birth to identical quadruplets, or winning a gold medal in the Olympic Games.

The point Doug wanted to make to me is that the odds of collecting a massive amount of wealth by chance are slim, and the odds of doing so on purpose, however, are actually very certain. His method is simply to add 1% to your annual savings rate every year from now until you retire. It can even be done automatically in most cases through your employer’s auto-escalation feature in a 401(k) or other retirement savings plan. This got me to thinking about those numbers more seriously, and that’s when I discovered just how true his secret is – and how I can become a millionaire in just 15 minutes with incredibly little effort.

The first five minutes of your day = 1%

The standard American work week is 40 hours or eight hours per day. It just so happens that 1% of that eight hours is 4.8 minutes. I’m going to round that off to 5 minutes here. That means that in the first five minutes of every day, I’ve earned 1% of my income, and that’s what I’m going to add to my savings.

It takes four minutes to calculate how this might work

I used an auto-escalation calculator to learn what would happen if, starting at age 25, I contributed 1% of my income to my 401(k) and used moderately aggressive funds, and increased that contribution by 1% each year until I was contributing 20% (45 years old). According to a Tower’s Watson survey of employers, the average pay raise per year is 3% for American workers, so by adding just 1% each year to my savings rate, I’m still getting the advantage of my pay increases and not missing that 1%. If my company matching contribution is 6%, and I start off making $48,000 a year, then by the time I retire at 65, I will have amassed over one-million dollars in my 401(k) account! It took me four minutes to open up and run this calculator with a few different scenarios. Your time may be quicker.

In just three minutes I can sign up

Actually signing up for an auto-escalator in most 401(k)s is a breeze. Just log in and find it as an option under contributions. In some plans, it happens automatically when you sign up for the 401(k) or when you are auto-enrolled at the beginning of employment. When I walked through the process with a participant in a plan with whom I recently spoke, the whole process took less than three minutes!

Two minutes to check your investments

While you’re accessing your 401(k), take just a couple of minutes to review your investments and re-balance to fit your investment plan, if necessary.

Take a minute to think of future you

Write yourself a quick thank you note from the future.

COVID-19 Special Report: The Impact of a New Normal

May 13, 2020

At the time of this report, America is battling the COVID-19 global pandemic. In response to social and economic pressure, many employers have adjusted the way they do business, including implementing social-distancing protocols, work-from-home arrangements, and in some cases workforce reductions. Virtually all employees, to one degree or another, are experiencing adverse effects to their financial health. These effects are often hardest felt by those that are least prepared to handle them.

Although there is a tendency to look at the workforce as a single unit, employers increasingly need to segment their workforces from a financial wellness perspective because of the disparity in financial stress and behavior that exists among coworkers. In our 2016 ROI Special Report, we introduced a method of segmenting the workforce into five levels of financial health based on employees’ financial wellness scores: Suffering, Struggling, Stabilizing, Sustaining, and Secure. This report includes more detail on each segment.

Small Business S.U.R.V.I.V.A.L. Strategies

April 29, 2020

As a small business owner, you face no small list of challenges to keeping your enterprise afloat even during “normal” times. The Covid-19 pandemic may seem like an out-of-the-blue, unforeseen event, but it likely will not be the last unpleasant surprise you encounter. The pandemic also provides an opportunity to improve the ability for your business to survive in good times or bad. Taking a bit of a twist on the U.S. Army’s “SURVIVAL” acronym used to train soldiers for successfully navigating practically any unexpected situation, here are some actions you can take to help your business survive pandemics and more:   

S – Size up your business. 

While it might be tempting to react to news headlines or copy what your competitors are doing, neither of those actions take your business into account. Instead, take some time to evaluate your specific situation before deciding what to do next to help your business survive. For example: 

  • Which critical operations must continue to generate revenue? 
  • Scrutinize how fast your business might be burning through cash reserves. What can you stop doing, permanently or temporarily, to conserve cash? 
  • Draft a three-month financial contingency plan to meet critical expense needs (e.g., rent, staffing, supplies, insurance, etc.).  
  • Update (or create) your business continuity plan. Again, coronavirus won’t be the last unexpected event to disrupt your business. Use this time to size up risks, evaluate options, and explore just how flexible your business could be if needed. Inc.com offers a helpful guide called, “How to Build a Business Continuity Plan.”  

U – Upskill your staff and yourself. 

Use this otherwise unproductive business slowdown as an opportunity to cross-train your staff so they can operate with more flexibility, particularly if some of them become ill and can’t work. Plenty of free or inexpensive online courses are  available on topics such as marketing, sales, accounting, and more to help your business become more competitive and adaptable.  

