How Taxes Work On Assets You Inherit

May 02, 2019

The death of a loved one is often a very emotional and stressful experience. Doubts about finances can compound that stress. One common concern is understanding what is owed in taxes on the financial assets that are left behind. Consulting with an estate planning professional is best, but here are some fundamental concepts about taxes on inherited assets that can help allay your concerns.

Income taxes take a back seat

Most of us are familiar with the concept of income taxes. It is the tax on the income we earn on our jobs, and therefore, the tax we worry about the most. In helping one client deal with the death of her mother, she expressed fear that the value of her mother’s assets would be added to her income for that year, and therefore, would increase the amount she would have to pay in income taxes.

She was relieved when I told her that estate tax rules are different from income tax rules, and therefore, she was most likely not subject to income tax in this situation. Generally speaking, this is true of most things that you inherit.

Step-up in basis

In her mother’s case, most of the money she left behind in investments was subject to the step-up in basis rule. For instance, if her mom owned a stock that she bought at $5 and it grew to be worth $100 at her death, her daughter will inherit that stock at $100, and her cost basis would now be $100. That means if her daughter sold the stock at $100, instead of paying capital gains taxes on the $95 in growth that her mom would have paid, she would pay nothing in tax. Also, any growth from that point forward would not be taxed at income tax rates but at long-term capital gains rates.  Despite recent legislative chatter about removing the step-up in basis rules, currently, no laws have changed.

Where income taxes show up

One major exception to this is assets in retirement plans like traditional 401(k)s and traditional IRAs. They are taxable at the income tax rate of the person who inherits the asset. This means if someone inherits a traditional IRA, withdrawals are taxable as income to the beneficiary who makes the withdrawal. In this case, you have multiple options on how to distribute the assets in order to control your taxation.

What about the ‘death tax?’

Federal estate taxes, sometimes called death taxes, are generally not a concern until the person who passed away has a net worth that exceeds a certain threshold. For 2022 that threshold is $12,060,000 per person. (Most spouses receive an unlimited exemption, which means no estate taxes if the money is going to your surviving husband or wife).

This federal estate and gift tax exemption excludes most Americans from having to pay Uncle Sam for money they are passing along to heirs upon their death.

Moving target

It is good to remain aware of the estate tax exclusion number because once an estate exceeds it, the tax rate is usually significantly higher than regular income tax rates. The exclusion is pretty high now, but it’s something that Congress likes to mess around with occasionally. As recently as 2001, the threshold was $675,000, and it affected a much larger percentage of Americans. When tax bills are passed, that number tends to move up or down depending on the political climate.

Not just federal

While the clear majority will avoid federal estate taxes, there could still be estate or inheritance taxes at the state level. Many states still have estate taxes, and the exemption levels may or may not be tied to the federal exemption.

That means that while the federal exemption is a little over $12 million, your state exemption may be much less. In addition, some states impose an inheritance tax, which heirs would have to pay. Like the federal estate tax, state transfer taxes are a moving target with several states rescinding their estate taxes in recent years to become more tax-friendly to retirees.

Talk to an expert

If you are dealing with the death of a loved one and you’re not sure about all of this, consulting with an accountant or estate planning attorney can be very valuable. If you are unsure where to find a professional, contact your employer’s financial wellness benefit or EAP, and they can often help you find the right person to advise you.

How Dollar-Cost Averaging Takes The Guesswork Out Of Investing

April 24, 2019

As you might guess, one of the most common investment questions we receive on the Financial Coaching Line is about when to buy and when to sell investments in order to maximize returns. My most common answer to that question is that if I knew precisely how to buy securities at the perfect price, I would be answering that question from my private island.

In all seriousness, the up and down nature of investing often causes investors to hit pause on executing their long-term investment plans, which can cause serious harm to their long-term results. If you are looking to buy and hold for the long run, there is a method of purchasing shares that can help you ride out the ups and downs of the market and potentially improve your returns over time. It’s called dollar-cost averaging.

Dollar-cost averaging is easy to implement

The beauty of dollar-cost averaging is its simplicity. All you do is invest the same amount of money in your desired investment on a consistent basis over time (say, every two weeks or each month, aka when you get paid). When the share price is high, the number of shares you will get for your investment dollars will be lower; when the share price goes down, you’ll get more shares for your money.

If you can resist the urge to adjust your investment amount and keep it constant each period, you’ll reap the rewards of your patience. Eventually, the greater number of shares you pick up when the share price is down will reduce the overall average share price on your investments and increase your average per-share return.

You might already be using dollar-cost averaging – if you participate in your employer’s 401(k)  or other retirement plan, the same amount of money is deducted from each paycheck and then invested per your selections. You are using dollar-cost averaging.

Dollar-cost averaging works

Because the stock market goes through many ups and downs over time, the odds of you being able to predict or pinpoint the lows with any consistency are extremely slim, making it unlikely that waiting and then investing all your money at once would pay off over the long term. But those fluctuations create the perfect conditions for dollar-cost averaging to work its magic.

Let’s say you’ve set up a program of investing $100 a month in a mutual fund. The fund share price generally hovers around $10, so you typically get about 10 shares for your monthly investment. But one month the market experiences a downturn and the share price drops to $5. Your $100 investment buys you 20 shares. You now own more shares that will be worth more when the market returns to its usual level.

In this example, dollar-cost averaging results in a 33% return for our investor. Not bad for someone who simply set up an investment plan and stuck to it.

An example of dollar-cost averaging leading to higher returns


Investment Amount
Shares Purchased
Share Price

Month 1 		$10010$10

Month 2		$10020$5

Month 3		$10010$10
Total$30040

Average Share cost:  $300 / 40 = $7.50

Current market price:  $10

Total Return:  33%

Note: This is a hypothetical example and is not representative of any specific situation. Your results will vary.

Dollar-cost averaging is not for everybody

Of course, dollar-cost averaging can have its downside. Such a strategy does not assure a profit and does not protect against loss in declining markets. If you are an active trader with a significant conviction about the price of a stock or ETF, you probably have zero interest in allowing your purchase price to be picked at random.

If you want to try something a little more active than traditional dollar-cost averaging, consider accelerating your purchases if you see a dip in the price of your desired investment. For instance, if you are dollar cost averaging $10,000 into an investment over 10 months you can decide that if there is a significant shift down in the price of the security, say 10%, you can double your investment that month.

Investing does not have to be complicated

If you’re like most people though, you’ll probably prefer to make dollar-cost averaging something you don’t have to think about. Most investment companies give you the option to set up automatic transfers from your checking account directly into your investment account, making investing on your own just about as easy as accumulating a nest egg in a 401(k) plan.

If you’re not already taking advantage of dollar-cost averaging, start now. As the old saying goes, time is money!

8 Things To Know About Negotiating A Car Purchase

March 26, 2019

One of my most vivid money memories growing up was when my dad took me in to the finance managers office to negotiate a car deal for the first time. We sat down and immediately my dad came out of the gate with a set price and would not budge. It set off a stare down with the car salesman who tried to look offended by his lowball offer.

What the salesman didn’t know was that my dad had done his homework and had a firm understanding of what the car was worth. He would also eventually learn that my dad would walk away from the negotiation unless the dealer budged significantly.

Negotiating for a used car in today’s environment

Unfortunately, these days that strategy may not work as well. I took a lot of good negotiating tips from my dad, but in my last few car negotiations I have not been able to extract the big price reductions on used vehicles that he was able to achieve 20 years ago. The fact is that car dealers are now advertising prices that are in close range of the Kelley Blue Book value on used cars. This means they know you know what the car is worth now too.

This also means that while you could get thousands off a used car sticker price in the past, it is more likely to only be in the hundreds today. As a result, dealers are more willing these days to walk away from a negotiation because their own research shows them that if I won’t buy that car at that price, someone else will.

There is still money to be saved in terms of how you approach your car purchase though – these tips are designed to give you the most bang for your buck.

How to negotiate for a car in today’s market

1. Negotiate from a position of confidence.

If you’re financing your purchase, get pre-approved for a loan before you walk into a dealership or meet with a seller. Sometimes dealer rates can be higher than other sources. If you’re paying cash, notify them of the ability to close a deal quickly if you believe that will give you a pricing advantage.

2. Know what you should pay for the car you want.

Most cars are sold below the manufacturer’s suggested retail price (MSRP) and some cars are sold below the dealer’s invoice price. Knowing the difference can help you.

The invoice price can be found on many auto websites and is a good target in your negotiations. It can be difficult to obtain a price that’s lower than invoice. It helps if you can find out the real dealer cost, which may be lower than the invoice price because of things like secret factory-to-dealer incentives, customer rebates and holdbacks (a payment made by the manufacturer to the dealership if it sells the car within 90 days of arrival on the lot — a guaranteed profit even if the vehicle is sold to you at cost).

