The Financial Minute

New Website and Bog Home!

2011-02-01T10:33:00.001-08:00

If you have stumbled across my old blog, please redirect your browser to the new home for my website and blog at www.vhfinancialmanagement.com . I hope you enjoy the new website. As always, I am happy to hear thoughts and comments.

Ever Been Caught in the Rain?

2011-01-11T12:50:00.000-08:00

We’ve all been caught out in the rain, and as an avid golfer, I can honestly say I have played golf in weather bad enough to make passersby shoot me strange looks from inside their dry cars. While an all-weather suit is a plus, a good umbrella is a must to stay dry. Just as an umbrella is a necessity in any die-hard golfer’s bag, a financial umbrella policy is a wonderful tool to protect your family.

An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.

Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.

The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.

We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.

So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.

A Financial Resolution!

2011-01-06T12:39:00.000-08:00

With the start of the New Year, many people set out their New Year’s resolutions. Financial planning resolutions should not be forgotten.

Financial planning is a broad process of decisions that collectively lead to forward financial progress. Or at least that’s the way it should be. Often I find that the forest is missed because of the trees. The small details get over-looked, and it’s the small details that matter.

One of the details that seem to get left behind is the designation of beneficiaries. Beneficiary designations are extremely important in the big picture. Assets that pass via beneficiary designation pass by operation of law. What does this mean, and why is it important? After the death of the owner of an asset, the asset will pass in one of two forms: via the will of the estate owner or via beneficiary designation (operation of law). If the asset has a beneficiary, the asset will pass to the beneficiary regardless of what the will of the decedent states because operation of law supersedes the language and wishes outlined in the will. It’s imperative that beneficiaries are up-to-date and reflect the wishes of the owner of the asset.

Life events should always be an impetuous to review designations. Marriage, divorce, death, and births, are all examples of life events that would trigger a review. The key is to have the asset pass as the owner wishes. For example, if an ex-spouse is still listed as the primary beneficiary, the asset will probably not pass as the owner wishes.

There is another reason to utilize beneficiary designations: cost! Assets that pass via the will of the owner must go through a legal process called probate. The probate process carries administrative cost, such as court costs and legal (attorney) fees. These costs reduce the overall value of the asset. For this reason, naming the estate of the owner as the beneficiary is usually not a wise choice because the asset will then have to flow through the probate process.

The most common example of accounts that pass per operation of law by the designation of a beneficiary is retirement accounts, such as 410k, 403b, and IRAs. Since these accounts typically hold a large portion of the average investor’s assets, it’s important to have the beneficiary designation appropriately assigned to avoid unnecessary probate. It’s also important to include a contingency beneficiary or secondary beneficiary, as well. Most accounts have this capability available for the account owners.

While the physical act of updating a beneficiary designation is not a difficult chore, it is something that often gets overlooked. It’s important to take the time to keep the designation of beneficiaries up to date and reflecting your wishes. If this process seems confusing or overwhelming, it would be wise to discuss the topic with a fee-only financial advisor. If you are searching for a financial advisor, www.acaadvisors.org is a great place to start.

Hello 2011!

2011-01-04T09:10:00.000-08:00

As we say goodbye to 2010, we look ahead to 2011. We hope for global economic stabilization and an improving job market, but we need to pause and give thanks. We should be thankful for a wonderful couple of years in the stock market. Yes, that’s right….I said we should be thankful for the last two years. Did you know that the total combined return of the S&P 500 for the last two years is almost 42%....26.47% in 2009 and 15.46% in 2010. Those are impressive returns.

The most impressive fact about these numbers is that most people have no idea how strong the market has been. Where are the trumpets announcing the close of another successful year? Where are the media leaders shouting the good news? Unfortunately, you won’t find it. Good news doesn’t sell like bad news. Remember the close of 2008? The S&P 500 closed down 37%. Ouch, it was painful for all of us, and we certainly knew because everywhere we turned we heard, quite loudly, the bad news.

We can’t control what is touted to the general public, but we can control what we filter and what we ingest from an informational standpoint. This is good news! We should stick it in our back pockets and hold onto it. How long did we walk around with our chins down living in fear that the sky was falling during late 2008? Well now’s the time to shine. Pick your heads up and be thankful for participating in the stock market.

There is a point to my commentary, and the point is the markets work. The stock market is a great tool when used correctly. Some folks feel they are smarter than the market and try to time buys and sells. These folks usually get whipsawed and end up on the bad side of market returns. Those who chose to follow sage advice and stay committed to the market were rewarded for their patience. Those who took things even further and made the decision to continue to dollar cost average (buy consistent amounts at regular intervals) where rewarded even further.

With two great years behind us, how does this position the markets for 2011? Unfortunately (or fortunately if you are wise) ,you won’t find a prognostication here. I have no idea which way the market will travel through this New Year. I am certain of this: investors should stay committed to prudent investment philosophies, such as diversification, rebalancing, dollar cost averaging, and tax efficient investing. These strategies win in the long run. Simple math proves this to be true. The returns of the S&P 500 over the last 16 years (1995-2010) produced an average return of 10.66% a year. Pull out any one year individually and you will find a high to low range from 37.58% (1995) to -37.00% (2008), but it’s not about the outliers. It’s not a sprint: It’s a marathon. It’s the commitment to the long term approach that wins in the end.

We have said our goodbyes to 2010. We sang, “Should old acquaintance be forgot and never brought to mind.” But I say we don’t forget. I say we learn from the past and be thankful for financial wisdom that served us well.

Auto Gap Insurance: Why you may need it!

2010-12-15T13:37:00.000-08:00

It seems that almost every other TV commercial during the holidays has a gesticulating car salesman telling why you need a new car. Of course, these dealers are trying to move stock by year end. “Hurry before the best deals of the year end,” is an often stated selling point. If you find yourself driving a new car, you may need to think about an auto gap policy for your new car. Gap policies are a useful policy addition that may save you money.

What is a Gap Policy?

A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.

Why does this matter?

If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.

Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.

Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.

The Theory and Reality of Emergency Funds

2010-12-10T12:04:00.000-08:00

Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.

I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.

My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.

In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.

The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.

The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.

What is a Diminished Value Claim?

2010-12-02T11:15:00.000-08:00

Recently, my wife was involved in a little fender bender in a parking lot. She was hit by a young driver who just wasn’t paying attention. The damage was not dramatic and no one was hurt. After gathering all the vital information and contacting our insurance company on the spot, both parties went on with their day.

With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?

In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.

A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.

The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.

If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.

Are You Asking the Right Financial Questions to Develop Wealth?

2010-11-29T13:36:00.000-08:00

Recently, a prospective client walked into my office concerned about his portfolio and was seeking investment advice. The interesting fact was the investment question was not the right question. Investments were not the issue, and this is not uncommon.

While investments are the easy target for financial blame or success for that matter, investments are usually not the catalyst to wealth. Real wealth is created by managing financial elements that can be controlled, and the stock market certainly cannot be controlled. It’s more important to ask questions that will assist in wealth creation.

What questions should you be asking yourself?
1. Are you spending less than you earn?
This is the starting point for all looking to create wealth. If expenditures exceed income, financial success will not be attainable. Actually, it’s quite simple: most financial problems can be solved in one or two ways….earn more or spend less. Living within your means is the first step to financial freedom.

2. How much are you savings?
Spending less then you earn may not be enough. A good target is to save at least 10% of earnings. This financial tenet is the foundational footing in which all financial growth is built upon.

3. How much are you paying in taxes?
Taxes are the single largest recurring expense that most of us will have from now until the day we die…..and maybe even after death as well. While taxes are a requirement, maximizing tax savings strategies are the responsibility of the taxpayer, and most taxpayers simply fail to utilize available strategies. Whether the cause is laziness or a lack of tax knowledge, the end result of anemic tax management can cost thousands of dollars.

4. Do you have consumer debt?
Not all debt is bad, but consumer debt (credit card, car loans, revolving debt from furniture stores…etc) is detrimental to financial success. Most often, debt is incurred because of spending issues….spending more than you earn. Elimination of consumer debt is paramount for financial stability.

While poor investment returns may get the blame for the lack of financial growth, the usual suspects to poor financial growth can be attributed more often to one of the four areas above and not investment returns. Investments are an integral piece of the financial planning pie, but investments are not the holy grail to financial bliss.

Control the areas centered around the four questions above and then worry about investments. Spend less than you earn, save at least 10% of your earnings, reduce taxes, and eliminate consumer debt, and financial progress is just around the corner.

Can you honestly and successfully answer these four questions? Are you worried about investments when investments aren’t the true thorn in your side?

Why Vision Matters!

2010-11-16T14:32:00.000-08:00

Many of us business owners have spent time in thought contemplating business goals, but, while goal setting is certainly an important part of a successful business venture, vision is the glue needed to adhere our goals to the values in our lives. Goals are mile stones, and vision is the guiding purpose of our goals. A business without goals may be at risk of failure, but a goal without vision can destroy happiness. For example, simply setting a goal to find a job is not enough. Vision is needed to establish the purpose of employment.

So how does vision help my business? One needs vision to develop a proper plan, so, again, a plan without vision may not capture the values of the business owner. Let’s explore a little deeper. Let’s say a business owner has a goal to generate $100k in revenue. Is that enough? Maybe….but probably not. What is the vision of the owner? Does the goal incorporate this vision? Maybe the $100k goal is obtainable but at the expense of the owner’s family due to travel for business. A plan that includes vision can help ensure that a business will stay connected to the values of the owner and optimize a great work-life balance.

The best place to start is by asking yourself about the continuity between your business life and your personal life. Set the overall vision of your business. How does your work life balance look? Does your business involve employees? If so, how many and how would you like to treat them? These questions can help set the stage for vision creation. Once the vision is created the goals should be set and measured against the vision to make sure they are congruent.

Large and small companies write vision statements to guide the decision making process. If a decision is in opposition to the vision statement, the decision should be reconsidered. For example, a business owner has the following vision statement….To create the best widgets in the most ethical manner. So, if the business owner can outsource the widget production to a factory overseas with deplorable conditions but increase profits 10%, the decision flys directly in opposition to the vision statement.

Goals and vision work hand in glove to create a successful business, but one without the other can create a crack in the path to happiness. When creating a business plan don’t forget to include a vision statement. Do you have a vision statement? What are you doing with your business to create a great work-life balance?

Tax Diversification and the ROTH Conversion Debate!

2010-11-11T06:53:00.000-08:00

If the downturn of 2000-2002 didn’t teach us about portfolio diversification, 2008-2009 certainly did. Simply put, diversification spreads risk. Most people understand the importance of portfolio diversification, but tax diversification is still a mystery to most. Essentially, the theory is to maximize tax reduction strategies and reduce taxation. My clients hear me talk about this rather frequently. One particular area where this is often overlooked is in the world of ROTH conversions.

A ROTH conversion can be an great tool for some folks, but a conversion for others may not be all that it is cracked up to be. This is where tax diversification comes into the picture. The beauty of tax diversification is that it gives you choices. Since we don’t know where tax rates will be when we retire, having options of pulling money out where it makes the most sense is a wonderful way to manage our tax liability. Here’s how it fits into the ROTH conversion topic.

For example, I have a 45 year old client that has a small IRA ($50K) that for many advisors would look ripe for converting. This client also makes a ROTH contribution every year (due to restrictions) and has a nice nest egg in his ROTH account. So, let’s move ahead to retirement when the client is taking distributions from these accounts. If the only funds withdrawn are from the ROTH account, he will leave tax savings on the table. The tax code allows for a standard deduction and personal exemption that will eat up some taxable income every year. To chew up the income reduced by the standard deduction and exemption, the traditional IRA is a great place to pull from. Currently, a single tax payer, age 65 earning social security but no other taxable income, can withdraw roughly $10,750* from an IRA and not pay tax on that withdrawal.….all while still withdrawing from the tax-free ROTH. One of the great sins in tax planning is to let free money go to waste.

Without making this more complicated than it needs to be, here is an easy way to think about it. For the current tax year, the 65 year old tax payer in the example above can pull $10,750 from a traditional IRA tax free. This taxpayer also received the tax deduction on the money when it was originally contributed to the traditional IRA, which saved tax dollars at the time of the contribution. This creates the best of both worlds for this money: it’s contributed on a pre-taxed basis and is withdrawn tax free. This is tax diversification at its best.

