Your Money Matters More

Financial Rocket Science

 

 

Personal wealth management is not rocket science. However, it does require those of us who are professionals to use the same focus.  A rocket scientist sets the goal of reaching a destination and all of her efforts are aligned to make it happen. She doesn’t do it in a day, but overtime completes the mission.  When the unexpected occurs she doesn’t scrap the goal, she adjusts.

As a Certified Financial Planner it is my job to help you refine your goals. The market has created the opportunity for growth similar to the way a fire clears the forest for new growth.  If you continue investing for the long term you can’t lose sight of that goal.  Through the use of specific financial tools we can increase the efficiency of achieving those goals.

One specific tool is dollar cost averaging.  While prices are fluctuating we invest uniformly. Over time making the same investment, levels any crests or valleys that the long-term investor encounters. Whether it be periodically investing in an IRA or the payroll withholding in a 401k, dollar cost averaging provides a more consistent return as the market rebounds.

Even professionals have a difficulty timing the market.  Currently, we are in a situation that has no precedent; there is no foreshadowing.  Trying to guess what is about to happen will only derail the long term growth of your wealth. A CFP, with any experience, will keep you on track.

The role of a financial planner is to help you prioritize your goals for the optimal outcome.  Like any good rocket scientist knows, you must have a good return.

Charles T Shearman, CFP

Prospero Financial Planning

www.ProsperoFP.com

 

 

 

The final installment (Taxes)

The final installment in this series on cash flow relates to making your tax rate work for you.There is no legal way around paying taxes.  However, you are not required to pay more than your share and there are ways to use the tax code to reduce that share.  As always, the goal is to maximize your cash flow with as little effort as possible.

The first line of defense is to using an employer sponsored retir  ement plan such as a 401k or 403b if available to you.  We all want to retire someday, so it is never too early to begin saving towards that goal. These contributions are tax deferred until retirement when you would optimally be in a lower tax bracket.  Once again, make sure that your contribution is equal to that which your employer matches. 

If you don’t have access to one speak with your Certified Financial Planner for the most appropriate IRA for your needs.  She can compare Roth versus traditional IRA to find the best alternative for your tax bracket.  Don’t make the financial mistake of assuming you don’t have enough money to save some money.  Over time that savings compounds and your tax rate will be less when you do retire and use the money.

Don’t treat your taxes like a saving account.  Your refund is not a windfall.  The government has been using your money for twelve months.  Over this year, you could have been using your money to your advantage.  Look at your budget, determine which of your expenditures tax impacted, for instance are, if you have a large amount of prescription cost and your company provides a 125 Plan or a Health Savings Account allocate money to these plans. They are pre-tax and as long as you expense the money for medical cost they are never taxed. However, the difference between the two is that 125 plans are use it or lose it, so be aware of what you have to spend and what qualifies as a medical expense. An advantage to the HSA is that it behaves much like an IRA in that if it is not used, it rolls over and is tax deferred.

A tax savings idea for those with a family is a college saving in a 529 plan.  These allow you to make a contribution after-tax which grows tax free as long as it is spent for education. All fifty states offer these plans, but you need to speak with your CFP because some States offer additional benefits in state taxes for these plans.

Taxes provide services beyond what fire trucks and police cars.  Knowing the tax code and using a CFP to help you maximize the benefits within can help you today as you plan for the future. 

Prospero Financial Planning can help visit our website at www.ProsperoFP.com

The New Year is Upon Us!

 

 

 

 

 

The New Year is upon us, and as always, the thought of a fresh start comes with it.  Financially, how do you make this happen?   This is the second blog in a series about cash flow. The focus on budgeting to help establish positive cash flow for the future begins now.

First and foremost the returns from paying off credit cards are not to be discounted.  Interest is a big negative to your financial health.  It is not deductible and overtime it eats away at your assets. You can’t get ahead if you are constantly paying in arrears.  Remember when making your yearly budget that to make a budgetary line for gifts.