Be aware of any repairs needed

For used cars, don’t discuss price until you know exactly what kind of repairs the vehicle needs. Arrange for an independent inspection by a reputable auto mechanic. Needed repairs may give you a bargaining chip.

3. Stay focused and tune out dealer tactics.

This is the part that a lot of people hate about car buying. Dealers are trained to distract you from the central task of negotiating the best car price. Avoid conversations about trade-in values before you agree on a firm price for your car purchase. Resist last-minute attempts in the financing office to add options or packages that you don’t want, don’t need, and never agreed to.

Recognize dealer tactics designed to intimidate you, such as:

  • Demanding that you put down a cash deposit to show you mean business
  • Changing salespeople in the middle of negotiations
  • Holding your keys long after using them to test drive your car for trade-in purposes
  • Asking for an unusually high down payment

Don’t be afraid to call these as you see them – it will hopefully make them stop once the dealer realizes they are working with an informed buyer.

4. Speak only to decision makers.

Countless hours have been wasted at dealerships where salespeople scurry between manager and customer. This practice is designed to wear you down and frustrate you. Tell the dealership up front that you want the manager in on the discussions because you don’t want to waste time. Leave (politely) if they won’t agree.

5. Be businesslike.

Few things are more vexing to car sales personnel than a customer who is level-headed, well-informed, friendly and calm. Never raise your voice, but don’t hesitate to repeat yourself as often as necessary to get your point across. Keep your interest in a vehicle free of enthusiasm. Remarks like “This is my dream car!” undermine your credibility and put the seller in a position of power. When a dealer tries to induce emotion into a car purchase, I am apt to remind the person it is just metal and plastic sitting on 4 pieces of rubber.

6. Know when to bend.

For my most recent car purchase, we learned of a private seller with a SUV that was not on our list. It ended up being the car that met our needs at the right price. Likewise, when dealing with dozens of cars on a lot, some flexibility is necessary for successful negotiation. Make small concessions wherever you can — it will appease the seller and allow you to stay focused on what’s important to you.

7. Get everything in writing.

Take notes about who said what throughout the negotiation process. Make people wait as you write. You’ll be glad you have a record of promises and figures as negotiations continue.

Once an agreement is reached, get it in writing. Don’t sign anything you don’t fully comprehend or have no record of discussing. Should the dealer try to raise the price on you later, point to the agreement as a reminder of the original deal. Take it slowly — there is no three-day cooling off period or right to cancel a car purchase contract, so you’ll want to get it right.

8. Know when to walk away.

Not happy with the way things are going? Feeling a little queasy? Not certain how to proceed? Just walk out. The alternatives include saying something you’ll regret, agreeing to something you don’t want, or getting emotional. Be polite and express your thanks, but don’t hesitate to leave and take your business elsewhere.

Hopefully these tips will help you start your own family tradition of getting the right vehicle for the right price for you and your family.

What To Expect When You Do A Retirement Account Rollover

March 14, 2019

One of the most common questions we receive centers around the decision with what to do with your old 401(k). We offer multiple ways to look at whether to stay or move strategically. But once you decide to move the funds from one firm to another, how do you best proceed? Here’s what to know in order to make the process as smooth as possible.

Opening the lines of communication

Have you ever seen an old movie, or a film set in the early days of the telephone? The switchboard operator actually had to plug and unplug the hardwire lines to connect calls. This a good metaphor for what happens when you initiate a rollover. You, as the account holder, function as the operator in terms of moving the funds from company to another.

Rolling money over from one account to another is a fairly common practice but here a few things you will want to consider when approaching this process.

Talk to the firm you are rolling the account from

First you need to know what paperwork is needed for the money to be released – the best place to find this out is to call your current provider. Do not take anyone else’s word for it. The receiving firm may have a decent idea of what the other firm wants, but there is no way to know for if you do not contact them.

To start, simply ask them what the procedure is to rollover your assets to another provider. That question may get you all the information you need, but before you hang up, make sure you know:

  • What timeframe can you expect from when you request the money to when it will be transferred? (this can take up to a couple weeks)
  • Are there any costs?
  • Is there a need to complete any paperwork?
  • What addresses do they have on file to you?
  • Can correspondence only be sent to those locations?

Be prepared that before you’re able to obtain this information that you may be transferred to an account retention department where someone may try to talk you out of your decision. It’s ok to be firm and state that you’ve made up your mind and to please give you the rollover information without further delay.

Talk to the firm that will be receiving the rollover

Once you know what will be required to get the money out, make sure you’re in touch with the company you’ve chosen to receive the money (either your new employer or the IRA company you’ve chosen). This side is likely to be a bit more flexible regarding the manner in which they receive the money from your old account, but here are somethings you will want to discuss with them in order to make the transition smooth:

  • If the receiving firm is a 401(k) or some other retirement plan at your workplace, be sure they know and understand the type of account the rollover is coming from. The ability to receive funds from another plan or IRA is based on what is in the plan document – not all 401(k) accounts accept all incoming transfers.
  • This also applies to rolling the funds to an IRA. Are the dollars in the old plan pre-tax, after-tax or Roth? This may create a necessity to open both a traditional and a Roth IRA.
  • If the old firm requires sending a paper check, get clear directions on who the check should be made out to. This step is crucial or you could inadvertently create an indirect rollover and its tax consequences.

You will likely also be asked how you want the money to be invested once it’s in your new account. Don’t let this decision delay the process, as you most likely can make changes once the funds are there, but make sure you make some type of selection so the process can be completed.

Initiate the transfer

Once you are clear on what to do from both ends, you can start your switchboard operator magic. It is common to have to sell any mutual funds or other investments in the old account because the new account may not offer the same investment options.

In the case of retirement accounts this tends not be a big deal because there should be no tax ramifications for selling, but be aware as that may change your mind about this whole process. Transferring cash tends to be a simpler process than transferring shares of mutual funds or stocks anyway.

Next:

  • Keep an eye on the process online and maintain any paperwork sent to you about the transfer.
  • Enroll in online access for the new account(s) so you can see when the funds are received.
  • Once the transfer is complete, check to make sure that the amount that left your old account lines up with the amount received in your new account.
  • Consider leaving the old account open for a few weeks to collect any residual interest or dividends in the old account, then make sure those are transferred over as well.
  • You should receive a Form 1099-R from the distributing firm the following year – if you did the transfer correctly, there shouldn’t be anything in the taxable box, but keep the form just in case. Use the paperwork and online history to make sure the transactions line up properly.

Hopefully this will help you navigate the steps to a rollover. Depending on your situation, the transaction may be more complex or you may be able skip steps. Also, if you are working with an advisor they can sometimes simplify the process. In either case, lean heavily on each firm to make sure they are both working toward getting your savings to the right place.

What To Watch Out For When Seeking ‘Non-Traditional’ Investments

February 20, 2019

The stock market is guaranteed to do one of two things: go up or go down. Because so many Americans are dependent on their 401(k)’s as their primary source for retirement, as a financial wellness coach I start to hear more investor discontent when the market is not doing well. When the market is going up, people tend to be content but when the market goes down, many investors go on a quest in search of the perfect investment.

Beware of “outside the box” investments

One of the most dangerous questions an investor can ask an advisor is, “Do you have anything other than mutual funds, stocks or bonds that give me a better return without taking on risk?” The reason I consider this a dangerous question is this is where an investment is often introduced that is hard to understand.

I recently read a story about an athlete that had sued his financial advisor for misconduct. Before I go further, let me emphatically state that the client is not at fault in cases of advisor misconduct. When I hear stories like this I can guess that the investment was something other than a traditional account before I read the details. One reason is the fact that most large firms have substantial checks and balances on advisors. It is difficult for the advisor to operate in felonious activity with traditional investments, but if there is some one-off, unique investment then an unscrupulous advisor may circumvent the built-in safeguards.

The reason most advisors stick to a narrow listing of investments is because that is what they are trained in. When clients ask for something different, the advisor may be able to pull some product off the shelf that functions differently, but in my experience those products tend to have a narrow application. Conversely, I have seen investors, in an effort to get away from traditional investments, squeeze themselves into investments that may have higher risk with a lower opportunity for return.

The exotic investment is never as easy as it sounds

If you move forward with something that’s different from the more typical stock market investments expect some rockiness. When going the road less traveled there is a reason there are not droves of others on the same road. Recognize there may be some risk that not even the person recommending it may be aware of. For example, pay close attention to the need for additional tax filings and keep track of any costs for those filings. This should count against your total rate of return.

Concierge service sounds nice, but beware

If someone is recommending an investment that may be complex, be mindful of trusting the advisor to make everything easy. If you are investing in real estate, expect to have to deal with tenant difficulties and repairs. If you are investing in a franchise, expect to see good and bad months. If you have an advisor or consultant telling how great things are going all the time you need to dig deeper – whoever is shielding you from the realities of these investments is not doing that for free and whatever they are paid will eat in to you returns.