Let’s go back to my original example. Essentially, we learned that my client doesn’t need to convert this IRA. He will be able to capture the same result in retirement as if he had converted…..but just a piece at a time. If he had converted his $50k IRA to a ROTH, it would have cost him $12,500 in taxes. This truly illustrates the magnitude and complexity of the ROTH conversion debate. It also points to the value in proper tax planning and creating tax diversification. So if you are considering converting an IRA to a ROTH, you should ask yourself if you are improving or reducing your tax diversification for retirement. Do you have a tax diversification story or idea you would like to share? I would love to hear from you!

*This is a generic example to illustrate a point. Your situation may be different, so you should consult a tax professional.

Rome was not Built in a Day!

2010-11-02T13:48:00.000-07:00

One of the stereotypical American traits is impatience. I want it, and I want it now! Sound familiar? This can be damaging from a financial standpoint…..not only from a spending perspective, but also from a planning perspective.

Financial planning is a process, or at least it should be. Some planning firms (mostly sales driven firms) operate as if the financial planning is event oriented. This means the planning is usually completed with the presentation of a hefty multi-page, disorienting, chart and graph filled report. While these plans are usually well done, they are missing one key component: the fact that life happens. A plan put into action today is usually obsolete tomorrow.

Life is constantly changing, and so should your financial planning. Every new job, home or car purchase, or a birth of a child can dramatically change a financial plan. Even smaller expenditures can throw a wrench in the mix. Ever had to pony up for a new HVAC unit? The ebb and flow of life can certainly be beautiful, but financial give and take is not conducive to a static financial plan.

As a comprehensive planner, I love the fact that my clients’ lives keep me on my toes. I love the challenges associated with the first time entrepreneur. Financial plans for entrepreneurs are always changing. I also love the challenges of a busy family with kids starting private school. Today’s education costs can certainly create a need for dynamic planning. The list of challenges goes on and on.

Developing a financial plan, implementing the plan, and then letting it go is dangerous. Financial planning is a process. Financial planning should be flexible. This is why I love my retainer business model. This allows me to assist my clients as their lives ebb and flow. Is your financial plan dynamic? Is it ever changing? The flexibility needs to come from your planner. If you don’t have the ability to be flexible, it may be time to search for a new advisor. Remember, life will not conform to your financial plan…..your plan needs to conform to life! Does your?

When Buying or Refinancing a Home You Should…

2010-11-01T12:24:00.000-07:00

Make sure you understand the fine print!

It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.

The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!

You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.

Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.

Does Your Retirement Plan Answer These Three Questions?

2010-10-14T09:21:00.000-07:00

It seems that with the market downturn in 2008-2009, there has been concern over folks ability to retire. One of the probing questions I receive from new clients is “When can I retire?” Sounds like a simple question, and for the most part (at least on my end) it is. The difficulty usually stems from a lack of preparation by the client or a non comprehensive view. Here are a few things that often get over looked from the client’s standpoint when performing retirement projections:

1. What will retirement look like for you?
Transitioning from a full time employee or business owner to the life of leisure is a big step. It’s also a step that fewer retirees are taking in today’s world. The old picture of retirement has changed for many Americans….and not necessarily for the worse. The new picture of retirement involves a higher degree of engagement in life’s activities, whether it be part-time employment/business ownership, volunteerism, increased family involvement, or simply a schedule of engaged activities. This new picture is farther from the rocker chair on the front porch.

Understanding what retirement may involve will help to ascertain the needed nest-egg to take you to the next stage in life. While the market’s tenuous past put a damper on many retirement dreams, it doesn’t have to. There are many options to transition into a new phase in life, but this requires a little forethought and is essential to proper retirement planning.

2. What about Health Care Costs?
Now I bet I have your attention. This thought certainly drives fear into most people, especially since the media and advertisers do a wonderful job of painting a dark picture. While Medicare and Medicare supplements (Medigap policies) can do an adequate job for those 65 and older, younger retirees face the road of individual coverage. While challenging, this should not be a deal breaker for most folks. There are cooperative plans, high deductible plans, and high deductible plans tied to health savings accounts that deliver options.

Health care costs are on the rise and should absolutely be considered when planning for retirement. Living a healthy lifestyle and proactively addressing health care needs should be a critical part of the any pre-retirement plan.

3. How much will you pay in taxes?
Taxes are the single largest recurring expense most people have in their lives. Properly managing taxes during the accumulation phase of life can get you to retirement ahead of schedule. Preparing and maximizing retirement taxation can be a real difference maker when it comes to the bottom line need for retirement. Tax efficient withdrawals can save big dollars, especially for those in lower tax brackets. For example, the current ability of those in the 10-15% tax bracket to utilize a 0% capital gain tax (up to the 15% tax bracket max) can save thousands of dollars in taxes. Through proper tax planning and strategies many retirees can drop into lower tax brackets during retirement….even after populating higher brackets during pre-retirement.

A retirement plan without a solid tax plan is a mistake waiting to happen. Simply estimating what tax bracket you may fall into is not enough. A comprehensive tax picture that takes into account maximizing withdrawals by efficiently juggling the taxable and retirement account ( IRA, Roth, or other qualified plans) can mean the difference in retiring sooner than later.

The days of our grandparent’s retirement picture are dwindling, and, hopefully, the days of improper retirement planning is, as well. The simple calculation of yearly need multiplied by years of retirement (mix in inflation) is not enough. Utilizing the standard withdrawal rate of 4% against your nest-egg is not the answer either. A true retirement plan incorporates a comprehensive view to include the above topics and more. By utilizing a comprehensive view to develop a tax-efficient retirement plan that incorporates a realistic retirement picture may show you that you are closer to retirement that you realize.

If you are struggling to paint your retirement picture, you may want to seek guidance from an advisor. An organization of advisors that does a wonderful job in this area can be found on the internet at www.acaplanners.org. ACA is an organization of fee-only planners that specializes is holistic financial planning, and, yes, in full disclosure I am an ACA member!

Why I'm A Fee-Only Financial Planner

2010-10-13T14:27:00.000-07:00

If you read my last blog post, you recall I discussed the different types of planners and how they are paid. Today, I will tell you why I am a firm believer in fee-only financial planning.

Fee-only financial planning is a wonderful way for clients to receive advice in a fiduciary manner. As a fiduciary, the planner puts the clients’ interest first. Fee-only planners receive their pay directly from the client, which virtually eliminates conflicts of interest. As a fee-only planner, I don’t sell anything, except maybe a good night’s sleep. I don’t receive any commissions, referral fees, or kickbacks, so, therefore, I don’t have a conflict with the advice I give to my clients. What I recommend to my clients is in their best interest….not mine.

Another wonderful aspect of fee-only planning is the ability to practice from a holistic viewpoint. This is my favorite part of my job. Financial planning is a process…not an event. Life changes, therefore I love having the flexibility to assist my clients as their lives change. It’s not about one particular piece of the planning puzzle: it’s about the entire puzzle and maximizing every piece. As a fee- only planner, my fees don’t change whether I am discussing investments or insurance, estate planning or cash flow, business planning, or tax planning. It’s all part of the big picture.

My business model allows me to serve my clients in a comprehensive fashion. With my simple retainer billing method, my clients pay me a fee, and I am their planner. I’m able to see the big picture and guide the client along life’s journey. This is why I am a fee-only planner, and I love my job.

What is a Fee-Only Financial Advisor?

2010-10-01T10:08:00.000-07:00

While the push for consumer education regarding financial planning has grown over the last ten years or so, many folks still are confused about how financial planners are paid. Essentially, there are three types of planners: commissioned, fee-only, and fee-based.

Commissioned Advisors receive their pay from products they sell. This type of business model can create a conflict of interest. The dilemma starts when an advisor makes a recommendation of a product that will benefit his or her personal earnings. Is the product offered in the client’s best interest or in the interest of the advisor’s back pocket? This model can be extremely confusing for the client due to the lack of transparency of what the advisor is truly earning for the services rendered.

A fee-based advisor is an advisor who receives some commissions and charges a fee for other services. For example, a fee-based advisor may charge a flat fee for a comprehensive financial plan but may receive commissions for investment products sold. This business model is not conflict free. Again, confusion over the total fees earned by the advisor can be created by this model.

Fee-only advisors offer the easiest model when it comes to understanding fees. What the client pays the advisor is what the advisor earns for services rendered. This creates a clean and understandable relationship between client and advisor when it comes to fees. The client can rest at ease that the advisor is making a recommendation that is in the client’s best interest and not the advisor’s pocketbook. This model also allows the advisor to make referrals to outside professionals with the client’s best interest in hand.

Fee-only advisors don’t sell products, period. This knocks down walls between the client and advisor and allows for a better understand from a transactional view. This means the client will always know where they stand with the advisor in terms of fees. This puts the advisor in a fiduciary position and allows advice to be delivered with the client’s best interest in hand.

The National Association of Personal Financial Advisors (NAPFA) is a champion of fee-only financial planning and is a great place to get more information regarding fee-only planning, as well as finding a planner in your area. WWW.NAPFA.org

Tips for the Small Business Owner (Part II)

2010-09-20T12:45:00.000-07:00

In my last article regarding small business owners I discussed how to run a small business from a managerial standpoint. While those issues are imperative for success for the business, there is another aspect to becoming a successful small business owner: managing taxation! If a small business owner owns a flourishing business but bobbles personal taxes or business taxes, the business will ultimately suffer and probably die.

Self –Employment Tax

Most folks don’t fully understand the tax implications of being self employed. In a nutshell, you pay more tax on earned income. Here’s why: W-2 wage earners, or folks who work for employers, pay into Social Security (6.2% up to the yearly max income level, which for 2010 is $106,800) and Medicare (1.45%). This is deducted from your paycheck every pay period. Don’t believe me?….have a look at your pay stub. The 7.65% total amount withdrawn from your paycheck for Social Security and Medicare is not the end. Your employer matches that amount as well. The total amount paid into the system for an employee is 15.3%: 7.65% of earned income by the employee and 7.65%by the employer. This withholding does not include the amount withheld for Federal Taxes.

As a self-employed business owner the contribution amount changes. Since there is not an employer to contribute the second half of the required 15.3%, the business owner is on the hook for it. This means the entire 15.3% is the business owner’s responsibility. That’s 7.65% more tax liability than an employee of a company *. These self employment taxes apply to business owners who operate under a pass-through type business entity, such as sole proprietorship. Partnership, S-corp, and LLCs. Corporate business owners pay tax at the personal and corporate level, so this discussion is not relevant to that scenario.

The IRS says pay as you go!

While an employee has the employer to withhold these additional taxes, the self-employed do not. The IRS recognizes this and has a rule. Surprised? I didn’t think so. The IRS has a rule for everything. Our tax system is considered a pay as you go system. This means we have taxes withheld as we earn money, at least for employees. Due of the design of our tax system (pay as you go), the IRS requires the self-employed to make estimated payments throughout the year. Luckily, these payments are only required four times a year: April 15th, June 15th, Sept. 15th, and Jan. 15th.

The payments due on the above four dates are estimates of tax due on taxable income. While called estimated payments and portraying a kind or forgiving tone, the IRS is quite serious. It is the taxpayer’s responsibility to meet minimum payment requirements. If these requirements are not met at year end, underpayment penalties will result. Again, surprised? I didn’t think so.

Managing Tax Liabilities of the Small Business Owner

Now that we understand the importance of taxation for the small business owner, how can we properly manage this liability?

1. Proactively view your tax liability.

Most Americans will not know their tax liability until after their return is prepared. This reactive approach can be financially devastating. As a small business owner it is vital to perform tax projections several times a year and coordinate those projections to determine quarterly estimated payments. Accepting the estimated payment voucher your tax preparer provides you may be risky. Usually, these vouchers are based on last year’s data. If your SE income and expenses will mirror last year, you will be fine, but most companies have a fluctuation in income and expenses. Proactively manage your business tax liability by incorporating tax projections and you will eliminate a tax-time surprise.