R – Reach out to your clients.

Stay connected with your customers. Although it might be difficult for them to buy from you right now, avoid falling victim to being out-of-sight-out-of-mind. Consider all the different ways you could communicate with them during the quarantine: 

  • Email to let them know how you are adapting your business to the situation. 
  • Update your website and educate your customers on how to do business with you during the emergency.   
  • Ask for ideas or send out surveys. Your customers may have some excellent thoughts on how to meet their needs right now.  

Stay active on social media: 

  • Post Instagram stories to interact and connect with your customers (show off upcoming products, discuss plans for the coming months, or just chat about how you are coping during these crazy times). 
  • Start a blog and chronicle your life or business during the pandemic; share your personal side as well. 
  • Use Facebook and other social media to help expand your customer base and expand your market outside of your geographic area.

V – Verify eligibility for federal and local assistance.  

You may be surprised to discover how much assistance is out there for small businesses. The Small Business Administration (SBA) offers a variety of coronavirus relief options, and the U.S. Chamber of Commerce offers a Coronavirus Small Business Resources Guide. Your local municipality may also have programs available to help keep your business operating.

I – Improvise.  

What could you be doing differently to generate cash, keep your staff engaged, stay connected to your customers, etc.?  What about implementing new technology or using existing technology in a different way?  For example, could you do more online? Real estate agents are now offering “virtual walkthroughs” for prospective home buyers. Similarly, shop owners are expanding their online presence and selling more online. Cafés and specialty food shops are offering online cooking courses.   

V – Value your time and effort. 

Consider how much time and effort (as well as money) you are putting into your business. This can be a difficult question to ask yourself, but is the business still worth doing in the current environment?  Consider how much money your business is reasonably able to generate – or how much it is costing you – compared with other pursuits that might earn more money or be less stressful. Whether that means freelancing, taking on a “regular” job, or working side gigs to make ends meet, you might be better off by shuttering your business for now.  You could always reevaluate and remake the business when times are better.  

A – Arrange for alternatives.  

Adapting to current business conditions means looking for alternate ways to continue doing business. If you are unable to service or sell to your usual customers, who else could benefit from your business? For example, small distilleries shifted from making booze to producing hand sanitizer. Restaurants and their suppliers have retooled to sell and deliver prepackaged meals to individual customers.  

Perhaps offering your products or services remotely is easier to do than you thought.  Creating online classes on a do-it-yourself version of your services could also be a way to make ends meet for now. Selling ahead by encouraging customers to pre-purchase gift cards is another way some businesses are generating cash to keep their doors open until the pandemic subsides. The key is to be creative and stay open-minded.

L – Learn from (or lean on) your competition.    

Finally, consider what your competitors are doing. While you might not want to blindly copy their strategies, your direct and indirect competition might also have a good idea or two that works well for you. Study those that seem to be doing okay. You might also consider temporarily partnering with other complementary or competing businesses to help you both stay afloat. For example, one business might be exceptionally good at production and another has excellent local delivery resources. Alone, they suffer, but working together keeps both going. In other instances, two different businesses may be able to combine their products as an attractive package deal for customers.  By working together, they both stay in operation and potentially expand their customer bases.  

Sources: 

Bhatti, S. (2020). How Your Small Business Can Survive The COVID-19 Pandemic.  Entrepreneur. Available at:  https://www.entrepreneur.com/article/348365 

Bos, P. (n.d.). How to Build a Business Continuity Plan. Inc.com. Available at:  https://www.inc.com/guides/2010/05/business-continuity-plan.html  

Department of the Army. (2002). FM 3-05.70 SURVIVAL. Available at:  https://fas.org/irp/doddir/army/fm3-05-70.pdf  

Inc.com (2020). Inc.’s Essential Business Survival Guide for the Covid-19 Crisis. Available at:  https://www.inc.com/business-continuity-cash-flow-coronavirus-crisis.html 

Slotkin, A. (2020). 7 Tips to Keep Your Business Afloat During COVID-19. Chief Executive. Available at:  https://chiefexecutive.net/7-tips-to-keep-your-business-afloat-during-covid-19/ 

Tennen-Zapier, D. (2020). 5 Creative Ways Small Businesses Are Succeeding During the COVID-19 Quarantine. Fast Company. Available at:  https://www.fastcompany.com/90489203/5-creative-ways-small-businesses-are-succeeding-during-the-covid-19-quarantine  

Wasserman. E. (n.d.). How to Write the Financial Section of a Business Plan. Inc.com. Available at:  https://www.inc.com/guides/business-plan-financial-section.html