It is ok to ride the downturn

You don’t have to stick to just stocks and bonds. I, along with many planners on our team, own investment real estate and other non-traditional investments not available through a brokerage firm. This is just a warning to make sure you have the time and risk appetite for these type of investments.

A buy and hold strategy of a stock- based portfolio can be difficult to watch on the downside but if your investments align with your goal it is ok to see down periods. A downturn is not a loss unless you sell at the bottom. If your allocation is reasonable and time is on your side, stick to it.

 

 

 

 

Should Newlyweds Combine Their Accounts?

February 13, 2019

At Financial Finesse I am often given the opportunity to assist people at the most important events of their lives. We encourage people to make good financial decisions at the outset of a career and on the cusp of retirement. We share in the joy of the birth of a child or the sadness of the death loved one. As such, it is quite common for couples to reach out to us before they marry to get the best tips for handling their finances. There is one questions that is universal:

Should we combine all our accounts or keep them separate?

Marriage represents a joining together of two individual lives and so it is reasonable to question how much needs to be combined. Combining accounts sounds simple, but it can be a shock to your system if you are accustomed to being independent. To help people decide, I like to review three different methods.

Option 1: combine all your cash accounts

Pros

  • Totally transparency
  • Less confusion because there are less accounts
  • Mitigates arguments over who should pay for which expense

Cons

  • Concerns about losing control
  • Requires significant changes upfront to ongoing auto deposits and auto withdrawals

Option 2: keep your accounts separate

There are cases where one person may walk into the marriage with unresolved financial issues from debt or a previous marriage. In those cases it may make sense, even though it may be the long-term plan to put it all together, to hold off on establishing joint accounts and paying bills out of them.

The alternative sounds appealing to couples that would like to enjoy a higher level of individual autonomy, but as noted below separate accounts often call for a much higher level of coordination to make sure bills do not fall through the cracks. Also, there needs to be an agreement on what constitutes individual versus household expenses.

Pros

  • Maintain total autonomy
  • Fewer changes to direct deposits and auto withdrawals
  • Could avoid fights about differing spending priorities

Cons

  • Requires significant coordination of payments for expenses incurred together
  • Requires a common understanding of what is considered joint expenses
  • Could lead to resentment if one spouse appears to have more spending power than the other

Option 3: the hybrid method

The system that worked for me and my spouse, and for many of the couples I work with, is to both combine and separate. It starts with having at least 3 accounts – one account for general household expenses and separate accounts for individual expenses. I have found this method helped us come together on what the joint expenses were. It also took away the 50/50 mentality which can become hard to track and is a major point of contention for many couples.

Over the course of our marriage, there have been years when I have earned more than my spouse and in other years she has earned more than me. Having most of the funds come to one place with one purpose took away our need to attempt to equalize. In the individual accounts we have money for personal expenses. Those individual accounts offered us the proper level of autonomy.

This method can be applied in multiple ways. I have a friend that deposits and keeps over 95% of his earnings in the joint or household account. His wife keeps a lower percentage because they agreed her personal expenses were higher than his. In our family, the percentage that goes to the household account has increased as our family has grown. For others, the individual accounts grow because joint household expenses were a smaller percentage of their overall budget.

There is no one right way

Couples are as different as the individuals they consist of and so there is no one-size-fits-all method to handling joint finances. I have seen couples handle finances in all three ways outlined above and I have seen them all handled successfully and unsuccessfully. The biggest key to success was that they got on the same page as a couple. Take some time to be self-reflective about how you came to your current money beliefs and discuss them together.

Regardless of which route you choose, the road is a lot smoother when there is genuine agreement about the destination. Take the time to get on the same page financially and the choice on how to work together will become clearer.

 

The Tax Rule Changes That Families With Dependents Need To Know About

February 07, 2019

If you are one of those go-getters who has already filed your 2018 income taxes, you may have noticed the effect of the 2017 the Tax Cuts and Jobs Act changes – they are wide-reaching, but how much it affects your tax bill will depend largely on your life circumstances. For families with minors, there are some significant changes that may reshape their tax strategies. Here’s a summary:

No more exemptions

The first thing a family with dependents may notice is the elimination of exemptions. In years past, you would occasionally hear people congratulate the birth of a child with the mention an additional tax deduction. Come to think of it, this was probably more common among finance nerds, but it’s definitely something I’ve said before.

Anyway, in 2017, you could count on receiving an exemption of $4,050 for each person living in your household. With those exemptions gone, larger families have taken additional notice to determine if the Tax Cuts and Jobs Act truly yielded tax savings to them. The new tax code offsets the removal of exemptions with an increased standard deduction and a substantial change to the child tax credit, but it is worth noting that these credits are set in place only until 2025.

Child tax credit

Speaking of the child tax credit, this was another big change. Remember that tax credits are the nugget of gold at the end of the 1040. They offer a dollar for dollar reduction of your tax bill, rather than just a reduction in your taxable income like deductions. In years past, the child tax credit was $1,000 per child, but was limited to lower income earners – the credit phased out if you had AGI over $110,000 and were married filing jointly or $75,000 if you were single.

The new tax law increased the credit and made it applicable to more people. Starting in 2018, the credit can be as large as $2,000 per child with higher income limits: if you are married filing jointly, you’ll still qualify as long as your AGI is less than $400,000 or $200,000 if single.

In order to qualify for the credit you must have a “qualifying child” according to Publication 972: they must be under the age of 17 and living with you at least half of the year.

Kiddie tax

Income earned by a child is also taxed, but how much depends on what type of income it is – earned, such as through a summer job, or unearned such as dividends or interest on investments in the child’s name. In years past, income for a child that exceeded a certain level was taxed at the parent’s rate – this discouraged families from gifting investments to their minor children in order to avoid or lower the taxes on that income.

The new tax law changed how earnings over a certain level is taxed to children, and not in a favorable way. It makes the rules much more simple, but essentially, once it exceeds the threshold, a child’s income will be subject to the same tax rates as estates and trust.

This is a significant tax increase for many families who have shifted income to minor children in order to pay a lower tax rate. For earned income, the tax rate in 2018 now jumps to 24% for income over $2,550 and hits 37% for income above $12,500. For long term capital gains and qualified dividends, taxation starts at the $2,600 level and hits 20% at income of $12,700.

With this change it may make sense to realize any long-term capital gains on an asset gifted to a minor and use those funds to buy tax-advantaged investments like municipal bonds. To determine if a change is necessary in this area, consult Topic 553 and consult a tax professional.

Don’t miss these other tax benefits either

While the following provisions did not change substantially, you should determine if you are eligible to reap the benefits of these credits and deductions.

The Child and Dependent Care Credit

This credit allows you to reduce your tax burden by claiming day care and after school programs. This blog breaks down the benefit and the decision between using the credit or a flexible spending account.

Student loan interest deduction

You may be able to deduct up to $2,500 in student loan interest paid on qualified student loans. This blog dives into the specifics.

Education tax credits

The Lifetime Learning and the American Opportunity Credits can also offer tax relief for education costs. We offer a deeper dive into these credits here.

Even with exemptions gone, there are still opportunities to lower your tax bill when it comes to dependents. Careful planning will help you take full advantage of these opportunities.

How I Perform My Year-End Financial Review

December 27, 2018

Editor’s note: As 2018 draws to a close and we launch 2019, I’ve asked each of our bloggers to reflect on their own personal goals, plans or thoughts on the past or upcoming year. Our hope is that you not only draw inspiration from our sharing over the coming weeks, but also that we are all able to feel more connected through our shared human experience and recognize that no matter where we are on our personal financial wellness journeys, that we all have similar hopes, dreams and struggles. Happy holidays! Here’s what Cyrus has to say:

As the year ends, I tend to turn my focus inward. I turn to the successes, the failures, and the changes that occurred in my life throughout the year. Obviously, a good bit of this introspection considers what went well and what didn’t financially. The intent is not to beat myself up about the negatives, but to learn what went well and what didn’t, then build from there. Here is how I assess my own financial decisions at the end of the year.

How to perform a year-end financial review

First, gather all your information

You may already have your opinion about the financial happenings of 2018, but before you give yourself a grade based on what you remember, pull together some reliable data. Here’s what I focus on:

Reviewing a budgeting app or online banking: If you use a budgeting app (for example, Mint) to look at your spending and budget targets, then much of the work for this step is already done. If you aren’t using an app, your online banking website may be tracking your spending for you, so check there. I use this information to track my budgeting goals and determine how close I was to sticking to them.

Reflecting on any financial milestones: What were the game changers for you financially in 2018? Did you get a higher than expected tax refund or bonus? Were there any financial surprises that threw your budget off? For me, one was definitely having to buy a car unexpectedly.