2. Maximize expenses.

So many small business owners blur the line between business and personal expenses. While migrating personal expenses to the business is wrong, utilizing all qualifying business expenses is a valid piece of the tax reduction strategy. If a business owner pays a $1000 expense out pocket and doesn’t claim the expense through the business, the taxpayer will lose significant dollars. A taxpayer in the 25% tax bracket who pays a $1000 expense out of pocket and doesn’t claim it through the business is losing close to$400 in taxes (25% marginal rate + 15% SE tax). The key to this tip is keeping diligent records to substantiate expenses. This is where a conversation with the tax preparer should be relied on to dispense advice on qualifying expenses. Also, don’t forget to track business mileage, another area which can create a great tax savings.

3. Utilize effective incentives and available tax savings options.

Our tax code does create benefits to a small business owner, but often the owner is not familiar with the available options and the breaks go unused. Retirement contributions are a great place to start. Pre-tax retirement contributions will reduce taxable income and are a wonderful, yet simple, strategy to reduce tax dollars. Some of the other available options for business owners are: section 105 health reimbursement accounts, office in home deduction for those that work out of their home, health savings accounts, section 179 expense deductions, and employing minor children of the business owner. Although, some of these strategies are quite complicated and required the hand of a professional to implement and administer, they are great tax saving strategies.

Understanding self-employment taxation, meeting quarterly estimated tax payments, and maximizing tax saving strategies for the self-employed are a vital component to a successful small business. These issues usually require the assistance of a professional. If your small business is struggling with taxation and would like someone to discuss these issues with, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA is a wonderful organization made up of roughly 150 comprehensive, fee-only advisors who specialize in integrating financial planning with taxation. You can learn more at www.acaplanners.org .

*While federal tax code does give some relief to the self- employed and true SE tax due does not actually total 15.3% (it is closer to 14.13%), the complexity of the calculation is beyond the scope of this text. The design of this text is to illustrate the tax burden to the self employed.

The opinions expressed in this article are intended as general guidance only and are not intended as recommendations for specific situations. Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding any tax penalties imposed by the IRS.

Prioritizing and Eliminating Debt

2010-09-07T17:55:00.000-07:00

One of the many questions I receive from new clients involves the elimination of debt. Should I pay off my credit card or my mortgage first? Should I make extra payments towards my student loans? What about that nagging car payment? The answer lies in understanding the question of how to prioritize debt.

Essentially, there are two types of debt: good debt and bad debt. Understanding the difference between good and bad debt will allow for prioritization and systematic elimination of debt.

Good Debt

Good debt is debt that utilizes some type of positive leverage. Good debt also has a component of longevity. For example, borrowing to pay for a college education is certainly good debt because there are tax benefits to the student loan interest, as well as, the education will outlast the debt. That pizza you put on the credit card six months ago is long gone, while the debt may linger. Another example of good debt would be mortgage debt. A mortgage (especially a 30 year fixed rate) will allow for leverage while utilizing the tax benefits of the mortgage interest deduction.

Bad Debt

Bad debt can be categorized as consumer debt. This would include credit cards, revolving debt (store debt, such as a furniture purchase), auto loans, personal loans…etc. These debts offer no tax benefits and usually lead to negative financial momentum. For example, a consumer purchases an expensive car and borrows the money to do so. The payments put a strain on monthly cash flow requiring the consumer to use credit cards to purchase needed items such as food and clothing. The spiraling downturn can become overwhelming and eventually lead to financial ruin.

Attacking Debt

Once the debt is categorized, the picture becomes much clearer and debt elimination can begin. Focusing on bad debt should be the priority. List the debt balances, as well as the interest rates associated with each debt. While some so called “experts” recommend eliminating the smallest debt first, as a comprehensive planner I feel everyone has a unique situation and the debt elimination plan should be individualized. A holistic CFP® (Certified Financial Planner) specializing in cash flow and debt elimination can be a big help when it comes to mounting a charge against debt.

Debt Reduction Tips

1. Understand Cash Flow!
Debt is a by-product of poor cash flow management. Most folks don’t truly know where their money goes every month. It’s important to see in black and white the spending choices that are made. Tracking income and expenses will allow one to see where their money goes. It will also show what is left over at month’s end. What’s left over can be applied to debt, so it’s imperative to keep a close eye on cash flow.

2. Make a Commitment!
If married or in a committed relationship, it is important that all parties are working together to eliminate debt. If one spouse is savings and paying off debt while the other is frivolously spending, little or no progress will be made. Debt reduction requires thought and action, so commitment is essential.

3. Don’t Rush to Eliminate Good Debt!
The good debt discussed above can actually have financial benefits, so don’t rush to eliminate that debt, especially mortgage debt. For example, a 30 year fixed-rate mortgage is a debt I recommend to most of my clients. This mortgage creates a great inflationary hedge. A long term fixed debt will allow the homeowners to make tomorrow’s mortgage payments in today’s dollars, so don’t rush to eliminate this debt. There may be better use of your dollars.

4. Know How Much You Can Afford!
While good debt has benefits, it is important to utilize this debt properly and not overspend. This is especially true in purchasing a home. While I am an advocate of 30 year fixed rate mortgages, I am not an advocate of over-buying real estate. Knowing how much to buy is imperative. Creating an inflationary hedge and utilizing the tax breaks offered from a mortgage will do no good if the homeowner buys a house they cannot afford.

Debt usually stems from behavioral choices, so before any debt reduction can begin the behavioral issues need to be resolved. In essence, living within your means is the first step. Another key component to debt reduction is understanding personal finances from a big picture view. Financial planning is equivalent to a giant puzzle and all pieces should work together to meet the end result, so a synergistic approach should be taken. Taxes, cash flow, interest rates, type of debt, and other issues should all be considered before a debt reduction plan can be put to work. A qualified financial advisor may be needed to tackle debt reduction with a synergistic approach. The Alliance of Cambridge Advisors (ACA) is a great organization of comprehensive planners that can assist is debt reduction strategies. More information can be found at www.acaplanners.org.

Tips for the Small Business Owner

2010-08-18T08:17:00.000-07:00

As a fee-only Advisor that works with small business owners, I constantly see issues with the management of prospective clients’ businesses. While every business has its own idiosyncrasies, there are several aspects of a business that should be similar regardless of the type of business. Bookkeeping is one example. A common mistake small business owners make is the improper tracking of income and expenses. Too often, I see owners commingling their business income with personal assets.

If you are a small business owner or thinking about starting a business, here are few tips.

1. Get a separate business checking account
A separate checking account is a great way to have a record of business income and expenses. If the business is audited or questioned by the IRS, only the business records may be needed. This could keep the personal assets out of the equation.

2. Track your income and expenses with software
There are several affordable software packages that are easy to use. Most packages these days will allow you to run reports which can help illuminate the true picture of the business. These reports can help set goals, establish budgets, as well as assist in tax preparation.

3. Set the business up for success
Run the business as a business! So often, small business owners “play” in their business. If you run the business as a hobby, it will probably remain a hobby. If you want to be a successful business owner, you must act like one. Study successful people and learn from their successes and failures.

4. Make sure to get a business license, if needed
Contact the local tax department and inquire about the proper licensing needed to operate the type of business you own. The last thing a business owner wants to learn is that proper licenses are not in place. Penalties and fines may follow suit, so it’s important to do the homework. For example, as a Financial Advisor in TN, I have to pay a $400 Professional Privilege tax every year. Failure to comply would result in penalties and eventually fines!

5. Keep Businesses separated
If you own more than one business, it’s imperative to keep all the business records and transactions separate. Again, this will make life much easier on several fronts. It’s make tax preparation and planning much easier, as well as projections involving business growth. If the business is to be sold, separate records are imperative.

These five tips will help to solidify the business side of the business. Don’t let your success be curtailed by bad business practices.

Why Stay in the Market?

2010-07-08T07:34:00.000-07:00

After a couple weeks of difficult market returns, investor fears are creeping up. As investor fears increase, so do the number of questions I receive regarding the market. Most of the questions revolve around the concept of exiting the market, essentially market timing. Should I sell everything to cash? Why should I be in the market during these volatile times? Should I move all my investments to bonds?

Just a couple years ago we were staring at a portfolio-killing time bomb waiting to detonate. The downturn of 2008-2009 really hurt, but, as with all downturns, it has become a memory. We all remember and still relate to the pain, but what did we learn? For those out there who exited the market, did you reenter the market at the right time? For those that stayed true to their investment strategies, did it pay off?

For most folks getting out of the market during rocky times is not difficult, but returning to the market is extremely precarious. Getting out is not what hurts the investor; consequently, it is not getting back in at the right time that is damaging. During Oct 2008, the stock market had wild swings. If an investor moved all their equities to cash, they would have missed out on a huge one-day run on Oct 13, 2008. All three major indexes (S&P 500, Dow Jones Industrial Average, and the NASDAQ) were all up over 11% in one day. The investors sitting on the sidelines in cash were rethinking their strategy after Oct 13, 2008. Being out of the market can be extremely costly.

What do we do?

Staying in the market is the right thing to do but only if you have a plan. An investment strategy based on factors associated with your life and risk profile is imperative. Positioning a portfolio to handle prosperous times while protecting against inflation and deflation creates a portfolio that promotes sleep at night. Blindly investing is risky in any market environment. Another important element of an investment plan should include dollar cost averaging. Consistently buying shares will reduce the total cost basis and increase return, so, while the market is down, buy the shares at a reduced price. Continuing to buy while the market is down is like buying your favorite product on sale. It makes sense, but most of us don’t follow through. I heard a wise investor once say the only thing American consumers don’t like to buy on sale is the stock market. It’s true!

While the questions continue, we should revisit those dark hours during 2008 and early 2009 when we thought the sky was falling. We should learn from our past experiences. Those who stuck it out and where positioned properly weathered the storm just fine. The next time the question about exiting the market pops up in your head ask yourself how did during 2008-2009. If you weather the storm, then you have your answer. If you didn’t, you either pulled out of the market or you had a poor investment plan. If you are currently without an investment plan, I highly suggest speaking with a fee-only advisor. Here are two websites to find a fee-only advisor in your area:
http://www.acaplanners.org
http://findanadvisor.napfa.org/Home.aspx

Can You Answer These Questions?

2010-06-28T12:16:00.000-07:00

As we move through life, we get bogged down with day to day activities and might find that small pieces of our financial puzzle get neglected. These neglected areas can have a negative impact on our ability to meet our goals. If you can positively answer the ten questions below, you are certainly putting your best financial foot forward.

1. Do you know where your money goes every month? Folks that understand their income and expenses have a better opportunity to make sound spending and saving decisions. I’ve heard many times from new clients that they are happy with their income but don’t know where their money goes every month. Creating a picture of income and expenses gives one clarity and opens the door to real financial growth.

2. What’s on your credit report? Knowing the contents of your credit report can help protect your financial backside! With the growth and ease of electronic communications today (email and internet) more and more people are at risk of financial fraud. Vigilant behavior is one the best offenses to defend against financial fraud. Another benefit of understanding your credit report is the ability to position yourself as a viable candidate for a loan if needed. Today, this is more important than ever with mortgage lenders ratcheting up lending standards. Mortgage rates are low and real estate prices are ripe for the picking, but a great credit score is needed to get the lowest mortgage rate.

3. Do you know where your important financial documents are and what they say? Your financial documents are vital to your success, but it’s not the documents themselves that are important. It’s what the documents state that is important. If you don’t know where they are, you probably don’t know enough about the information they contain. The exploration and discovery of your important financial docs will help illustrate your financial health. Once you find them, dust them off and read what they say.

4. Are your Estate Planning Documents up to date? Obviously, this question goes hand and glove with question #3. Estate Planning techniques and tax laws are constantly changing, so older legal documents may not serve the original purpose. The fiduciary appointments (executors, personal representatives, guardians, trustees…etc.) inside these documents may no longer be the appropriate choice. It’s important to review estate planning documents every 3-5 years or upon a major life event such as birth, marriage, death, or divorce.

5. Do you know how much you pay in taxes? While the exact answer to this question is not the purpose, the overall goal is to understand that taxes are usually the single largest recurring expenses for most folks. Understanding the magnitude of taxes on your overall financial health is vital, so maximizing tax efficiencies should be an integral part of holistic planning.

