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 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.

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.  

Emergency Fund

The first thing that any planner worth his/her salt does for a client is to establish an emergency fund.  An emergency fund is made up of investments with liquidity and serves a multitude of purposes.   Among these is covering unforeseen expenses, satisfying deductibles, car repairs, and home repairs.

Benefits of having an emergency fund:

• Covering higher levels of deductible making insurance policies much more affordable. 
• It can be used to cover unforeseen expenses.
• As a source of liquidity when markets are too volatile to sell off investments.
• Used to cover loss of income due to extended medical leave or loss of employment.

A recent article I found in the Wall Street Journal stated that thirty-eight percent of the individuals surveyed weren't prepared to cover even a $500 car repair or a large medical bill.  This is a result of living paycheck to paycheck.  A good rule of thumb is to have three to six months of living expenses in reserve.  The fund is accumulated a little at a time. 

An Emergency fund should be kept in money market funds or as an alternate in short-term bond funds with low volatility investments.  

 

Charles Shearman is a Certified Financial Planner with 32 years experience as a financial planner.

www.prosperofp.com 

It's the beginning of a new year!

Starting into the new year is the prime time to plan for the future. Basic planning is dependent on three things, cash flow planning, tax planning, and projecting your asset growth based on these two previous categories.

Cash flow planning consists of projecting future revenue streams as well as future expenses. An estimation of your future expenses needs to be as accurate as possible. Things such as capital expenses, buy a new car, or buying a new house needs to be included with the ongoing expenses. It pays to be specific with these items even though you might be off by the year in which they occur.

Tax planning is based on the revenue you project and the deductible expenses that you incur. These items should already be in your cash flow projections and the two projections need to be interactive with each other.

The net worth projection needs to be based on the taxes, cash flow, and pure asset growth. Items such as the net cash flow need to be included in the investment detail of the projection. As well as the purchase of capital assets, the car, the new house, need to be added to the assets already on the books. You may find it advantageous to have the net cash flow to flow in and out of a cash account.

You may seek professional help with this task. A true comprehensive planner is out there you simply need to do your homework. Professionals come in two forms, the fee only planner who charges by the hour and the commission-based planner who collects commissions on the products that he puts in place. Make sure you understand how they are compensated. They should have to disclose this in their presentation.  Above all they should be a Certified Financial Planner (CFP)

Buy Smart

    I have always had medical professionals as clients. One thing this has taught me is that being smart enough to pass med school doesn’t necessarily translate into financial intelligence. Doctors, as well as any professionals who have a steadily increasing salary at the start of their careers, can often make purchases that hurt their cash flow down the road once their income plateaus. This makes it all the more important to develop an emergency or “slush” fund early in your career no matter what your occupation. Then later in life, once your rainy day money has grown, the finer things are less of a strain on your bank account. The two main purchases that can set an individual up for financial distress are expensive cars and big houses. Making the right buys can lead to a life of comfort, if done correctly.

 

Fancy Cars 

 

When individuals jump up into the six figure income bracket one of the first things they want to do is buy an expensive new car. What they fail to realize is that when they drive their so called “investment” off the lot, it loses thousands in value immediately. Their new car will then continue to lose value until the wheels fall off. But Chuck, “How am I supposed to show off my financial superiority while I’m on the go?” It’s  simple. Buy used. Say you think you would look nice in a Mercedes-Benz SLK350. You’ve worked hard to bring in the money and its time to reward yourself. A new SLK350 costs over $55,000. A used last year model costs $36,000. Paying an extra nineteen grand for that “new car” smell seems quite ridiculous. Any other investment that declined in value by 35% its first year would make you furious. Even for individuals with more modest tastes, a Honda Civic loses four thousand in its first year off the lot which is still a 20% decrease. Do yourself a favor and let someone else be the sucker who has to unload their bad investment in a year’s time.

 

Living Large 

 

The other mistake many make is purchasing a house that is too big early in their careers. If your job is putting fat stacks in your slacks the worst thing you can do is tie yourself down to a house that will pull cash out of your pocket for the next fifteen to thirty years. We at Prospero Financial always push to develop a solid emergency account before purchasing an expensive home. Buying a less expensive home allows you to build that emergency fund faster.  You will then be able to make a larger down payment on your next home. This will give you more equity to build on. You will need 20% equity in the property in order to avoid private mortgage insurance and decrease your mortgage payment.

 As unpredictable as the housing market is, you want to make sure that your house and property are sellable when the time comes. Choosing your neighborhood wisely can make a huge difference in the future. Picking the right house in that neighborhood can be just as important. The most expensive house in a neighborhood will be the hardest to sell. When prices in housing go up your palace might increase in value, but a home is worth nothing if there’s no one to buy it. The cheapest house in the neighborhood can be just as tough. Look for a home that is in the upper middle price range for the neighborhood you are moving into and you will have made a safe choice if you ever need to liquidate the property. Lastly, when  it comes time to sell a house, you need to leave yourself at least six months time to keep from leaving money on the table. Selling a home can be profitable, as long as you make smart decisions along the way.

Related articles

The Millennial Home Buying Guide

Should You Buy a New Home or Older Home?

Not Ready To Retire Yet?

 I was looking around my networking group and it seemed to be made up of a large group of people on their second or third careers due to company downsizing. They probably had a retirement plan, 403(b) for not-for-profit entities or 401(k) for any other entities, after leaving a previous employer.  They may be spending this to maintain their lifestyle and that's probably alright as long as that doesn't go on for very long. It is better to reduce your lifestyle then drain your retirement plans.  You not only don’t have the money for the retirement years you also don’t get the growth on that money that you withdraw from these accounts.   

Not only do you pay tax on the withdrawls but this can be doubly bad if you're paying tax penalties on an IRA or 401(k).  The IRS may charge a 10% premium to withdraw funds.  This is if you haven't reached the age of 59½.  There are several exceptions to the age 59½ rule. Even if individuals receive a distribution before they are age 59½, they may not have to pay the 10% additional tax if they receive a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55 (age 50 for qualified public safety employees).  Or they are receiving a series of distributions in equal payments based on your life expectancy.  These are not the only exceptions but those most likely to apply.    

Another way to avoid the 10% penalty is to prove hardship. A retirement plan may (but is not required to) allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need.  

You should consult your tax Advisor before you undertake this.