Taking your financial wellness assessment: This is a great way to track your financial health from year to year. Ask your employer if they offer an online financial wellness assessment as part of your financial wellness program.  If not, you can use this Financial Health Assessment to see how you are doing in the area of cash management.

Celebrating the victories: In the New Year’s spirit, take a moment to toast the decisions that went well financially. This year our family achieved a long-term goal of buying a family car with cash. The opportunity to do so wasn’t expected, but because we had some cash tucked away for sudden financial changes, we were able to take advantage of a surprising situation. My wife and I have high-fived each other a few times to celebrate reaching that goal. We have since added additional goals to our financial bucket list.

Analyzing the problems: Where did things get off track this year? Were you anticipating a tax refund but ended up having to pay? Were you caught financially unprepared for a financial emergency? It is easy to tuck away those negative memories, but this is where that old saying about those who don’t learn from history are doomed to repeat it seems to hold true. What can you do right now to prepare if that situation occurs again?

Deploying your game plan: Create an action plan to make a change in your finances as the year ends. We offer several resources like this one that can give you some concrete steps to end the year. If your company offers a financial wellness benefit, speak with someone that can help you with your action steps.

Whether you have more things to toast than problems to analyze or vice versa its ok. A new year is a great opportunity to take the lessons learned and use them make your finances more efficient and less stressful.

 

The Pros And Cons Of Last Minute Christmas Shopping

December 19, 2018

I have a confession to make. I am a last-minute holiday shopper. If you have ever wondered who scavenges the picked over shelves on December 23rd and 24th, it’s me.

Why do I wait until the last minute?

First of all, it takes me a little while to get revved up for the season. I avoid anything Christmas-themed until after Thanksgiving, at which time it becomes unavoidable. Eventually, after attending a few holiday parties and watching Charlie Brown Christmas a couple of times, I am ready to attack the task about a week before the big day. My late shopping ways has it pros and cons.

Pros of last minute Christmas shopping

Fickle Christmas requests

My kids start campaigning for their ever-evolving Christmas lists in May. If we bought their gifts as they asked for them, they would forget what they asked for by the time Santa left them under the tree. I find it easier, unless they are really passionate about one thing, to zero in on what they really want closer to the actual day. Waiting to buy the presents also saves the concern about the kids finding our stash too.

Avoiding the doorbuster hype

Some late season deals are as good, if not better than the door buster/Black Friday/Cyber Monday sales. Also, I’ve found that I am just as likely to buy something for myself rather someone else when I start shopping earlier. Waiting keeps me focused.

It’s a better environment for hunter/gatherers

Those picked over shelves look great to a last-minute shopper because there is less choice – it is easier because you avoid decision fatigue. Also, the late crowd is all business. There are less people slowly perusing the store aisles humming holiday songs, so my patience isn’t tested – we are all on the same mission!

Reasons to avoid last minute Christmas shopping

It may increase stress

For some, holiday shopping later in the season is nerve wracking. They spend the entire month worried about finding what they want to give. That is no way spend the season. Last minute shopping is best suited for people who totally set aside the concern until they are ready to shop. If you are going to worry about procrastinating, don’t do it (as in, just get out there and shop already).

If there is no question about what gift you’ll buy, is it is better to get it as soon as possible

Sometimes that loved one is really clear about what they want. Other times you have a good idea regarding that extra special gift you would like to find. In those cases, it is better to set aside your personal preference and get it as soon as possible. The gift may be in high demand and therefore may go up in price due to scarcity.

Starting early gives you time to be strategic and find the best deal on that extra special present. Shopping online is a great way to avoid the traffic and crowds. Also, shopping early gives you plenty of time to deal with shipping delays.

Ironically, you must plan to procrastinate

If you plan to shop early or late, you will need to be prepared financially for the shopping. Our family has an overall limit on Christmas expenditures, regardless of the timing of the actual buying. We want to walk out of the season having created memories instead of financial regrets, and planning ahead financially allows that to happen.

Late holiday shopping is not for everybody. I have friends that complete their shopping in October and the gifts are wrapped before Thanksgiving – for them it gives them a better sense of peace and allows them to enjoy the season. But if you are slow to get motivated like me, use the tips above to make the most of your holiday shopping.

How To Make Sure Your Charitable Donations Are Most Effective

December 12, 2018

It is said that it is better to give than receive. There’s even research that shows that giving is psychologically and financially beneficial. For many Americans, giving to charity has made a material difference in terms of reducing their tax liability (approximately 25% of Americans report charitable donations as itemized deductions to their income each year.) Charitable giving is a key component of tax planning for many taxpayers and it is important to make those gifts in time to count for 2018.

Last year’s Tax Cuts and Jobs Act left most charitable deduction rules the same but there have been some additional changes that may make it more difficult to reap the same tax benefits. If you are in the habit of making a lot of donations toward year-end in order to get the tax deduction, keep reading – you may not see as much benefit as in years past.

Is it deductible?

First, a quick review of the rules of charitable giving. You can count a gift as a charitable tax deduction ONLY if you make that gift to a qualified organization as defined by IRS section 170(c) – most of these are 501(c)(3) organizations.

Outside of that, you may make donations to people or organizations, such as helping a local family in need, but those donations are considered gifts and are not deductible from your taxes. That means those charitable individuals paying off Walmart layaways aren’t likely to see a tax benefit (although I still think it’s really cool!). One of the more common misconceptions is that crowd-sourced giving, like GoFundMe campaigns, are tax deductions, but they are not.

Will charitable giving actually reduce your tax?

Due to the recent tax changes, people who make charitable gifts strictly to lower their income tax burden may need to re-think their strategy. One major change to the tax code is the increase in the standard deduction, which basically doubled for each filing status. This doubling means that many Americans who previously itemized deductions will likely use their standard deduction this year because their itemized deductions will not measure up. To determine if you have enough itemized deductions, total them up and compare them to your standard deduction ($12,000 for single, $24,000 for married). You’ll claim whichever one is higher.

One way to make it count for tax purposes

If you are falling just short, one idea is to accelerate some charitable contributions for next year into this year to get you over the standard limit. If you are falling well short of reaching your deduction level this year, you could hold off on some end of the year giving to boost your itemized deduction for the following year.

If you have a large amount of funds to donate this year but want to spread out the disbursement of those funds over several years, consider a donor advised fund. You can make a gift to the donor advised fund upfront and claim it for the current year and then disperse the gifts over time.

Making sure your gift is going to a worthy cause

Your charitable gift can help an organization achieve its cause, but you want to make sure the organization you are giving to is managing your gift correctly. There are many organizations that offer rosy promises but how can you be sure they are doing what they say? Take some time to investigate the organization’s mission and find out what percentage of donations actually go toward the mission. You may want to tour the operations or even volunteer with the organization to see how your gift is making a difference.

If you are looking for a third party assessment of an organization’s stewardship, online resources like Charity Navigator rate hundreds of organizations on their accountability measures and transparency. If you are considering giving to a smaller or local organization that may not show up on these national search engines, check in with resources like a local community foundation to determine if they have vetted that organization’s efficacy.

The bottom line

I have witnessed the ability of a well-run charity to change individual lives and whole communities for the better. Whether you will receive a tax deduction for a gift does not have to be the determining factor in whether to make a gift, but consider these strategies when you do give to maximize the potential tax benefits. Doing so can give you additional assurance that your hard-earned dollars are being effective in helping others, while also leaving you with more money to be generous in the future.

How I Bought A New Car After An Accident

August 16, 2018

A lot of the financial guidance out there about making big purchases such as a car focuses on building up savings and shopping around for the best deal. But what happens when you need a car right away?

As outlined in my last blog, I was recently in a car accident. What I didn’t say in that blog was that my car was totaled. Because of this, I was suddenly thrust into the car-buying market without a plan. I typically like to spend months researching a car purchase but this time my process was greatly condensed. I hate buyer’s remorse, but my 5-member family is busy and one car would not cut it for long.

Here are the steps to quickly prepare for your next vehicle purchase

Determine the type of vehicle you need

As much as I am going to miss my old vehicle (we named the car John), it had been less than ideal for our family for some time. When we bought the sedan we were just a family of 3. We are now a family of 5 with 3 car seats/boosters. We determined that this was a good opportunity to not just replace what we had, but find something that would give the kids more space. Doing this helped us focus our search. Picking a car based on need can simplify things in an environment where you find every car in a 50-mile radius within seconds on your phone.

The search is on

Once we knew what amenities to look for, we began the search. There are dozens of apps and sites to choose from. For my search, I preferred tools that could give me easy to view pictures, the ability to filter searches based on price, mileage, and vehicle features. I also preferred tools that gave me a measure of the value of the vehicle. This helped me to understand how much negotiation room there was in the price.