6. Are you living within your means and savings at least 10% of your income? This question is similar to question #1 but goes a step further. Knowing where your money goes is important, but doing the right thing with your money is crucial. Spending less than you earn and saving 10% of your income is pinnacle to spur financial growth.

7. Are you balanced financially between today and tomorrow? Are you eating rice and beans today so that you can eat filet tomorrow? Are you savings everything for retirement, or are you spending your earnings as quickly as it hits your pockets? A financial lifestyle based on a lop-sided view will lead to financial dysfunction. So, while saving all your nuts and berries for tomorrow may seem like a great idea, the reality is the mental dysfunction of hoarding may lead to less enjoyment of the nuts and berries later. Creating balances between today and tomorrow will help to balance life’s ups and downs, as well as establish a healthy approach to growing wealth.

8. Do you have an investment plan in place? Are you just throwing money at the market? Do you rebalance your portfolio at least annually? Is your portfolio properly allocated based on your personal risk profile? An investment plan will address the above questions and deliver guidance during turbulent market environments. A financial plan without an investment plan is like a ship without a rudder.

9. Do you have the proper amount of liquidity? Liquidity is the keystone of the financial foundation. Liquidity is the cash that delivers stability during an economic hardship (job loss, unemployment, or natural disaster) enabling one to withstand the hardship without irreparable financial damage. The old adage of 3-6 months of living expense may or may not be enough. Every situation is different and should be assessed individually.

10. Do you know what your insurance deductibles are? If a rock broke the windshield on your car, would you know if you are covered? If a tree fell on your roof, do you understand how the insurance company will determine the amount of your payout? Insurance deductibles are a great place to start when looking to understand your coverages. Is your insurance deductible right for you? Is it too high….Is it too low? Remember, lower deductibles increase premiums!

These ten questions are broad questions that point to the importance of a total financial plan (holistic planning). While there are other questions that may be important, this list is a good start to give yourself a quick check-up while searching for any missing financial puzzle pieces.

Goldilocks and the Three Tax Preparers

2010-06-08T13:53:00.000-07:00

Once upon a time there was a small business owner named Goldilocks. She owned a business in the woods. As a small business owner, she was subject to self employment tax and was required to make estimated payments.

One day an ill-informed tax preparer knocked on her door. The taxman told Goldilocks that she need not be concerned about making her estimated payments to the IRS. Goldilocks loved the idea and followed his advice to the letter. All year long, her business made money and grew, and all year Goldilocks neglected the pay- as –you-go tax system and lived happily spending the money she earned.

The pay-as –you-go tax system was established for those who are self employed. Each quarter the IRS requires an estimated tax payment for the tax due on income. Neglecting these payments may result in an underpayment penalty at tax time!

Goldilocks enjoyed the fruits of her labor throughout winter, but then spring arrived. Goldilocks was shocked when she learned that she had a huge tax bill due, including an underpayment penalty. Goldilocks thought her prior year’s tax planning was “too cold” and decided to revisit the estimated payment idea.

A few weeks later, an over-anxious tax preparer arrived at her door. This conservative preparer told Goldi to send big chunks of her income into the IRS. While Goldi slept a little better at night, her disposable income was negatively affected…..she didn’t have money to spend.

After a year of this method, Goldilocks completed her tax return and learned she was due a huge refund. While the idea of a large refund made her happy, she realized the money she paid to the IRS was being returned to her without any interest. She thought this method was “too hot!”

Any money paid into the IRS and then returned to the taxpayer will be returned without interest. In essence, overpayments are equivalent to an interest free loan to the government, so large refunds are not always the most efficient use of hard earned money.
Goldilocks was upset that she mishandled her taxes the last two tax years. She didn’t know what to do. While sitting and thinking about her options, a new tax preparer appeared at the door. This preparer sat down with Goldilocks and discussed her situation. They talked about her income and expenses and created a projection of her current year’s tax liability. This projection was used to determine the estimated tax payments Goldilocks needed to pay for her current tax year.

After a year of pro-active tax planning, Goldilocks was excited to see that at tax time her estimated payments were not “too hot” or “too cold”….they were “just right”!

Moral of the Story
It is important not to over or under pay estimated tax payments. Merely taking a guess can create a bad situation. Underpayment penalties really are easily resolved through proper planning. Overpayments are not the answer either, because no one wants to give the government a big interest free loan. Creating a balance between tax payments and retaining liquidity for current cash flow is truly the Goldilocks’ scenario in which tax planning is “just right.”

Why a Roth Conversion may not be Right for You!

2010-05-26T13:44:00.000-07:00

The Roth conversion topic has certainly dominated headlines, articles, and blog posts in 2010, but part of the story may be missing. A Roth conversion may not be the wisest financial move for some. Most of the reports regarding this conversion have touted the benefits, and little has been written about the negative affects to a Roth conversion.

Roth Conversion and College Planning

An ill-timed Roth conversion can dampen financial aid prospects for some college bound students. The most important year for the financial aid process is the year the high school student is a junior. This is the base year for most financial aid formulas. If a parent converts during this year, the conversion can be viewed as income to the parent. The parent will then be viewed as having more income available to pay for college, and, since financial aid is based on the ability to pay, the parent can be seen as having the ability to fully pay the college bill. Depending on the level of assets and the amount of the conversion, a Roth conversion may be a deal breaker to receive financial aid for your college-bound teenager.

Conversion Income and Taxes

Tax planning is similar to college planning in that more income creates negative consequences. Taxes are a moving target for most people, and an unexpectedly large tax bill due to a Roth conversion would certainly be painful. Remember when an IRA is converted the amount converted is considered as income in the year of the conversion (although spreading out this income is possible). If a conversion is accomplished the year in which the taxpayer is in a high tax bracket, the converted amount will be taxed at that high tax rate. The marginal tax rate could actually increase due to the conversion as well. I generally don’t recommend Roth conversion for taxpayers who are in a high tax bracket.

Opportunity Costs

There are many calculators available that illuminate the tax savings generated by a Roth conversion, but these calculators fail to show opportunity cost lost to the tax due, which includes the cost of not having the money available for current needs. Ex. A conversion of a $100,000 IRA to a Roth will generate a $25,000 tax bill for someone in the 25% tax bracket. The opportunity cost of that $25,000 might be high. If the rationale of the conversion forces someone to eat rice and beans now so they can eat Fillet later, that rationale doesn’t fly with me. This will create financial dysfunction. This seems to be the case for younger couples. Younger couples implementing wise financial and tax strategies can leverage monies now when it is really needed. Most of the families I work with have children in private schools and college. They need money now and shouldn’t move backwards financially today to pay for their tomorrow.

Roth conversions can be a wonderful tax savings strategy, but these conversions should be carefully reviewed. By understanding the possible negative consequences, a mistake may be avoided. Just because Roth conversions are the topic de jour doesn’t make them right for everyone.

Financial Tips for any Economic Environment

2010-05-18T08:58:00.000-07:00

It’s been more than 18 months since we first heard the utterance of the “R” word, recession. The funny thing about economic data is bad news travels much more quickly than good news. While we all heard about the economy’s struggles, many have no idea that we are technically out of a recession.

While the technical data points to some positive signs and the economy actually grew, the pulse of individuals still remains fearful. Economic gloom and doom doesn’t have a mortal enemy that clearly pronounces the proverbial all-clear. While the media loves to provide data illuminating every wrinkle in our economic system, good news remains sparse at best.

Are we still in a recession? Either way, what does it really matter? From a personal financial standpoint, it really doesn’t matter. Our habits and financial wherewithal should always remain diligent. I live in Nashville, the city that experienced an enormous flood that some experts claim to be a 500 or maybe a 1000 year flood. Does it matter to those flood victims if we are or aren’t in a recession? Of course not, but what does matter is sound financial planning and decisions.

Sound financial decisions transcend good and bad economic data or even disasters. The stock market is out of our control, and the ups and downs associated with our economy are beyond the reach of our hands. Focusing on something that is out of our control is not productive.

If we can’t control the market or the economy, what can we control?
The items listed below will allow you to focus on the things you can control, while participating in financial growth, buffering against economic downturns, and all while providing support during emergencies.

Have sufficient cash liquidity.
Liquidity is the keystone of the financial foundation. Emergency funds (cash) can provide liquidity to those in need during emergencies, large or small. This cash can prevent folks from going into debt for purchases that are necessary to return life to normal.

Live within your means.
Spend less than you make….save 10% of your income. These old adages will ensure that some money is set aside for tomorrow.

Dollar cost average.
Continue to be a buyer during economic downturns. Buying at regular intervals (such as into a 401k plan) will help buffer the ups and downs of the market.

Proactively manage your tax liability.
Proper tax and strategic planning can help reduce the single largest recurring expense that most Americans face.

Invest for the long term.
Don’t try to time the market. Timing the market most often results in disappointment. By focusing on the long term, the short term ups and downs become blips on the radar screen.

What we do behaviorally (controlling the things we can control) is much more important that what the market is doing or how the economy is holding up. So whether we are in a recession or not, the 5 tips above are simple to implement, yet extremely effective.

Casualty Losses for Flood Victims

2010-05-14T10:24:00.000-07:00

There has been much discussion regarding the tax benefits available to flood victims here in middle Tennessee. The discussions have also created a good bit of confusion. While the information provided has delivered general guidance, this guidance can lead to costly confusion.

The tax benefits available are through a provision titled Casually and Theft Losses. A casualty loss is generally taken as an itemized deduction, but can be utilized without itemizing for tax year 2009. The loss is not equal to a tax credit. The loss will reduce taxable income; therefore, the amount of loss will generally create a savings equal to the loss amount times the taxpayers marginal tax rate. Example, a taxpayer in the 25% bracket showing a $1000 casualty loss will produce $250.00 in tax savings. While the tax savings can be beneficial and even substantial, casualty losses are not easy to understand for most people.

The Nuts and Bolts of Casualty Losses

The IRS definition of a casualty loss is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Here in Middle TN, the identifiable event was the flood of May 2nd. Losses attributable to the flood can be considered for tax purposes, but the valuation of the loss is complicated.

Caution- technical content follows!

To determine the loss the IRS states there are three steps:
1. Determine the adjusted basis in the property before the casualty or theft.
2. Determine the decrease in the fair market value (FMV) of the property as a result of the casualty or theft.
3. Use the smaller of #1 or #2 and then reduce that by any insurance or other reimbursement received or expected to be received.

Got it? Clear as mud, right? Let’s use an example to break this down.

If a taxpayer loses a car due to a flood, the taxpayer must use the lower of the adjusted basis (what was paid) or the decrease in the fair market value of the car. If the taxpayer originally purchased the car for $20,000 in 2008 but the fair market value (the value of an identical used car) is now $10,000, the taxpayer will use the $10,000 value for the casualty loss. NOTE: Remember the value of the loss is either adjusted basis or the decrease in the FMV…..not replacement cost. In the example above, the taxpayer cannot use the purchase price of a new car as the casualty loss value! Again, a casualty loss should not spur the taxpayer to over purchase with the thought of increasing the casualty loss.

The loss must then be reduced by any reimbursements. If the taxpayer received $6000 from an insurance claim on the car, the casualty loss is now down to $4000.

Once the valuation of the loss is determined there are additional steps to take
to finalize this tax benefit. Based on the current tax picture there are two years (2009 and 2010) in which the losses can be applied, and each year creates different tax situations. 2009, based on current tax law, offers a better bang for the buck, at least in most situations. The difference is in the details.

Most casualty losses are subject to a 10% of Adjusted Gross Income (AGI) floor, as well as an additional reduction. For 2009 the reduction is $500, but in 2010 the reduction is only $100. Example, a family with an AGI of $100,000 will normally have a $10,000 threshold to overcome, along with the subtraction amount, before any losses can be used. But often disaster area victims receive a nice break from Congress by removing the 10% of AGI threshold. As of this writing, the 10% of AGI floor is removed for folks in federally declared disaster areas for the tax year 2009….BUT NOT FOR 2010. Pretty confusing, right?