Cliché as it sounds, pay yourself first.  Remove some money, before you see it.  Transfer a set dollar amount into a gift account as a fixed budgetarye item.  The most valuable thing is pre-tax savings for retirement.  If you have access to an employer sponsored retirement plan contribute at the maximum In the final matched amount.  Although this is not sufficient, in and of itself, for your retirement, it is the first step in on the road to financial security.  Have no access to a employer sponsored plan, create an IRA with automatic deposits.  As of 2019, a contribution of $7,000 can be made if you are over 55 years old, into an IRA.

An emergency fund, in the budget is not just a good idea, but can keep the budget afloat.  Often small emergencies such as car repairs, home repairs, or health issues come as a costly surprise.  Even the deductibles that seemed reasonable when buying the insurance can be out of reach if there is not fund to cover them. 

Pets and children: who knew how much cute cost?  So often the surprise of incidentals like a vet visit derails a healthy budget.  Children’s activities come with not only health cost, but the added expenses of those costumes/uniforms and travel are the stuff of nightmares. The emergency fund is not just there for the obvious, but also the unexpected due to naivety when becoming involved with a new endeavor.

Other items that are predictable and can be budgeted by looking back to look forward.  Sit down and take a hard look at what you spent last year and find the trends in your spending.  Categorize these trends to the extent that you can and use this to predict what you will need to have for the coming year.  

Sticking to a budget is not the goal, but it give a path of control in spending.  Don’t give up on the budget just because you got off track.  Adjust the other spending around the unusual expenditure.  Once again your Certified Financial Planner can be helpful in creating a budget that works for you.

In the conclusion of the series, taxation will be the focus of creating positive cash flow.  Knowing how to use your tax rates to your advantage gives you a leg up in predicting your cash flow.

 

Happy New Year from Prospero Financial Planning!

The most wonderful time of the year!

It’s the most wonderful time of the year…for worrying about cash.  In the next few weeks I will be addressing healthy cash flow going into the New Year.  Credit management,budgeting, and taxation are the focus of this series to help achieve a robust financial picture so that this time next year you will be on better footing.

Few people appreciate the impact of cash flow management on their financial health. Good management reduces the need to borrow, which in return keeps unnecessary interest payments at bay. By having a budget, knowing what you are actually spending money on, allows you to better manage your cash flow.  There are products available for your computer, some on-line banking features and even apps that can simplify the process.

Going into December the strain of the season manifests itself in an artificial need to spend money.  A budget of the previous eleven months can be negated by one month of uncontrolled spending.  We have a tendency to rely heavily on credit, especially store cards.  The more cards used the more minimums there need to be hit to get those discounts or points.  Actually, it is all well and good to do this if you have set aside cash to pay them off in January, if not you are incurring major high percentage rate payments.

Credit cards can be tricky.  The fantastic zero percent offer quickly morphs into a huge rate after the fixed period of time elapses.  Keeping an eye on the clock or in this case calendar is beneficial if you are prudently paying off the card before the rate jump. Stores, for example, often offer a discount if purchases are made on their cards, but it isn’t a true savings unless they are kept paid off interest free. Cash back options are frequently a moving target offering differing amounts on different types of purchases.  Let’s say you are getting one rate on fuel and another for grocery purchases make sure that t you are aware of this and use the card to your advantage.  Don’t rack up invisible savings that you aren’t actually taking advantage of.

These cards may also come with a bonus that has an expiration date.  If you are counting on this bonus as a reduction in the cost of future purchases, you have to make a point of using the bonus before it is no longer valid.  If you don’t it isn’t a bonus at all.

The discounts are attractive on the surface.  Retailers are not naive, they encourage you to use those cards to get the discounts, but a 10 - 20 % discount is recouped by the 21-27% you will pay if it not paid off in the January.  Not only have you purchased extra goods, but you are paying more for them than you think.  Do the math...if you had a 10% discount, but are paying it off at a 27% interest rate you would have saved by paying full retail. 

Concentrate your purchases on your lowest interest rate card.  Buy only what you can pay off, use cash when possible, and as you pay them off, pay the highest rated card first.  Prudence isn’t Scrooge’s first cousin; you can still be thought in giving, while at the same time making wise decisions about spending.

The series will continue with a look at ways to budget going forward to ensure a prosperous New Year.

 

From the Prospero Financial Planning Family to your family, Happy Holidays.