New versus used

The advantage of a new car is that you are the first person to own the car and so you know the standard of care and maintenance history. Also new cars usually come with manufacturer’s warranties. The downside to buying a new car is the price and the fact that the value of the vehicle depreciates significantly once the car is driven off the lot.

Because of the size of my family and the amenities they enjoy like leather and entertainment, used cars have often been a better value for me. While a used car forgoes the rapid depreciation in value of a new car, they often present their own risk. Unless the previous owner kept good records, it can be hard to determine the level of care the vehicle received. Also, unless you buy a low-mileage used car there is high likelihood the manufacturer’s warranty has expired.

In those cases you might consider buying a warranty. To mitigate the concerns about the maintenance, request a vehicle history report like Carfax. In many cases those are available free online. It also does not hurt to have an experienced mechanic look at the vehicle to determine if maintenance costs will likely be needed in the short term.

This is what I do to make sure I’m not buying a used lemon, but instead a quality used car that will last as long as I need it to last.

Buy versus lease

Before you negotiate the price for the vehicle, it’s good know how much car you can afford. Most of the car search apps and sites offer a calculator that will give you an idea of the monthly car payment. You will want to reach out to your bank or credit union to get loan terms before going on a car lot as well.

Most dealerships are incentivized to get you to finance through them and I have seen price breaks for choosing dealer financing. Even if it is a good deal, having your own independent loan quote is still a good idea to have bargaining power – this will help to ensure that you get a loan at a reasonable interest rate. Also, the dealer may try to match your bank’s terms, which is what happened with us.

Leasing can be a reasonable alternative to taking out a loan, especially if monthly payment is an issue for your budget. However, leasing a vehicle means you’re pretty much locking yourself into having a car payment for the foreseeable future. This article offers 5 questions that can help you determine if leasing is the right move for you. For me, I like the idea of eventually being free of a car payment, while still having a car. That’s why we opted for financing.

By assessing your needs and shopping with a knowledge of what you are looking for, along with your preferred plan to pay for it, you can be certain to walk away with a car purchase you can feel good about for years to come. Now to find a name for this new car…

What To Do If You Have A Car Accident

August 07, 2018

A few weeks ago, I was driving through an intersection a few blocks from my home. I had taken this route hundreds of times but it was different today. I heard a sudden honk from a car horn and looked up to see a vehicle bearing down on my driver’s side door. A few seconds later all my afternoon plans changed.

I was involved in a car accident.

After checking my person to see if everything was ok with me physically, I slowly exited the car. I was thankful that the situation was not any worse, but I also knew I had some work to do. It was incumbent upon me to get the right information so that I would be compensated for the damages. This was definitely not my fault. Here’s what I did to make sure I was covered.

Gather up the information

  • Take pictures of the damage and the scene – Because the collision occurred in a busy intersection, I knew there was a high likelihood the vehicles would need to be moved, so I got myself to safety and took a few quick pictures of the vehicles in their post collision positions. I also took pictures of the vehicle damage, along with the license plate of the other party.
  • Take pictures of or exchange insurance and contact information – Once we were in a safe place, the other driver and I exchanged names, contact information, and insurance information. This is usually the point in time you discover if the other party has insurance in place. You may need to report the collision to both companies so having the other party’s identifying information is crucial.
  • Get the information from any witnesses – Several people who witnessed the collision approached to tell their version of the event. I made sure to obtain contact information for them as well. The experience can be a bit of whirlwind, so you will want to make sure you have a good witness or two that can lay out the events clearly in case of a dispute.

Prepare to tell your story again, and again, and again

  • When the police arrive – Once an officer arrived on the scene, he asked those involved in the collision what happened. It’s important to give your version of events in an easy to understand manner. Once the vehicles were moved to an even safer environment, the officer asked each party separately what happened. What he was looking for was consistency in our points of view. When the officer was done, he gave us information regarding how to retrieve the official police report.
  • Talk to both insurance companies – Even though you have up to 24 hours to report an accident to your insurance company, it makes sense to do it while the events are fresh. Upon arriving home, I went ahead and contacted my own insurance company first. I did that because I wanted my insurance company to have on record my version of events in case the other driver attempted to contact them as well. After that I called the other party’s insurance company to make a claim. Be aware that both companies will likely record your statement.

Getting things back in order

  • Get yourself checked out medically – Even if you feel good physically, go ahead and make an appointment to see your doctor as soon as possible. The initial shock of a collision can produce enough adrenaline in the near term to make you feel ok, but you want to have a professional be sure that you did not overlook something once the adrenaline wears off. This can be really important if you find yourself with a back or neck injury after the fact.
  • Getting back on the road – Our family of 5 is a 2-car household by necessity, so I began working with my insurance company on obtaining a rental car and starting the process of having the damage appraised on my vehicle right away. It was a good time to pull out my policy and review the benefits I was eligible to receive. In situations where you are not at fault, you can often choose which company would handle the claim (although this may vary from state-to-state). Even if the other party claims responsibility, it may make sense to use your own company because it may offer higher or better coverages. Then your company can send the other company a bill for what is owed.

Walking away safely from a car accident is always the primary goal. Taking these steps can also give you peace of mind that your action will give you the best opportunity to make your financial situation whole after a car accident as well.

 

How Does Mortgage Escrow Work And Is It Worth It?

July 30, 2018

As interest rates creep back toward historical norms, you may want to take some time to determine if you have the best possible mortgage for the long-run. When I refinanced my home several years ago, one move saved me thousands of dollars at closing and continues to save me money. That move was making sure I had enough equity in my refinance to forgo my need for an escrow account.

What is a mortgage escrow?

An escrow account, in the case of a mortgage, functions as a middleman between a homeowner, tax entities, insurance companies, and anyone else whom the homeowner designates to pay with the funds saved in it. It is typically a mandatory savings account attached to the larger mortgage payment. Mortgage escrow services are popular with mortgage lenders because they prevent foreclosures due to the lack of payment of property taxes.

Why did I want to leave the escrow account in the past?

Here are some downsides to having an escrow:

  • When purchasing a home, the up-front funding for the escrow account can add several thousands to the closing costs.
  • The escrow generally must maintain a minimum balance, and if taxes and fees come in higher than estimated, your escrow payment may grow to replace that minimum balance, which means your mortgage payment will fluctuate.
  • Some escrow accounts do not earn the account holder any interest. If you have a substantial amount to pay in property taxes, imagine an account holding thousands of dollars and earning no interest.

Escrow accounts can create the ‘credit card effect’

When I completed my refinance, I set up my home’s property and casualty insurance on auto-payment. I also started a monthly deposit to a savings account to cover property taxes. Coming face-to-face with these actual costs had me taking the extra step of shopping for less expensive insurance coverage and appealing my tax assessment. Both of these efforts yielded us substantial savings.

For me, the escrow account acted as a buffer to my being totally aware of the overall cost of housing. Like using a credit card can encourage over-spending when we’re less likely to overspend when we pay cash, using the escrow account made me much less aware of exactly how much I was paying for insurance and taxes. The escrow was not at fault for me paying more than I needed to, that was my responsibility, but not having the escrow brought me face to face with the reality of what I was spending on insurance and taxes.

Escrows are not all bad

There are good reasons to maintain an escrow:

  • If you’re not great at saving for big expenses, it can save you from yourself – rather than making individual arrangements to separately save for property taxes and insurance, these expenses are included in one payment.
  • You may get a slight reduction in your mortgage rate for maintaining an escrow account. The lender benefits by having an escrow in place for taxes and insurance because it protects against the risk of the collateral for their loan (your home) being auctioned off by the county if those expenses are not paid. (it’s also worth mentioning that they probably make some money in interest from the money that accumulates in your account as well)
  • It also reduces the uncertainty of the property not being insured against catastrophe if you miss a payment.

So should you try to get away from using an escrow account?

It depends on your situation. If you are not refinancing your home, once you pay your home down below 80% loan-to-value, you may be able to request removal of the escrow account, but some lenders may charge a fee to do so.

Keep in mind that the escrow is not in place to protect the lender only. If you choose not to escrow, you will need to be very confident in your ability to save for the property taxes separately. You may also want to consider having the insurance premiums auto-debited so you don’t forget. You may be able to save money on insurance by paying it as a lump sum, so saving for the annual payment and then paying it can offer some savings as well.

If you are in a situation where you have more than 20% equity in your home and you are confident you can maintain the discipline of paying your insurance and your taxes then leaving the escrow behind can save you a lot in the long-run.

 

What Are Your Health Insurance Options If You Retire Before Medicare?

July 20, 2018

Early retirement is a very common goal, although how exactly do you define “early?” For most people, early means stopping work before the availability of benefits that are used by retirees like Social Security and Medicare. Uncertainty over whether retirement savings can stand up to several years without these programs is often the reason people put off retirement.