Let’s pick up the example from above. The taxpayer has a choice to amend their 2009 return or capture the loss in 2010. By amending the 2009 tax return, the taxpayer will not have the 10% of AGI floor, but will be subject to a $500 reduction. In 2010, the taxpayer will be subject to a 10% AGI floor and a $100 reduction. Let’s continue through this example assuming the taxpayer is in the 25% tax bracket with $100,000 of AGI.

2009
Loss from car = $4000.00
AGI threshold= none
Reduction= $500
Total Loss Applicable=$3500 ($4000 -$500)
Tax savings created = $875 ($3500 x 25%)

2010
Loss from car = $4000.00
AGI Threshold = $10,000
Reduction = $100
Tax Loss Applicable = $0 (loss doesn’t cross threshold)
Tax Savings created = $0

Why it might be wise to be patient

In the above example it’s quite clear which is the best choice, but patience MAY add another option. Congress usually makes changes in the tax code later in the year. One change that could make a difference would be AGI threshold removal for 2010. I am certainly not suggesting they will…only stating it might be possible. If this does occur it gives the taxpayer an option. The taxpayer could then choose to take the loss in the year it which it makes the most sense. This would be extremely valuable for a taxpayer whose tax bracket is different in the two years. The taxpayer would choose the year of the higher tax bracket. Therefore, a larger percentage of the loss ends back in the pocket of the taxpayer. The benefit of waiting may present options. These options will become clear over time.

What to do in the meantime

Some of the most important steps that a flood victim can do at this time in regards to casualty losses are:
1. Take pictures of damaged property, as well as find pictures prior to the flood.
2. Store those pictures in a safe place…maybe even electronically store them
3. Document losses- take notes and create a very detailed inventory (remember items such as trees are applicable as well)
4. Don’t make purchase decision based misconceptions (replacement value does not create a tax deduction).
5. Be patient – the deadline to file this particular amended return is April 2011, so there is no rush. Make sure that all losses are accounted for.

While the tax code creates an opportunity for those of us that have been impacted by the flood, this opportunity is very detailed and confusing. A rushed or hurried decision could be the wrong one. If a taxpayer is in real need of funding to rebuild, the amended 2009 return may be the only choice. Whatever decision is made, the tax payer should consult a tax professional to assist with the details.

The opinions expressed in this article are intended as general guidance only and are not intended as recommendations for specific situations. Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding any tax penalties imposed by the IRS.

What Our Tax Return Can Teach Us!

2010-04-27T10:45:00.000-07:00

Tax season is behind us, and it’s time to move ahead with 2010. But we need to take a minute or two more with our 2009 return before we send it off into the black hole of all things stored. We can learn a great deal about the current year by reviewing last year’s return. This is one reason why I strive for all my clients to file timely (by April 15th).

First, look is at the bottom of your return. Did you have a balance due, or did you receive a refund? This will illustrate how well you planned. If you overshot the runway in either direction, a change may be needed. The easiest way to make this change, for most people, is by changing your W-4. This document tells your employer how much to withhold from your paycheck every pay period. If you are not an employee, but own your own business or work as contract labor, the change needs to come through quarterly estimated tax payments. Remember a large refund is not a high-five-your spouse experience. You just gave the government an interest free loan! Underfunding your tax liability and generating an underpayment penalty is not the answer either. I generally like to see clients get less than $1000 back at tax time. Anymore than that is just too much….but there are always exceptions.

If you had an event in 2009 that will not occur in 2010, but you received a taxable benefit in 2009, you should make appropriate adjustments. Did you buy a car in 2009 and utilize the sales tax deduction? That may have saved you several hundred dollars or more in taxes. Unless you buy another car in 2010, that deduction will disappear. Did you have a college age child graduate or finish college. If so, you probably received some tax deduction. That tax savings will not be there in 2010 if you don’t have a child in college. Be sure to understand where your refund or balance due came from.

Some of this may sound a bit confusing, or maybe you don’t care to understand the tax code. I’m not suggesting you become a tax expert, but I am simply stating that it is important to understand, at least from the big picture view, your tax return. Your preparer needs to understand the details, but it’s your job to understand how the details affect you. If you don’t, you could be dinged. If it’s confusing, ask your preparer for a little explanation.

The next question to ask yourself is did you fund your retirement? Remember that most retirement contributions will reduce your taxable income, which means it saves you tax dollars. Taxes are the single largest recurring expense for most people, so we should do our best to manage that expense. If we contribute to our retirement and reduce our taxable income, an amazing thing happens….we create leverage. For example, a couple in the 25% tax bracket making a $10k 401k contribution will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money is ever invested in the market. Let’s take it a step further. If that couple then plans accordingly and puts the $2500 tax savings into their 401k, another $625 tax savings is generated. It creates a positive snowball effect!

Take some time and learn where your tax savings are generated. Look for the areas that create a tax liability. Speak with your preparer to seek methods to maximize your tax savings and minimize liabilities. Taking a proactive approach to managing your taxes can set the stage for financial freedom. Reviewing your 2009 return and learning from your tax successes and failures can help plan accordingly for a successful 2010.

The Benefits of a Mortgage

2010-03-05T11:32:00.000-08:00

The recent downturn in the economy has spurred financial scrutiny in personal spending and savings. Most families have taken a closer look at their income versus expenses as well as savings versus debt to see how they can weather the financial storm. Anytime an examination of personal finances arises, the question of paying off the home mortgage seems to pop up. While the theory of debt elimination is good, understanding how a home mortgage can impact a personal financial plan is needed. To better understand the pros and cons of mortgage reduction we must take a closer look at debt.

Good Debt Versus Bad Debt

Some financial pundits argue that all debt is evil and there is no such thing as good debt. I take exception to this thought and find it somewhat short-sided. Some debt is bad, and I call this bad debt consumer debt, which includes personal loans, auto loans and revolving debt (credit cards). Consumer debt usually carriers a high interest rate and offers no tax benefits. The debt that I classify as good debt is mortgage debt and student loans. Both mortgage debt and student loans have tax advantages. While not all taxpayers can take advantage of the student loan interest deduction, I find an investment in one's education and future certainly justifiable.

Understanding Mortgage Debt

A mortgage is a debt secured by a personal residence, and that residence is an appreciating property (at least over the long term). Since a home will increase in value over time, mortgage companies allow long term debt against this property. A 30-year mortgage is the most common example.

The IRS gives homeowners a break by allowing a mortgage interest deduction for interest paid on a home mortgage. Obviously, there are rules and restrictions, but the majority of homeowners have allowable mortgage interest. This deductible mortgage interest effectively reduces the taxpayer's true mortgage expense. For example, a taxpayer in the 25% tax bracket with a 5.5% 30 year fixed mortgage will effectively hold an after-tax interest rate of roughly 4.4% (this number will vary based on the calculation and year of the loan).

There is another benefit to holding long-term mortgage debt that most people do not realize. A long-term fixed-rate mortgage provides a nice inflationary hedge. Sound confusing? Here's an easy way to understand this concept. A homeowner will pay tomorrow's mortgage payment in today's dollars. Simply put, the mortgage payment 10, 20 or 25 years in the future will remain the same (barring escrow payments). The home increases in value, but the mortgage payment does not.

Why Have a Mortgage?

Besides tax deductibility and the inflationary protection, a properly valued home and properly sized mortgage can create balance. Buying the right size home and carrying the right size mortgage is a vital piece of a balanced financial puzzle. If a homeowner pays off a mortgage and draws down cash to do so, a liability can be created. A rich house and cash poor homeowner who owns their home outright is not balanced.

Retaining cash and leveraging that cash can be quite powerful as well. I often see prospective clients that don't fully max out their retirement plans or IRAs but are paying extra money every month towards mortgage reduction. This move does not grow wealth. Imagine the scenario where a couple is paying an extra $500 a month to their mortgage. If that couple is not maxing out IRAs or 401ks, they could put the $500 a month towards their retirement. If they are in the 25% tax bracket, the $6,000 contribution for the year would reduce their tax bill at least $1500, and this is not factoring state taxes. That's a 25% return on investments before the money is invested. Once the money is invested it will grow and should outpace the after-tax effective mortgage rate in the long run. That's leverage!

A Few Things to Remember

Once additional money is paid towards a mortgage, it is gone. The only way to get that money back is to refinance, open a home equity line of credit or sell your home. All three of these have fees and costs involved. While a home is somewhat marketable, it is not an asset that can be sold quickly and efficiently. Any money put towards principle reduction will be tied up and difficult to utilize.

Personal financial planning is similar to Newton's Third Law: "For every action there is an equal and opposite reaction." Every financial action taken in one specific area will affect another. This is why the topic of mortgage reduction or elimination should only be discussed from a comprehensive viewpoint. The above examples illustrate how a mortgage can impact, either positively or negatively, many other financial areas, such as taxes, cash flow and even retirement.

Even though there are many positive attributes to having the right size mortgage, there must be parameters. Taking the stance that mortgage debt is a plus does not one give free rein to overspend! The decision of homeownership should be carefully considered in the context of the whole financial picture.

While we tighten our financial belts and march forward through the economic downturn, it is wise to fully understand all financial decisions and how those decisions can impact our financial wellness. The mortgage reduction question is one that requires careful consideration. For all the reasons discussed above, a rush to reduce a mortgage balance could be the wrong choice. A comprehensive understanding of a home mortgage is essential before any steps are taken to either increase or reduce mortgage debt.

Debit or Credit? How the Choice Can Affect Your Financial Security.

2010-03-01T06:37:00.000-08:00

We are all familiar with the point of sale transaction vernacular: will this be debit or credit. What’s the difference, and how does it impact you? Most folks really don’t understand the difference, but the difference can be vital.

Unfortunately, in today’s world of ID theft and financial fraud the decision of debit versus credit matters. Many people feel that our banks will help to protect us in the case of a stolen card. While this true in most instances, it’s not guaranteed. Making the wrong choice between debit or credit may mean the difference between being protected or not.

Banks strive to protect their customers and indemnify (make whole after a loss) after a stolen card is wrongfully used. But some transactions may force the bank to refuse to pony up for your financial loss. If a check card customer uses the debit option, which requires the use of a personal pin, and the card and pin are stolen, the customer could be in trouble.

Using a check card as a credit card at the point of sell will require a signature and identification, at least in theory. Using the debit card option just requires a personal pin. If a thief steals a check card, or check card number, along with the personal pin (by looking over your shoulder or any other devious method), the bank may refuse to cover the wrongful charges. The bank’s stance is that the customer did not protect their personal pin; therefore, the bank can hang the responsibility of the wrongful charges on the customer. The personal pin is personal and should be protected!

The moral of the story; chose the credit option whenever possible. If you don’t have that choice and must use your debit option, be careful and protect your personal pin.

Are You Really Ready?

2010-02-11T08:33:00.000-08:00

As we move deeper into tax season, I am seeing a trend in my office. I am finding more and more clients are waiting on tax documents, and the missing information is making everyone wait. It’s certainly not my clients’ fault.

Actually, the problem lies in a change in the law that will allow brokers and investment companies to send out 1099s a couple weeks later than usual. This means you may not receive all of your required tax documents until mid-to-late February. So, if you are still waiting, you are not alone.

It is extremely important that tax returns are completed fully. The last thing you want is to file a return and later find a nice little gift in your mailbox causing you to amend your return, which could result in penalties and fees.

What to do in the meantime?

If you are still waiting, the best thing you can do is to organize all your information. You might even ask your preparer if they would like to start your return and fill in the missing data later. The data in question is usually dividend, interest, and capital gain information. This is easy information to input into a return and does not require a lot of time. Your preparer can finish all but the missing data of your return, and, after the info arrives, the return can completed with a few clicks of the mouse. This tactic will keep you from being put at the end of the line.

I am a big proponent of communication between taxpayer and preparer. Preparers get very busy and stressed during this time of the year. The best way not to add to that stress is to communicate. Ask your preparer what you can do to make your tax preparation easier. Whether it be better organized data or letting them complete the bulk of you return until your remaining tax documents arrive, this allows the preparer to operate more efficiently…..which is certainly in your favor!

If you are not sure whether you have received all of your documents, simply wait a couple more weeks. Maybe you are waiting on a refund and are ready for the cash. Be patient, for it is more important to file an accurate return. In the meantime, speak with your preparer and determine your best plan of action.