Secondary Education Dollars

Congratulations! You are in possession of a future high school graduate.  The carpools have diminished, the lunches have been packed, and homecoming and prom dramas are behind you. You are about to enter the most expensive part of raising a child…and you thought daycare was costly!

There is hope if you and your student are willing to be creative.  In about their sophomore year, given foresight, your teen could have taken Advanced Placement Courses or been involved with programs offered by high schools that allow for college credit.  This does require some footwork.  Talking to a counselor early and knowing your student’s goals is required.  If the student has a culinary, cosmetology or trade interest early, look to see what is available within the high school curriculum (Remember, in most States the educational dollar now follows the student.  You are no longer held by district boundaries.) Applying the credits gained in secondary school to post-secondary often the reduces the number of credit hours required for a degree and are more cost effective in the long run.

Scholarships and grants are free money; no amount of is too small. Talk to, but don’t depend solely on the high school counselor to find these all.  Participation in extracurricular activities, can be a source of scholarship.  It isn’t just the high school athlete or academic that captures these.  Do your research.  A caution here: the scholarship dollar value does not generally rise with the tuition cost.  Often there is added participation requirements on these as well.

Vocational/technical schools and apprenticeships are viable ways into employment without the high cost of other higher education.  Honest dialog with your student about career goals and interests before heading down the road to college is paramount. Projecting parental expectations onto kids without considering the financial ramifications can lead to years of debt.

Beginning at a community college can  offer multiple benefits. The cost is less per credit hour and most transfer to State Universities as well as the cost of "finding themselves” is at a greatly reduced rate.  Commonly, there is up to a 47% reduction in tuition and an associate’s degree can be the added bonus! If one of these colleges is available nearby and your relationship can withstand the growing pains into adulthood, living at home can also be added monies saved. This does not decrease your water bill or food consumption! 

Room and board savings can’t be discounted…as long as it is the right thing to do with your burgeoning adult. You will still incur commute expenditures, parking fees, and they do have to eat, but on average approximately a third of the total yearly cost for a major state school is room and board.  Communicate.  Although not financial, living at home has a cost; in the end you would like to be on speaking terms.

If your student is focused on a program that only fits with a university, starting the program freshman year may be the best choice. There are options here as well.  Work study is available at most universities and carries the added benefit of preparing them for the workforce in general. 

Don’t be intimidated.  If higher education is planned for appropriately, it is not insurmountable. Your Certified Financial Planner can help you prepare a plan that works for you.

Retirement is Personal

Retirement is personal:  it can be an elusive goal or it can be a well -planned gift to yourself after a long career.  There are key milestones in this process. To avoid tax penalty waiting until you reach the age of fifty-nine and a half to take distributions from your qualified plan maximize your benefit. Contribute the maximum matched dollar value—the more the better—and keep it invested.  When you do reach fifty-nine and a half you have more options. Remember though, fifty-mine and a half is a number; retirement is a goal.

 

To avoid any penalty from a qualified plan your birthdays count. Once you are fifty-nine and a half, there is no longer a penalty to remove your money, but your money can still work for you if you leave it.  The penalty is considerable: it not only becomes taxable income, but there is an additional ten percent tax on the amount of the withdrawal. Conversely, if your money is not in a qualified plan these restrictions do not apply…you will have already paid tax each year as it accrued but you will have less to invest and you will have less accumulating tax defered. As always, talk to a Certified Financial Planner (CFP) before making any move.

Putting away the maximum dollar amount matched by your employer makes you less dependent on the rate of return as your investment accumulates funds. If you can add other moneys to this amount they too can grow tax deferred. The tax deferral allows you to accumulate money faster. For example if your 401(k) is being invested at the rate of $3,000 a year, you are not only saving the whole $3,000, but you are also compounding interest on that investment tax defered. If you are able to leave it until you are fifty-nine and a half, you will not pay tax until it is distributed.

Waiting until you are at the optimal age, you can take the entire amount or you can take any amount you need to live on and let the balance ride.  Determine with your CFP what supports your lifestyle. You can control your taxable income by controlling your distributions. The ability to combine your defined contribution plans gives you better economy of scale when it comes to selecting your investments, also.  