If you have dreams of sleeping in or traveling the world before you’re eligible for retiree benefits, all is not lost. As is the case with any goal, you must decide to face it head-on and find ways to make it work within your financial plan. Here are a couple of ways to address meeting your medical care needs if you choose to retire prior to age 65.

Option 1: Obtaining insurance through the federal marketplace

Pros

  • You have the possibility of finding health coverage similar to what you have with your employer – Due to the implementation of the Affordable Care Act, coverage from your employer and coverage through healthcare.gov offer similar coverage benefits, deductibles and premiums.
  • You may be eligible for subsidies depending on your income – The cost of coverage for health insurance through the federal exchange is correlated to how much income you report. In some cases these subsidies  can bring the cost of coverage in line with what you are currently paying through work.

Cons

  • Coverage can be very expensive – Without the subsidies, you are exposed to the full brunt of the cost of healthcare. Depending on where you live and the size of the deductible you choose, costs can approach $1,000 or more per month. While you may want to maintain the deductible you have through your employer, you may need to increase it in order to make premiums affordable.
  • Changes in laws pertaining to the Affordable Care Act can make it difficult to plan – The laws that govern the plans that are available on the exchanges have changed substantially over the past year and there is reason to believe that there are more changes to come. This can make it very difficult to plan the cost for this line item in your budget going forward.

Option 2: Use COBRA coverage

Pros

  • You can maintain your same coverage – The Consolidated Omnibus Reconciliation Act or COBRA is a rule requiring employers to offer you access to coverage after separation of service for a certain amount of time. So rather than searching for a similar plan, you can use the same plan.
  • It may still be at a lower cost than coverage through healthcare.gov – The cost of coverage is essentially what you would normally pay in premium plus what your employer pays. If you work for a large company, the total cost can still end up being cheaper than going it alone in the Exchange because of the cost savings the employer may have negotiated.

Cons

  • Coverage is available for only 18 months in most cases – Because the coverage only lasts 18 months in most cases, COBRA is only a temporary fix for an early retirement. Once the coverage goes away, the exchange may become your primary option.
  • It is still substantially more expensive than what you probably pay today – If your employer covers a large portion of the cost of your insurance benefit, you may experience sticker shock.

Start planning now

As you can tell, both options have some drawbacks but you have no way of knowing how much of a drawback unless you do some research. Here are some things you can do to plan now:

  • Contact HR: If you think COBRA is a likely option, reach out to your benefits department to find out how much it costs today. In the case of insurance on the Federal Exchange price it now. Yes, there is a reasonable likelihood the pricing will change, but it will give you a baseline to plan.
  • Beef up your HSA: If you have an HSA, make sure you’re maxing out your contributions to the account now. You can use the account to pay for COBRA tax-free. HSAs cannot be used to pay health insurance premiums from the exchange, but they can be used to offset out of pocket medical expenses. (and they can also eventually be used to pay for Medicare premiums)
  • Consider investing in vehicles that will not show up as future income: By investing in accounts like Roth 401ks and IRAs, you can lower the amount of taxable income you generate in a year when you withdraw from these accounts. This may help you to qualify for Healthcare Exchange subsidies and will eventually allow you to keep your Medicare premiums down as well.

 

 

 

Common Mistakes To Avoid When Starting A New Job

July 10, 2018

This month marks my 2-year anniversary of joining Financial Finesse. Prior to making the move, I was with my previous employer for 17 years. It was my first change in employer since college. While I am a seasoned veteran at my job, I was a rookie at changing companies.

Transitioning from one company to another can be an exciting time but it also presents many opportunities for costly financial mistakes. Here are some areas you will want to focus on if you recently made a change of employer.

Common mistake: lack of budgeting for new cash flow

There is nothing more fundamental to your finances than your cash flow. Understanding the method in which you are paid is essential to your budgeting habits. While most job changes are made to increase cash flow, you have to plan for how it may differ from the previous employer.

You may be switching from a company that paid biweekly to now getting paid bimonthly. Or there may be a lag between your starting date and your first paycheck. In my case I went from a job that was primarily salary based compensation to a job that had a larger performance based component.

We had to readjust our monthly budget to accommodate for those changes. We adjusted to using the performance based compensation to save for our “big wants” like vacations, which freed up the regular compensation for our week-to-week needs.

How to avoid it

If you’re fortunate enough to receive a signing bonus, don’t “pre-spend” it, but instead keep it on hand for the first couple months in case you need to adjust to a change in cash flow. If you don’t receive a signing bonus, try to cut back on spending for a few weeks leading up to your job switch so that you’ll have an extra cushion.

Common mistake: choosing the wrong health insurance

When changing jobs mid-year, you have an opportunity to re-enroll for health care. Even if the coverages are administered by the same provider, the coverage options can still differ greatly. In our case the insurance company remained the same so there were a lot of similarities all the way down to the insurance cards looking the same, but when we looked under the hood the coverage was different.

How to avoid it

Be sure to download your coverage details from your former employer and compare it to your new company’s offerings. Get the information from your new plan options to make sure your preferred doctors and hospitals are available in the plan you are choosing, even if you are staying with the same insurance company.

Common mistake: keeping your retirement planning on auto-pilot

Not all retirement planning benefits are equal, so it is not safe to assume you should contribute to your retirement plan the same anywhere you go. Before you just go with the default at your new company, take some time to understand how the new retirement plan works.

How to avoid it

Get the match – At the most fundamental level, you need to understand if your new employer offers a match and when you are eligible to start receiving that match. This ensures you are not leaving free money on the table.

Pick your investment – Next up review your investment options and choose one. I have seen cases where no investment choice was made and the default option wasn’t the best fit. If you are unsure which investment is the best fit, many plans offer several hands-off investment options.

Pre-tax or Roth – Your new plan may also offer options that may not have been available at your previous employer like Roth 401k and after-tax savings. There are resources that can help you determine which option may work best.

Common mistake: missing out on unique benefits

Perform a deep dive into your benefits beyond the basics. Sometimes you can find hundreds of dollars of savings in your employee benefits, but you have to take some time to read up and maybe do some digging.

Here are some examples of unique benefits you may want to explore:

Student loan assistance – Some employers aid with managing your student loans. Some programs offer to pay a portion of your loan after a reaching a certain level of tenure. Other companies offer student loan experts to help you refinance.

Legal benefits – If getting a solid estate plan in place is one of your goals, investigate your new company’s Employee Assistance Program or EAP. These programs sometimes offer free legal document preparation software. They also may offer discounts on local attorney services.

Your company may also offer a pre-paid legal program that will allow you to have the cost of will or a trust covered by you making small monthly payments. In many cases you can enroll in the program with a single year’s commitment and have a large amount of legal work done at a significant discount than you would pay otherwise.

Financial wellness benefits – Last but certainly not least, your company may offer financial wellness benefits. I spoke to someone recently who said they were having a hard time finding a financial advisor that would help them with their plan to pay off debt but had just learned that their company added a Financial Wellness benefit. She was excited because her family has likely saved hundreds of dollars because of her company’s benefit.

How to avoid it:

Take some time in your first 60 days or so to peruse your company’s benefits website and/or brochure. Ask around to see what benefits your colleagues value the most. Finally, when the annual enrollment period rolls around, don’t just go on auto-pilot — it’s a great chance to assess whether you made the best choices and to switch things up as necessary. Your employee benefits are a valuable part of your compensation, so make the most of them.

How My Wife & I Keep Our Finances Organized Through Life Changes

June 22, 2018

There are certain things in life that, without regular attention, will eventually cause serious issues for you. I call these thing self -care. If you neglect your personal health, it will eventually hijack all your time and energy to get well again. If you do not nourish your personal relationships, you will ultimately have to spend much more time trying to sew them back together again (or finding new ones). Organizing and maintaining your family’s finances also falls into that category.

Five years ago, my family’s finances were cruising along after making substantial changes a couple years before. My wife and I had gotten on the same page and were working as a team. We were debt free except for our home, and surpassing our savings goals. We were in the best financial shape of our lives. It felt great! Then my wife made a conscious career shift and things changed.

Re-thinking our financial organization

It sure would have been nice to throw our finances into cruise control and concentrate on the new undertaking, but life doesn’t allow for that. In the case of changes like career shifts, personal health challenges, aging parents, and family additions, you must consciously decide to revisit your financial organization.

How to re-organize your finances after a major life shift

Examine it

A few months in to her career change, we felt the turbulence of our autopilot budget. Spending areas like dining and transportation started to creep up. The need for childcare increased. The old habits that had put us in a great financial position before were no longer working now that my wife’s company had been added to the mix. It was time to re-visit our plan.

What worked before?

To get on track to being debt free the first time, we sat down for a series of family meetings to get on the same page. We decided that it was time to return to the kitchen table and get back on track. We had to question everything again.

We asked ourselves the following:

  • What things were mainstays in our family’s finances that we needed to change?
  • Should we still be dining out at the same rate?
  • Do we want to maintain the same entertainment subscriptions?
  • Is our cell phone plan still the right one?