Giving Support While Saving Tax Dollars

2010-01-29T08:05:00.000-08:00

We have all watched over the last few weeks the horrific images coming from Haiti. It’s hard to imagine how difficult that would be here at home, but imagine how hard it must be in a country that struggles with the simple tasks we take for granted. They obviously could use our help.

The IRS has given us a little incentive to help out. On Jan. 22, 2010 a new law went into effect that will allow taxpayers to deduct qualifying contributions to organizations providing relief to victims in Haiti on their 2009 tax return.

The fine print

Contributions must be made after Jan. 11, 2010 and before March 1, 2010, and the taxpayer must itemize their deductions on Schedule A in order to take advantage of the benefit. Contributions must be in the form of a cash type donation, as opposed to a donation of property. Donations via text message, check, credit and debit cards are allowable. The IRS states that the taxpayer may choose either tax year 2009 or 2010 to take the deduction. Obviously, not both….the IRS frowns on double dipping!

I always tell my clients not to make charitable contributions solely based on the tax deduction. Make the donation because you choose to. This still holds true, but the flexibility to take this deduction either in 2009 or 2010 is fabulous. This is another opportunity to utilize a little forethought and tax planning to maximize tax savings…..all while helping those in need.

Three Ways to Reduce Your 2009 Tax Bill in 2010.

2010-01-19T13:21:00.000-08:00

It’s that time of year again! Tax documents are arriving by mail and the race towards April 15th is on. What many folks don’t fully understand is the fact that while 2009 is over and gone, there are still things we can do to reduce our tax liability for last year. Here’s a list of a few things you can do now that might reduce your tax bill for 2009.

1. Take full advantage of available tax credits.
The government offers taxpayers an array of credits. Remember that credits are a dollar for dollar reduction in tax liability as compared to a tax deduction, which will reduce your taxable income. In short, tax credits are preferable to tax deductions. While some credits are phased out by income, such as the child tax credit, other credits are not phased out by income, such as the residential energy credit.
Below is a list of popular credits that often get overlooked:
• Residential Energy Credit. Taxpayers can use this credit for improvements to a principle residence that creates an increase in energy efficiency. I.e. Installation of a tankless hot water heater.

• Alternative Motor Vehicle Credit. The government will give you a tax credit if you purchased an alternative fuel vehicle, such as a hybrid automobile.

• First Time Homebuyers Credit. This credit has certainly made the headlines. If you purchased a home in 2009, you may be eligible for a tax credit that could save you tax dollars.

• American Education Opportunity Tax Credit. This credit extends the credit formerly known as the Hope credit. If you sent a child to college in 2009, this credit might be for you!

• Dependent and Child Care Credit. This credit is available for working tax payers with dependents that require care during working hours. There are several requirements and regulations with this credit, but it is certainly worth the effort, if applicable.

The above list is only a portion of available credits. It is beyond the scope of this article to explore the entire list. It is important to discuss the applicability of tax credits with your tax professional. It could save you big bucks!

2. Maximize Retirement Contributions.
Did you know that the government will subsidize your retirement? That’s right, through tax deductions the government effectively is subsidizing your retirement. Many personal retirement accounts allow contributions up until April 15th, and those contributions can apply to 2009. A few even allow contributions as late of Oct 15th, 2010 while applying towards the 2009 tax return.

Contributions into tax-deferred retirement accounts, such as IRAs, SEPs, and SIMPLE IRAs reduce current taxable income; therefore reducing tax liability. For example, a couple in the 25% tax bracket who can make an allowable Traditional IRA contribution of $10,000 could save $2500 or more. That’s a 25% return on investment before this money is even invested! Best of all, this contribution can be made as late as April 15th.

There are a multitude of rules and regulations regarding allowable retirement contributions and deadlines, so it’s imperative to speak with a tax professional before making a decision.

3. Review Itemized Deductions.
Schedule A (Itemized Deductions) is a common area for mistakes and omissions. In my experience, I have seen mistakes and omissions on this form due to a lack of effort from the taxpayer. For example, many people leave tax dollars on the table when it comes to charitable deductions. Charitable deductions can help reduce taxable income and ultimately decrease your tax bill.

Here are a few other areas that are often overlooked.
• Charitable Mileage. A deduction is allowable for qualifying charitable mileage. For example, if you drive to a local Goodwill to drop off items, the mileage to and from is deductible.

• Sales Taxes. In 2009 there are a couple ways to deduct sales taxes paid for automobile purchases. Depending on the state in which you live, this deduction can save you several hundred dollars or more. Let your tax preparer know if you purchased a vehicle in 2009.

• Non-cash Charitable Contributions. Organizations such as Goodwill perform a great service to our communities. It’s important to properly substantiate non-cash contributions to maximize deductibility. Make sure to always get a receipt from the organization, create an itemized list of items being donated, and do not forget to properly value the items being donated to fully substantiate these types of donations. There are several documents available to assist taxpayers in determining the donated value of each item, including one on Goodwill’s website. It’s worth the additional effort.

This is another area where a good tax preparer can come in handy. Don’t be afraid to ask for assistance from your preparer when it comes to properly valuing your donated items. Also, make sure to keep up with your mileage as well!

• Utilize Miscellaneous Items Deductions. Miscellaneous itemized deductions are subject to a 2% floor of adjusted gross income. This means in order to get a deduction you must produce deductions greater than 2% of your adjusted gross income.

The number of employees working from home has increased in the past few years. An office in the home of an employed taxpayer is a fine example of a miscellaneous itemized deduction. Tax preparation fees, financial planning, unreimbursed employee expenses, and investment expenses are a few more examples of miscellaneous itemized deductions.

Most Taxpayers don’t have the time and energy to fully understand all the available deductions, credits, and retirement contribution options available. The key to properly handling one of the largest recurring expenses (taxes) in anyone’s financial world is by implementing a proactive tax strategy. But, even with good tax planning, numbers can change and life can get in the way. When that occurs, the above options allow taxpayers another chance to reduce their tax liability.

I utilize integral tax planning for my clients. I feel this areas is one of the most important (if not the most important) part of the financial planning puzzle. Taxes can touch and impact (both positively and negatively) many aspects of our financial world, so it’s important to manage our tax liability. It’s important that taxpayers work closely with tax preparers.

I am a firm believer in holistic financial planning, which includes proactive tax planning. If you are searching for a holistic financial planner in your area, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA advisors integrate taxes into financial planning, which is an enormous benefit to clients. You can find more info and search for an advisor near you at www.acaplanners.com .

In full disclosure, Troy Von Haefen is a member of The Alliance of Cambridge Advisors.
Any of the above information is intended for informational purposes only and is not intended to be considered tax advice or implemented as such.

Start 2010 on the Right Foot!

2010-01-04T15:09:00.000-08:00

It’s hard to believe that it’s 2010. Has it really been ten years since the Y2K scare? While the world has changed over the last ten years, there are financial planning strategies that can help position ourselves for success. If you’re looking for a few things to implement as we turn the corner into another decade, read on!
Here are three things you can do to help positively position you for a successful 2010!

1. Timely file your taxes

Most people handle their personal taxes in a reactive manner. They don’t spend much time during the current tax year preparing and planning to balance the tax liability due. Many folks put off preparing the tax return until the last possible minute, which can mean October.

It’s difficult to get a handle on your current year’s tax projections if you don’t file your previous year’s return until October. For those of you who year after year file for extensions and finalize your return in October, you know the burden you carry around until the return is finally signed and filed. If the return is filed in October, there are only a couple more months before the process begins again. Imagine the weight that would be lifted from your shoulders by filing your return when due (April 15th). I have seen this time and time again in my office with clients who were perpetual late filers. By filing timely, clients now have more time and energy to prepare for the current year’s tax burden and can focus on tax reduction strategies.

Remember that taxes are the single largest recurring expense that most of us will encounter from now until the day we die…..and the IRS will want a piece of the pie even after you die! So, why not pay more attention to this expense. File timely and focus efforts on reducing your tax liability through efficient tax planning. Start now by preparing documents for your tax preparer and strive to hit the April 15th deadline.

2. Establish a Spending Plan (Budget)

I realize I have said a bad word. The term budget conjures up similar feelings as “pop quiz” or “shot”. Just like testing and vaccinations are necessary, budgets have a very useful place in our personal financial world. The overall goal of a budget or spending plan is two-fold: 1. to make sure we spend less than we earn, and 2. to make sure we are doing the right things with our money (working towards goals and spending money in areas that bring us joy).

While not everyone will need a budget that is dialed down to the penny, some folks will need to see in black and white where their money goes every month. Knowledge is key, and having a budget on paper, in black and white, will help you visualize the income versus expenditure concept.

Again, not everyone will need a detailed budget. I feel that everyone will at least need to have a spending philosophy. In essence, if expenditures are less than income, liquidity is in place (emergency funds), goals (future needs) are being tended to, consumer debts (car loans…etc) are eliminated, and purposeful spending is occurring (spending money in areas that bring joy), then a person’s spending philosophy is right on track.

3. Take advantage of matching funds while savings for your retirement

While some corporations have reduced or eliminated matching funds in retirement plans, most have not. If your company offers a 401k/403b match, take full advantage of this free money. If your company matches up to 6% and you only contribute 4% into your 401k plan, then you are leaving free money on the table. There are not many free rides available for hard working folks, but this is one!
There is a nice additional benefit tied to retirement contributions. Money that is deferred into a retirement is not currently taxed. The government will help subsidize your retirement by delivering a tax break for retirement contributions. For example, a single tax payer in the 25% tax bracket who contributes $10k into their 401k will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money even enters the market!

At first glance the above three items may not seem connected, but the interworkings of a good financial plan work hand and glove with all the integral pieces. These three pieces can work together to produce a positive snowball effect on a personal financial plan. With proper tax planning comes tax savings, which in turn frees up more money for cash flow. More cash flow allows for an increase in retirement contributions, which reduces taxes even further and again increases cash flow. You get the idea! Start 2010 on the right foot by taking positive steps to improve your financial wellbeing. Happy New Year!

I-Bonds Return to Favor!

2009-12-02T14:33:00.000-08:00

A few months ago I was discussing with a client the fact that one of my favorite little tools, I-bonds, were not as effective as they once were. Over the last six months I-bonds were not attractive. The reason for the shortcoming was the negative inflation rate component of the composite return associated with I-bonds.

While I-bonds have struggled over the previous 6 month period, the new rate is appealing. The new annualized rate for the six month period from November 2009 to April 2010 is 3.36%, and that’s 3.36% tax deferred!

Why I like I-bonds:

1. They grow tax deferred! A taxpayer in the 25% tax bracket will receive an equivalent taxable return of 4.48% on the current I-bond six month annualized return.

2. I-bonds can be used tax-free to pay for certain college expenses. Although, there are income restrictions to use this feature.

3. I-bonds have an inflation component factored into to the composite (total) rate of return. If inflation creeps up, the total return of I-bonds will increase.

4. I-bonds can be used as emergency funding in a financial plan. There are redemption restrictions:
• I-bonds cannot be redeemed within one year of purchase (special provisions may apply)
• I-bonds redeemed in years 2-5 incur a three month interest penalty. This penalty may be tax deductible.
• I-bonds redeemed after 5 years incur no penalties.

5. I-bonds are a debt of the US government and are an extremely safe investment. Note: I-bonds have a composite rate, which is based on two components: 1. A fixed rate component, and 2. An inflationary component. While the fixed rate is locked over the life of the bond, the inflationary component varies based on inflation. This formula can create an interesting and rare situation where the inflationary component is negative and can reduce the composite rate to 0, but the rate will not fall below 0. In a nutshell, in the worst case scenario I-bonds will return little or even nothing, but you can’t lose money! Also, the rates change every six months, so the prospect of this happening over of long term period is very slim.

How I use I-bonds:

1. As part of a client’s emergency fund package.
2. As a tax-deferred savings vehicle.
3. College planning. This is an easy way for grandparents to gift small amounts for college without hassle.
4. Clients that hold large sums of cash can reduce their overall tax liability by moving money from a taxable money market type account into tax-deferred I-bonds.