Although fifth-nine and a half is the point where penalties no longer occur, retiring later can have even greater benefit.  Your CFP can walk you through these options based on your personal financial standing. Begin planning as soon as possible to allow for the optimal benefit when using a defined contribution plan.  When the time is right—enjoy! 

Children are Expensive

 Children are expensive. That is a given: but the cost of higher education is growing at an unprecedented rate. A 529 Plan, a type of college savings fund, is a tax free way to accumulate money for college expenses. After the birth of a child, begin to put money away for college. The owner of the account can contribute for a named beneficiary. If for some reason the beneficiary chooses not to use it the owner can transfer it later to a different student. 

There are a wide selection of plans available. Each State has its own plan with some offering more than one, and an investor can choose from any of these. Each state provides its own residents additional incentives, but these tax incentives should be subordinate to the underlying returns of the investments of the plan. Always seek the advice of a Certified Financial Planner (CFP) when selecting a plan. 

Recent graduates have left college with a crushing debt load. An alternative to this is paying out of pocket. Making wise investments early allows compounding of returns to work for you. This is just one of the tools that your CFP has in their arsenal.  

6 Steps to reduce your income tax for this year

1. Max out your at least your matched retirement plan deductible contributions
2. Recognize any capital losses in your taxable accounts
3. Prepay as many deductible expenses in this tax year
4. Make as many non-cash contributions to charity that you can (Including that old broken down car that you no longer need)
5. Have an accounting of medical expenses ready for your tax preparer including prescriptions, deductibles and direct medical expenses
6. Have an accounting of your miscellaneous expenses that include moving expenses and non-reimbursed business expenses

If you have done as many of these items as you can you will be better prepared when it comes to the time for filing your income taxes!

Financial Rules of Thumb

I have relied on general rules of thumb for the financial well being of clients.

Financial security results by adhering to basic principles:

Controlling Debt
    o Not exceeding 20% of your net worth (excluding the mortgage and net equity in the home)

Housing Costs
    o should not exceed 28% of your net income
    o includes all the expenses related to your house

Emergency Fund
    o Represents three to six months living expenses
    o Should be liquid and not volatile
This would include your money markets, short-term bond funds, and other cash equivalents.

Retirement Funding
    o Contribute 6% on a pretax basis to an IRA or a 401(k)
    o Or 8% funded on an after tax basis

Following these four steps should result in the accumulation of enough wealth to retire comfortably

If you would like more ideas contact.:

Charles T Shearman, CFP

Prospero Financial Planning
23 S 8th Street, Suite 3400
Noblesville, IN 46060
Work (317) 774-5136

www.prosperofp.com

 

Portfolio Construction

When developing a portfolio for the average investor the key points you need to consider are: time horizon, taxability, liquidity, risk and diversification. 

 

• The first thing you have to figure out is what time frame you are going to need the money.  The longer time you have before you need the money the more aggressive you can be.  Due to the time you have to ride out cycles of the stock market.  Saving for retirement is different than saving for the down payment for the purchase of a house.  You can invest for the long term if you have a number of yours until you need the funds.  By increasing the amounts of risk you are taking you can statistically increase your returns.

 

• The second thing to take into account is how the money is going to be taxed.  Investments that are in a tax-free environment can stand more ordinary income. With taxable income you can write-off losses that you incur.  Also capital gains are preferable to ordinary income in a taxable environment.

 

• The next area that you need to worry about is the amount of liquidity available with your portfolio.  The longer you have to invest the more able you are to use illiquid assets like real estate.  Real estate functions on a longer cycle than stocks.

 

• You can’t expect return without taking a little risk.  Risk translates volatility. The level of risk that you take is what you personally can tolerate.  Risk is measured in different ways including standard deviation and/or beta.  They are measured relative to the standard deviation and/or beta respectively of the market as a whole.

 

• Last but not least to be sure that your portfolio is diversified by having enough holding, by industry and by type of investment.  Income oriented investments tend to have different characteristics than appreciation driven investments.  International funds add an extra level of risk in the fact that there is an exchange rate in play in addition to the underlying stock making then inherently more volatile. 

You needn’t go it alone; contact a financial planning professional.