Making time for Family Money Meetings

Since we are equal partners in the decision-making of our finances, we had to make time to come together and agree on the plan. This article goes through the steps to have your own Family Money Meeting. Even if you are the sole financial decision-maker in your household, it still makes sense to set aside time to examine your financial foundation. Our meeting focused on creating a stable financial foundation by following the steps in this list.

Set it

Once we got a new plan in place, we had to make some adjustments to the things that were occurring automatically. First we looked at our automatic savings plans and 401k contributions — since we had some business debt we wanted to pay off, we had decide whether automatic savings was still the best strategy for the time being. Automating your finances can be very convenient, and it worked when we were cruising along, but you must remember to adjust as your family’s situation changes.

Once we adjust to our “new normal,” we were able to go back to automatic savings, just at different levels til we had that debt gone.

But don’t forget it

Once the plan was in place, we had to keep an eye on whether it was having the desired effect for awhile. We looked at things like whether the new budget categories were staying within range and made sure our savings were growing at the desired rate. Until you can get back to cruising along, it’s important to continue having regular family meetings to make sure you remain on track, while adjusting as circumstances change.

Once we took the time to re-organize our family’s finances it gave us back the time to focus on and prepare for the future. Take the time to give yourself financial organization check-up. If you already have a plan in place, take the time to examine your plan to make sure it still works.

 

 

Is A 15 Or 30-Year Mortgage Better?

June 13, 2018

One of the most common questions we receive as financial coaches is, “Should I do a 15-year or 30-year mortgage?” Maybe you’ve heard that a 15-year is better, but like many financial questions, it really depends on your personal circumstances. Let’s take a quick look at the history of mortgages and explore the criteria for deciding.

Why are mortgages 30 years anyway?

Prior to the Great Depression, mortgage terms were actually shorter, but in order to stimulate home-buying as the economy turned around, the government agreed to back longer-term loans. The thinking on the 30-year loan was that a person would be able to pay off the loan over the course of their working years. This was obviously back when many people purchased one home and lived there for the rest of their lives.

While many credit the 30-year mortgage for fueling the American dream of owning your own home, we have recently started to see a call for the end of the 30-year mortgage due to concerns about the amount of interest that borrowers pay, along with recent abuses of the system. (remember the 2008 financial crisis? Blame it partially on mortgages lent to unqualified borrowers)

That fact of the matter is, in most developed countries, the 15-year mortgage is the standard.

Breaking down the numbers

The concern about the amount of interest paid on a 30-year mortgage is easy to see once you enter it into a calculator. On a $244,000, 30-yr mortgage at 4.5%, the buyer would end up paying $201,000 in interest over the life of the loan PLUS the original $244k borrowed. Compare financing that same amount using a 15-year mortgage at 4% (the shorter timeframe usually also comes with a lower rate). The total amount of interest paid drops to just under $81,000. That is 60% less interest!

That same calculator also illustrates that much of the interest is paid in the earlier years of the mortgage. This is especially important when you consider that most people will not live in the same home for 30 years. If you make 2 – 3 home purchases over your lifetime as many of us now do, while continuing to choose the 30-year option, you are restarting the interest train without making much of a dent in the principal.

Why doesn’t everyone just choose 15 years?

It certainly looks appealing to see that interest amount cut down by 60%, but one mortgage calculation does not settle the debate. When someone chooses a 30-year mortgage, they are exchanging payment flexibility with the cost of the interest. Depending on your circumstances, the 30-year mortgage payment may be better for your budget. Here’s how to decide.

What can you afford?

First, consider the amount of the mortgage in my example above of $244,000. That is the average amount of national mortgage originations. $244,000 could easily help you get into a 3,000 square ft home in my part of Tennessee, but in many areas of the country that same amount wouldn’t even get you into 900 ft condo. Therefore, a 15-year mortgage fitting into your budget will vary depending on where you live. To satisfy your housing needs in certain areas the 30-year may be the better option.

Do you need payment flexibility?

What about future income? Are you planning to go from a 2-income home to 1-income in the future? The lower 30-year mortgage payment offers flexibility for those future changes. One way to hedge would be to pay your 30-year mortgage at the pace of a 15-year, then drop down to the 30-year payment when your life dictates. This will definitely save you in overall interest costs.

How to get 15-year results with 30-year flexibility

One way to give yourself the flexibility of a lower payment over 30 years but with the intention of paying less interest would be to pay the same amount of a 15-year mortgage while signing up for a 30-year mortgage. This is also a helpful way to go about it if you’re already in a 30-year mortgage and don’t wish to go through refinancing.

Typically, 30-year mortgages have a higher interest rate, so it would cost a little more than the normal 15-year mortgage  to do this, but again you keep the flexibility of the 30-year mortgage. If you paid the 15-year payment to the loan in the 30-year example, you would pay off the loan in 15 years and 10 months. The total interest over the life of the loan would be $97,000. In other words, you’d pay an extra $16k over an extra 10 months for that flexibility.

To achieve these results you have to maintain a disciplined approach. One way to make sure the payments occur regularly is setting up an automatic debit from your checking to your mortgage. Also be sure to confirm those extra payments are being applied to principal and not just treated as early payments.

Look at the big picture

It’s important not to make this decision in a silo though. Technically speaking, a 15-year mortgage will always make more financial sense when you’re strictly looking at total interest paid over the life of the loan. However, if committing to the higher monthly payment would compromise your ability to save for the future or potentially cause you to take on credit card debt, then the benefits of saving on interest could be negated by lost opportunity in saving or higher interest paid on credit cards.

Like most things with your personal finances, it’s a trade-off. What is most important to you?

Is It A Good Idea To Take A Job For Student Loan Assistance?

June 04, 2018

It is clearly graduation season — the proud parents, gowns, and decorated mortar boards are filling my social media feeds. My favorite part of the season are the inspiring commencement addresses. While the ceremonies are filled with optimism about the future, many of this group of graduates will walk away from the festivities with a burden of student loan debt. As many as 7 out 10 college graduates have student loan debt with an average balance of almost $29,000.

Employers and some government agencies recognize this burden, so there has been a rise in the variety of programs that offer everything from financial assistance to loan forgiveness in order to help graduates grapple with this debt. As you or your child venture out into the “real world” of working, paying taxes and paying your bills, you may be wondering if any of these programs could be of benefit.

Programs that help with student loan debt

Public service loan forgiveness programs

Many people have heard of these programs, although not many are clear on what it is or whether it can help them. The most widely available program has to do with working for certain organizations. If you work for any of the following types of organization, you may qualify for Public Service Loan Forgiveness or PSLF:

  • Government organizations at any level (federal, state, local, or tribal)
  • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code, such as a charity or certain hospitals
  • Other types of not-for-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code, if their primary purpose is to provide certain types of qualifying public services
  • Serving as a full-time AmeriCorps or Peace Corps volunteer also counts as qualifying employment for the PSLF Program

How to qualify for PSLF

In order to qualify, your loan must meet certain requirements and you have to remain current on your payments. These programs also require 120 months of employment with a qualifying employer (aka 10 years total – you can switch jobs, but you need 120 months total with qualifying employers). It’s a good idea to certify that you meet the requirements as soon as possible (and re-certify about once a year) to make sure you’re still on track for the 120 months.

Other options besides the federal program

The federal government may not be your only resource. Local governments also offer loan forgiveness programs for professionals they deem to be a need in their region. For instance, my home state of Tennessee has programs for Math and Science teachers and graduate school for nurses. Many inner-city public school jobs qualify with slightly different requirements than the federal program. These programs can sometimes even give you the option to work for a for-profit organization, so check around to see if your job qualifies.

Employee benefit assistance programs

If working in the public sector isn’t for you, you may be able to find a job with a company that offers some type of student loan assistance as well. SHRM reports that 4% of all employers offer some type of student loan assistance program these days —  the percentage jumps to 8% for larger companies and is expected to rise according the CFPB.

How it works

Like the PSLF programs, many employers are looking for a certain level of tenure with their organization before the assistance truly kicks in. In most instances we see today, employers are offering qualifying employees matching payments on their loans up to a certain amount. In some cases, employers also provide assistance with refinancing and setting up payment plans for qualifying employees.

Check with your HR representative to see if your company offers student loan assistance and to see if you qualify.

Should I pursue a job with these benefits?

Getting help with your loans is definitely one thing to put in the “Pro” column when considering a job opportunity, but there are other things to consider as well. Ask yourself the following questions to help decide.

Is this the right profession for you?

We all know people who picked their profession just for the money — sometimes it works out, but as some of my second-career financial planner colleagues will tell you, it’s often not worth it. You will spend approximately 90,000 hours of your life at your job. By some estimations that is 1/3 of your waking hours. Work is so much easier when you enjoy it.