The previous six month period was not idyllic for I-bonds, but rates have improved. The effectiveness of I-bonds have returned. While not sexy or designed to outperform stocks, I-bonds can be a nice addition to almost any portfolio.

If you would like to learn more about I-bonds, here are a couple good website suggestions:
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
http://www.savings-bond-advisor.com/

Oh My, You Don't Have a Will!

2009-11-10T14:11:00.000-08:00

Many folks that walk into my office for the first time don’t have a will in place. Maybe I should rephrase that….the folks that walk into my office without a will they have created have a will as prepared by their state. Dying intestate (without a will) will move into action the state’s plan, which more than likely will not coincide with your plans or wishes.

Let’s look at a few examples of what a state’s will may include (or not include):

Guardianship Provisions

Since most of my clients have minor children, let’s start with guardianship provisions. While the state will try to get the children where they belong, if the relatives cannot agree, the state can appoint someone. Guess what? That someone can be a stranger! Guardianship provisions should be the primary focus of young couples with children. It’s important that you designate a guardian and not leave that up to the state. Don’t let the care of your children become a bureaucratic decision.

Estate Tax Reduction

Your state will more than likely forgo any opportunity to lower estate taxes. There are estate planning techniques that may reduce estate taxes, but the state may not implement any options unless stated in a legal document (will). In essence, the state will say that your money is better off going into the state or federal coffers and not to your spouse, children, or charity.

Division of your assets

Here in TN, the state may give your spouse only one-third of your assets and your children the remaining two-thirds. The state can appoint your spouse as the legal guardian of your minor children but may require a performance bond to guarantee the proper handling of the children’s assets. The living spouse may also have to produce a yearly account to the probate court of the monies spent on the children. These details will only compound a difficult situation (death) by making a simple task (spending money on your children) complicated and burdensome.

These are a few of the issues that can arise out of intestate death. The over-riding theme here is that while the state will try to do what is right with your children and assets, the letter of the state’s law may not be your wishes. If you have a will, make sure it conveys your wishes. If you do not have a will, speak with an attorney and have one drafted.

Disclosure: Troy Von Haefen is not an attorney and the above information does not constitute legal advice or the practice of law but is written for informational purposes only.

Purposeful Spending!

2009-11-03T14:58:00.000-08:00

I was intrigued this morning as I met some friends at a local bagel shop for breakfast. After paying over $6.50 for a bagel with cream cheese and bottle of juice, I realized how expensive this establishment was for some of the regular patrons. I watched a father buy his sons breakfast before school, moms in workout clothes dropping in for quick jolt of caffeine before hitting the gym, and a few high school kids walk out with coffee mugs the size of milk jugs.

As I sat in astonishment at the number of people that patronized this local shop at 6:30am, I wondered how many of these folks came here everyday. From the familiarity of exchanges between the clerk and the customers, I supposed this was routine for many. I started to calculate the monthly outlay of the “average” bagel shop customer when it hit me that maybe I was missing the point.

I regularly speak to my clients regarding cash flow, and one of the most important elements we discuss is purposeful spending…..spending your hard earned money on things that really matter or bring joy into your life. By developing a budget that establishes joyful spending, we can create a healthy relationship with our money and not an angry, oppositional, or frustrating encounter every time we open our wallets.

Purposeful spending applies to all economic classes from the wealthy to those with little. The wealthy may enjoy purposefully spending through charitable giving, while those with less may simply enjoy the time together with the family at a local restaurant.

How it Works

Creating a purposeful spending philosophy has to work hand and glove with fiscal responsibility. Obviously, the necessities of life must be paid first followed by saving for the necessities and joys of tomorrow. What’s left over is often called discretionary funds. These are the funds in which purposeful spending evolve from. I feel it is important to understand that many of our purchases are choices, especially discretionary purchases. Focus on the areas of your spending that bring you joy and work on reducing spending in areas that do not. I often encounter families that over-spend in areas that are in opposition to their life goals or just can not be justified.

This brings me back to the bagel shop. Maybe I had the picture distorted, for I suppose the father may work long days and enjoy the focused time with his sons every morning. It could be their tradition rather than a financial drag to their monthly budget. Maybe the moms that walked in wanted someone else to make the coffee once in awhile and enjoy the time away from the hustle and bustle of their morning routine. These thoughts would certainly qualify for purposeful spending.

What about the teenagers? Well, I don’t pretend to imagine what their thoughts are…who knows? That’s above my pay grade and certainly fodder of a different professional.

The key to purposeful spending is to align discretionary outlays with sustainable joy and happiness (experiences with friends and family)…not purchases that generate short term bliss (keeping up with the Jones). Developing a spending mentality that enables you to feel good about what and where you spend your money can lead to a new level of financial freedom.

Financial Synergy

2009-10-27T11:48:00.000-07:00

Synergy has become popular vernacular across boardrooms, conferences, and certainly touted by motivational speakers in the business community. So much so, that many books have been penned on the topic. There are books available on synergy relating to food, clothing, fitness, and physical and mental health to name a few, so the concept has certainly caught on!

I believe in the concept of synergy, and I am a firm believer in applying the theory of synergy to personal finance. As a holistic (one who sees the entire picture) financial advisor, I see the benefits in my clients’ progress because of synergic effects.

How to create personal financial synergy?

Financial synergy can only be achieved through connectivity. Think in terms of Sir Isaac Newton’s Third Law: every action has an equal and opposite reaction (My seventh grade teacher would be proud!). Personal finance is similar to the world of physics in this way. Every financial move or decision creates a reaction in another area of your financial life. The key is to create positive reactions and not negative.

For example, buying a home that is too expensive will create negative synergy to your cash flow. It will create a scenario that will produce a negative snowball of reactions that can lead to a deep financial hole and possibly irreparable financial damage…..maybe even bankruptcy.
While negative synergy can create a downward spiral, positive financial synergy can spur tremendous financial growth. A fine example we can all relate to is saving for retirement. Money contributed into a 401k is tax free; therefore, the contributions will reduce your tax bill. This is positive synergy. Let’s continue the example, the excess funds created by the tax reduction from the initial 401k contribution can now be contributed into the 401k. The more money contributed the greater the tax reduction. The greater the tax reduction the more cash is freed up. This is just one example of financial synergy between two areas of personal finance: taxes and retirement.

There are many areas involved in personal finance. Estate planning, retirement, taxes, insurance, cash flow, goal setting, investments, college planning, retirement planning are most of the topics involved with personal finance, but not all. Imagine the traction that can be generated by constructing a financial plan by integrating all of the pieces. Imagine the power and efficiency of a financial plan created using synergic strategies between the aforementioned topics. The positive momentum becomes exponential!

Often families may employ various professionals to handle their personal finances. A CPA takes on taxes, and a broker covers the investments, while an attorney handles estate planning. Unless these professionals communicate effectively the power of financial synergy is lost. The right hand must know what the left hand is doing! Whether a family uses various professionals or navigates the financial landscape solo, continuity, connectivity, and efficient synergic decisions are a must for financial success.

Effective financial planning increases efficiencies across all financial areas, which is synergy. If you feel you are leaving money on the table somewhere in your financial world or feel a lack of connectivity, you should contact a financial advisor. Some of the brightest minds in synergic financial planning can be found through The Alliance of Cambridge Advisors (an organization in which I am a member). Check out their website at http://www.acaplanners.org/ .

Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding tax penalties by the IRS.

Buyer's Remorse

2009-10-22T09:35:00.000-07:00

Have you ever experienced buyer’s remorse? You bought something and later regretted making the purchase. I think we all have made this mistake. Hopefully, most of our regrets are for purchases with only a zero or two involved and not involving thousands of dollars.

Unfortunately, the financial world is an area that leaves many folks confused and misguided when it comes to fees and costs. As with any wise consumer, financial product/advice consumers should perform their due diligence to understand the cost of the product or advice to be purchased. Some financial products on the surface may come across as costing the consumer little or nothing, but, after closer inspection, the costs or fees may be exorbitant. For example, there are commissioned advisors who sell loaded funds (funds with a purchase fee attached), but some of these advisors may not disclose to the client that the fee may be withdrawn from their investment account balance. The client may only notice after opening their investment statement and learning their balance is immediately 3-5% lower or worse!

Why is it important to know the costs and fees?

Most often hidden charges are withdrawn from the underlying investment. The largest culprits are insurance and commissioned-based investment products. Let’s look at a hypothetical example: A client purchases a couple of mutual funds with $100,000 that dear Aunt Ida passed on in her will. The front load fee is 5%. This means the after-fee investment goes from $100,000 to $95,000 right off the bat! In essence, the cost to purchase those two funds is $5000! If invested at 8% a year for 20 years, $5000 would grow to almost $25,000!

The same scenario can be played out for insurance based products such as annuities, as well as investment-based life insurance products. For this reason, I rarely recommend insurance based products that are tied to investment returns. Why, because it is difficult to understand the true cost of ownership. Sometimes it is even difficult to understand the product itself, and, if you don’t understand what you are buying, maybe you shouldn’t own it.

As a consumer, knowledge is key! If you are confused as to the cost of doing business with a financial advisor or insurance agent, simply ask. What you don’t know could hurt you! Don’t let buyer’s remorse impact your ability to reach your financial goals. Understand the true cost of ownership, and make sure hidden fees won’t leave you in regret.

Goal Setting!

2009-10-14T11:16:00.000-07:00

The title of this post may lead you to believe that I am going to deliver strategies pinned to outlining and achieving goals of fame and fortune. Not so, for this article will hopefully help you to see what is really important in your life.

One of the most exciting meetings that I offer to my clients is the goal setting meeting. During this appointment I have the privilege to hear my clients’ dreams, wishes, and desires. This is a wonderful opportunity to search for continuity between couples and their goals, as well as explore what people really dream about.

After years of listening to my clients’ goals and dreams, their responses always seem to pleasantly surprise me. The popular perception that real goals are lofty aspirations of wealth and riches is just not the case; at least not in my world. Most folk’s true desires are often very simple.

It has been fascinating for me to learn what really excites people is the connectivity to family and friends and not flashy cars or opulent mansions. Relationships and endearing memories are what people really desire! Money can certainly help facilitate relationships and create memories, but time is the only real solution to building relationships and creating lasting memories. Creating a portfolio of wealth is not something we can fully control. Sure we can and do develop investment strategies that are time tested and built on fundamentally strong ideas, but ultimately we cannot control what the market is going to do. What we can control is our time!

We all have responsibilities and obligations…many to our careers, but again we can still control what we do with our time. I encourage us all to take the time to explore what (or should I say who) is really important in our life. I often tell my clients to find their “it.” Find what really brings you joy. It could be as simple as walks with your spouse, coaching your child’s sports team, or golf with friends. Once you understand what really drives your dreams, we can then focus on getting you there. Again, money can help facilitate this, but often money is not the driving force.

We live in a society of over-indulgence and consumerism. We have seen firsthand the devastation created by greed with the collapse of the real estate market and this recent economic downturn. Don’t get me wrong, I enjoy the finer things in life as much as the next guy. Society programs us to want more when we often have what we want right in front of us.

Take the time to review your goals and dreams. Explore what really brings you joy. Focus your efforts, including financial efforts, in this direction and you cannot miss. Again, it is important to view your financial life as a giant puzzle where the individual aspects (taxes, investments, insurance…etc.) create your big financial picture. Your goals should be driven by what brings you true joy and not by consumerism or society.

Four Do's During Open Enrollment Season!