A lot of the jobs that will help you qualify for PSLF are rewarding if your personality is the right fit, but they can also be very demanding (I really don’t know how teachers do it — it takes a special person!). Keep in mind that to reap the loan award you will need to stick with it for 10 years – that’s a long time to stay in a job you hate! Similar rules also apply for other loan assistance programs.

One other consideration is that many of the jobs that qualify are lower paying, which means you may have some of your student loans forgiven, but you may also be giving up earning power throughout those years we well. As much as you would like the benefit of clearing up your student loan debt, be sure you are doing something you find fulfilling to make it worth it.

Are you clear on the tax ramifications of loan assistance?

Loan forgiveness: The notion of having your student loan forgiven is appealing, but there may be tax repercussions to consider. At this point the PSLF program does NOT treat the amount forgiven as taxable income, but other programs may. One of my colleagues had a call from a client that ran into this issue and this blog explains how she handled it.

Payment assistance: If your employer is making any payments toward your loans through a benefits program, then those payments are considered to be taxable income and will be included in your W-2. (Know that you can still deduct the interest paid on any portion of the loan your employer paid, as long as you’re eligible for the deduction)

How do the rest of the benefits of the job add up?

If you are comparing job offers and one offers loan assistance, does that make it an open and shut case? Not necessarily! Be sure to compare all the financial aspects of each offer. While one company may offer student loan assistance, the other may offer a lower cost healthcare plan that could balance out the difference in cash flow to you. Obviously, salary is a major part of the calculation but also consider comparing things like 401k and HSA contributions. Calculate how much you would save if the loan was paid off by forgiveness and compare that to the cost of how much you may miss in other perks.

When you don’t have student loan assistance available

If the career opportunity or overall benefit package is better elsewhere, then it may make sense to attack the student loan debt the traditional way. It is oftentimes helpful to have someone walk you through the different options or help with a student loan payment strategy. Your employer may offer a financial wellness benefit in which someone can walk you through the process of weighing the value of each opportunity.

The Red Flags To Watch For With Investment Fraud

May 15, 2018

The topic of investing can be a difficult one to navigate. One survey says 61% of Americans find the stock market scary or intimidating. To make things even more difficult, not every investment is what it is advertised to be — the last decade exposed us to high profile cases of investment fraud.

It’s understandable that seeing these cases can cause some trepidation for prospective investors. A key to harnessing the good parts of investing is to make sure you know what to avoid. 

What happened when I went to an ‘investment presentation’

In the mid-2000’s, my wife and I were invited to an investment presentation. There were not a lot of details but we were assured by our friends that the information we would receive would be “life-changing.” I assumed it was some type of pyramid style business presentation because they were very popular at the time. But I went along with it because dinner was promised afterwards and well… dinner sounded fun.  

Once the presentation started, the red flags were everywhere: no real investment materials were handed out, the people introducing the concept were selling outrageous returns with no risk, the emphasis was on success stories and not the actual methodology of the investment, etc. Questions from the audience about transparency were vehemently challenged. It turns out that I was in fact witnessing a sales pitch what would later prove to be a fraudulent investment. 

The red flags that told me this was possible fraud

Shhh…it’s a secret 

A reputable investment is not hidden under a rock. If someone is creating a sense that there is this secret opportunity that only they know about, you should be very cautious about proceeding. One tell-tale sign in the case I witnessed was the lack of printed information about the opportunity.

The lack of information hinders the prospective investor’s opportunity to research the investment. Publicly traded investments are required to make available documentation about the opportunity. Offering for smaller and non-publicly traded investments typically require documentation as well. If you can’t take something official away from the meeting then it is a big concern – it’s probably a scam.  

Selling a fairy tale

The most obvious red flag should always be the promise of exponential growth with no risk. I’m here to tell you that nothing earns significantly better interest than a savings account without some risk. That’s just the way it works. These folks were promising fantastic returns without any risk of loss.

Another red flag is when an unscrupulous salesperson states their track record is perfect. There is no such thing as the perfect investment that yields double digit returns with no risk. Investment returns are the function of increased risk, not lower risk.  If you are getting this sales pitch run the other way.  

Pushing back against transparency

One red flag that does not involve paperwork is the attitude of the person selling the investment. If there is push-back against questioning on the front end it is usually a bad sign. Even if the paperwork checks out and you understand the investment, but you get the impression that the sales person or advisor is not giving you the full story, there is a high likelihood that that impression will get worse as time progresses.

By investing in something, you become a partner in that endeavor and you should be treated as such. If you feel like your voice is being minimized, you may not necessarily be experiencing investment fraud, but you are being pushed out of the position of authority to make decision about your money and that’s still a red flag. If you feel like an investment product is the right one for you but you do not like how it is being sold, find another salesperson from whom to buy it. 

How to avoid being taken for a ride

Find out how it works

One of the great Buffett-isms (sayings of the billionaire investor Warren Buffett) is, “do not invest anything you do not understand.” It sounds simple enough, but people regularly break this rule with disreputable and even reputable investments. I have worked in the financial industry just under 20 years but have been in situations where someone couldn’t explain the investment to my satisfaction.

Asking the right questions

My most pressing questions are:

  • How does everyone get paid?

and

  • What are the risks?

If I cannot get clear answers to those questions, I will not touch the investment with a 10-foot pole. Generally, the more complex the investment the more likely you are to make a mistake by investing in it.  

If you feel like you may have already experienced investment fraud, FINRA offers a list of steps to take to recover from it. If you are not sure, solicit assistance from a trusted advisor, friend or family member to consider the situation.  

 

How My Wife Started A Successful Business & What It Took To Get There

May 04, 2018

Editor’s note: This post is part of our Personal Stories series, where our financial coaches share their own financial journey. We hope you enjoy getting to know us a little better and ultimately learn from our mistakes!

OK, so here’s the situation…

For several years my wife had been dropping hints that it was her dream to have her own business. She had a distinct vision for how she wanted to disrupt an industry and provide a unique service that she could not find anywhere else. I had always been mildly encouraging saying, “Sure if our income has progressed to this level and if we paid off all of our debt except for our home and if we got our savings to a certain level, then it will be worth a shot.” Suddenly without even realizing it, we hit those goals and my wife handed me a business plan.

“I got this”

Off we went into the wonderful world of starting a business. While we did a lot of things right, we have learned (and are still learning) some crucial lessons on this journey. For example, without realizing it, when I laid out those goals of paying off our debt and building savings, I was implementing a very crucial step to us being able to sustain a new business. To the extent that your business has overhead costs, the stronger you will need to be financially to stand behind that business. Here’s how we did it.

Counting the costs

When my wife handed me the business plan, I found she had made an itemized list of every expense she could find for the business and the time frame for each expense. She had taken hours to uncover the real-world cost of every piece of equipment, researched leasing costs, and estimated salaries for the first 3 years of the business. It allowed us to make realistic estimates for how much we would need to set aside and a time frame for profitability. Consider using the Small Business Adminstration’s template to lay out your costs.

Planning for error

My experience is no one has a perfect business plan. Even the most meticulous planning can be derailed by real life. That means making sure you have resources over and above what you have budgeted, in case things go sideways. In addition to your savings, assess your access to low interest loans. Banks generally will not lend to a start-up business, so having a good personal financial reputation is very helpful.

At the end of the day

These days my wife has a successful business that enables us to raise 3 children and live in the neighborhood we desire. Her work provides the flexibility to accommodate the fact that I occasionally travel for work, and being a business-owner allows her to choose how big she wants to go, depending on where we are in life.

If I could turn back time

One thing I’d say she’d do differently would have been to get a little more experience in her particular industry before launching her business. From the outside looking in, it can be easy to see that an industry needs a shakeup. For instance, Netflix wasn’t the first company to present an alternative to cable. On the other hand, it can be helpful to spend some time in that business to understand the reasons why companies do things a certain way.

In our circumstance, my wife always wondered why the level of personable service was so low in her chosen industry. If she had found a mentor or worked part time in the industry, she would have discovered that hiring and keeping employees was a challenge for everyone in the business. With a little real-world experience, we could have planned to manage this obstacle. Start networking in your desired industry to get an idea of those real-world obstacles. You can also find business mentors through the SBA here.

If I could tell you just one thing

It’s worth it to take the time and get your finances in order first before launching a business from scratch. There are success stories of people of who ran their business solely on their credit cards, but those are few and far between. There are far more stories of people who failed at a business using credit cards, and wound up back in the daily grind, saddled with high interest debt and nothing to show for it.

Your likelihood of a successful business goes up substantially if you have a firm financial foundation. Start where you are doing the things you can do. Go ahead and start itemizing the expenses, lay out your business plan, and try to get some of that on the job experience and mentoring. These are all things that cost you nothing but you can use that time to build the financial foundation to be ready when opportunity knocks.