2009-09-30T13:52:00.001-07:00

As we move into fall, open enrollment season is starting. For those of you that are employees, you may have already received information from your employers outlining the benefits available to you. Some benefits may be offered on a pre-tax basis. Most often health insurance is offered in this manner. Here are four do’s to get you through this season’s open enrollment.
1. Do the reading!
While many folks simply peruse the information provided, benefits and tax savings are often left on the table. Understanding your benefit package is an important part of your overall financial health….as well as your physical health! Don’t rely on your co-workers for information. It’s your responsibility, so, if you don’t understand what is being offered to you, simply ask a human resource representative. This is part of their job!
2. Do the Math!
Does it make sense to use a FSA(Flexible Spending Account)? Do you usually incur a large amount of out of pocket medical expenses? If so, the medical portion of a FSA could be a home run for you! Don’t forget dependent care benefits care be big tax savers as well. The combination of medical and dependent care FSAs can save hundreds and possibly thousands of tax dollars. If you have to pay for these expenses anyway, why not make them tax-free and save money? Remember that FSAs are use it or lose it monies, so you may want to underestimate your first year FSA contributions. The bottom line is that FSAs do require your attention throughout the year, so make sure the savings generated are worth the time you spend administrating your account.
Also, when doing the math, compare the cost of benefits provided to you by your employer to those you can acquire on the open market. Most of the time the economies of scale work in favor of the employee provided benefit, but not always. So, do the math and compare!
3. Do the right thing!
Many plans offer additional benefits to spouses and children, such as group life insurance. If a spouse has an underlying medical condition that would impede their ability to acquire life insurance at an individual level, group life insurance offered as an employee paid benefit is a simple way to add some protection. Obviously, it’s important to understand how much insurance is really needed, and the amount of insurance offered as a benefit may not be enough……but, that’s a topic for another day!
Another wonderful benefit that is often offered and is a real value is disability coverage. Often the most valuable asset a person owns is their ability to earn an income. Disability coverage can offer protection of that asset. The ole insurance axiom of “don’t risk a lot for a little” applies here. Most disability policies offered through employee benefit packages are affordable, so do the right thing!

4. Do Enroll!
After you do the research and determine what options are the right fit for you and your family, make sure you actually enroll. With our busy lives, it’s quite easy to miss the due date. This can be a costly mistake. Mark your calendar, set a reminder in your outlook, mail yourself a letter, or whatever it takes to complete the task.
Open enrollment is the time to understand and take advantage of the benefits your employer offers to you. Many of these benefits are just that: benefits! They are offered as a perk for your employment, so don’t miss out!

Four Things To Do Right Now!

2009-08-31T11:51:00.000-07:00

With the recent up-side movement in the stock market, many folks are wondering what to do. Should I sell some of my positions? Should I buy more? These questions a based on two feelings that can destroy your portfolio: Fear and Greed! Timing the market has never been a productive venture, at least not for me, and I feel that I am smarter than the average bear when it comes to investing.
So what can we do during this up and down market that is prudent for our future?
1. Dollar cost average.
This is the single most important strategy that an investor can implement. This can be accomplished either through your retirement plan at work or in a taxable brokerage account.
2. Invest Tax Efficiently.
This suggestion runs in tandem with point #1. If you are contributing to a retirement plan such as a 401k or 403b, you are saving money pre-tax, which reduces your tax liability. Taxes can erode investment returns, so tax efficiency is paramount to long term growth.
3. Adjust your w-4 withholdings.
The more you contribute to your 401k, 403b, or other tax deferred retirement plan, the less taxable income you will show on your tax return. In a nutshell, increase your retirement contribution, decrease your tax withholdings, and you may not notice much change in your take home pay. But, you’ll be doing yourself a big favor….taking care of your future.
4. Remain committed to balance.
With the recent surge in equities (stocks) many folks may be tempted to invest more than they should into equities. This could be a dangerous proposition. Even thought the market has had a terrific run over the last couple of months it certainly doesn’t assure future stability. A commitment to balance through proper portfolio diversification will allow for portfolio growth while offering downside protection.

Remember that we are long term investors. This is not a sprint, for life’s financial journey is more of a marathon (hopefully without the heavy breathing and cramps!). Short term ups and downs are insignificant to our portfolio. We are in it for the long haul, and our focus should remain on our future goals.

Government CARS Program....Winner or Clunker?

2009-08-05T12:35:00.000-07:00

The auto industry is jumping for joy over the “Cash for Clunkers” program. The program has dealerships across the country scrambling to find supply to fill the demand. The Wall Street Journal recently reported that Ford Motor Company expects its first year-over-year monthly increase since 2007. It’s no doubt that this program is bringing out the buyers, but is it good for the consumer?
While this cash incentive can really help stimulate auto sales, it may not be stimulative for some folks’ bottom line. The reason for my concern is that the program may incent a buyer to overspend. Overspending and greedy behavior is what drove us into the economic mess in the first place.
I recently had a client take full advantage of this plan. He found a car that satisfied the CARS requirements and stayed within his budget. It worked wonderfully, and he saved $4500. I love it! But, problems can occur when the opposite happens. A buyer looking to pick up a $15,000 car but walks away with a $35,000 car over bought. No matter how you draw it up, sugar coat it, or justify it, overspending is overspending.
I often tell clients not to purchase something just for a tax deduction. I can now tell clients not to buy something just for a rebate. If a new car is needed and the funds are in place, this is a wonderful deal! Be careful though, the last thing you want is a clunker wrapped around your financial neck.

Know Your Limits (Part II)

2009-07-28T12:24:00.000-07:00

Back in January I wrote about the new financial limits that were ushered in with the new year. While it’s important to understand the limits that impact our savings and taxation, there is another set of limits that everyone should know: your automobile insurance limits.
Auto liability limits protect us from financial harm when we are involved in an accident, at least if we are properly insured. Most states only require minimal liability limits. The minimum limits are usually too low and offer inadequate financial protection if you are involved in a major accident….or sometimes only a minor accident.
Unfortunately, today’s litigious world finds lawsuits occurring at a breakneck pace. Many suits are filed over auto accidents. When an underinsured driver finds himself involved in a wreck that produces damages beyond his limits the litigation begins. Once the insurance limits are exhausted and paid out the insurance company is not required to pay out any more damages.
The State of TN requires 25k/50k/15k as a minimum. The first number (25K) represents the amount of damages paid per person due to a claim. The second number (50K) is per accident. For example, if three people in another car are involved in an accident in which you are at fault and each person requires 25k worth of medical care, you could get sued for the remaining 25k of medical care. If one person in the other car requires 50k in medical care, you could be sued. The last number (15k) represents property damage. This one is easy to see why low limits can put you at financial risk. If you’re involved in an accident that totals another driver’s car and they happen to drive a car valued at more than 15k, you could be sued.
The old insurance adage of don’t risk a lot for a little is certainly in play when it comes to auto insurance. If you are not sure about your auto limits, ask your agent…..or better yet, ask a fee-only financial advisor. Take the initiative to know your current limits. Determine the proper limits for your situation. Review the possibility of an umbrella policy. You and your family could be at financial risk!

Costs Matter! Mutual Fund Expenses Part II

2009-05-13T06:50:00.001-07:00

In the first part of this series, I discussed the basics of mutual fund expenses. In this section I would like to explore the reality of how mutual fund expenses will impact your bottom line.

As of May 11, 2009, Schwab announced that it will reduce its expense ratio on several mutual funds. One in particular caught my eye: The Schwab S&P500 fund (SWPIX). This fund lowered its expenses from .36% to .09 %. This is a big jump!

As the Schwab S&P 500 Fund is a passive fund or index fund, the expense ratio has a big impact on your bottom line. Also, the Schwab S&P 500 fund should hold the same assets as any other S&P 500 fund, so now that the expenses are lower it could save you money.

Here’s an example of how fees will impact you bottom line. Since the Schwab fund just lowered its fees we can not use it as a historical example. The Vanguard S&P 500 fund currently has an expense ratio of .16%, while the Dreyfus S&P 500 fund has an expense ratio of .50%. The difference of these two fund’s returns on an annualized basis for 10 years is .39%. This difference is essentially the spread in their expense ratios over the last ten years since the fees do change over time. If the funds more or less hold the same assets, why buy the fund with the higher expense ratio and pay more money for the same product?

Exploring this further will illustrate the impact on your portfolio. A $100,000.00 investment in the Vanguard fund for the last 10years would produce a return almost $3400 higher than the Dreyfus fund based on historical data. While every S&P 500 fund will produce slightly different results (regardless of expenses), it’s important to be cognizant of the impact expenses can have on your portfolio. $3400 here and there can make the difference in your ability to reach your goals, so make sure you know where your money goes and what it costs you!

Understanding Costs! Mutual Fund Expenses Part I

2009-05-13T06:49:00.000-07:00

One of the aspects of investing that is often over-shadowed by investment returns is the importance of expense ratios in mutual funds. These expenses can erode returns and are often misunderstood by investors. Expense ratios are the fees paid to the fund itself by investors like you and me. These fees are expressed as a percentage and go to cover the costs of running the fund.

The expense ratio of a mutual fund wraps several fees into one number making it somewhat easy to understand. The number is expressed as a percentage of assets under management. For example, if you own $10,000.00 of a mutual fund with a 1% expense ratio, your yearly costs would be $100.00. That $100.00 is used to pay the fund’s manager(s), administrative costs, and possible 12b-1 fees. 12b-1 fees are used for marketing, advertising, and the costs of selling the fund (commissions paid to brokers). Yes, part of the expenses you pay every year goes to advertise the fund, as well as compensate brokers who sell the fund and receive commissions. Now, not every fund carries a 12b-1 fee, and I strive to stay away from those that do!

There are two general types of mutual funds: Actively managed and passively managed. An actively managed fund is a fund who’s manager strives to outperform a market index. These funds, on average, have expense ratios in the 1.4% range. It’s higher for international funds and lower for fixed income funds. Passively managed funds are funds who’s manager strives to mimic or capture the returns of an index. These funds on average have much lower expense ratios. Why? Well, the guess work is taken away from the fund’s manager. If a fund’s job is to follow the S&P 500 index, the stock picking is already done. The fund doesn’t need to pay a fund manager to go out and find investment opportunities because the fund’s objective is set….replicate the S&P 500 index.

While the above paragraph may be a bit difficult to grasp, the understanding of expense ratios should not be. It’s very simple…..the higher the expense ratio, the more you pay!
Some funds may be worth the extra costs, but you should at least know what you are paying in expenses before you buy! Stay tuned for Part II, as I will explore an example and illustrate the affects of expense ratios on long-term returns.

2009-04-21T09:29:00.001-07:00

Why Tax Planning is Important

Tax planning is an integral piece of a proper financial plan. The fact is many people do not do any tax planning. I have seen this truth in my practice through new clients who often tell me, “My tax guy never talked to me about how to lower my tax bill through tax planning.” Most folks handle their taxes in a reactive manner versus a proactive approach. They dump their tax documents on the CPA’s desk and hope for the best. This is a recipe for disaster.

Now that tax season is over it’s time to start planning for your 2009 tax year, especially if you are self employed. There is plenty of time to make adjustments that will work in your favor to swing the tax momentum to your side. There are new laws in place, many of which are quite complicated, that will work for you, but you must implement them in 2009. This illustrates the importance of proactive tax planning.

Getting control of your taxes and saving tax dollars is what tax planning is all about.
Some of the biggest savings associated with tax planning can come from ideas that are very simple, such as saving a percentage of your income to cover estimated taxes or retirement contributions (if you are self employed), or increasing your 401K/403B contribution while adjusting your W-4 so your paycheck is not affected (for those who are employees).

Like many other aspects of your financial life, through knowledge and understanding can come clarity. Take control of your taxes. Remember that taxes are the single largest recurring expense that we will have throughout our lifetime. The tax code is quite complicated, so talk with your Financial Advisor or CPA about helping you plan accordingly for your 2009 tax year.

2009-02-12T14:14:00.000-08:00

Why it may not be deductible!

So you bought a painting at a charitable auction only to be told by your tax preparer it’s not deductible. You even paid the charity directly. You even have a receipt. What gives?

Rather than cite tax code lingo, let’s talk in understandable terms. If you buy something at a charitable auction, it’s only deductible if you pay more than the value of the goods or services you received.

Example 1. A $50 gift certificate to a local favorite restaurant purchased for $40 is not deductible.

Example 2. The same $50 gift certificate purchased for $60 generates a $10 charitable deduction.

Example 3. You purchase a box of fruit to support a local high school band program for $30. The equivalent fruit at your local grocer would cost you $15, so you receive a $15 tax deduction.

How do you support your favorite charity and walk away with a nice tax deduction?
Go for the items that have low intrinsic values but sell for big dollars. I’ve attended charity auctions where progressive dinners held by teachers sold for $500 a couple. This is a win win! The charity receives a great donation and the buyer receives a nice tax deduction. The intrinsic value of the dinner may be only $50, but the buyer receives a $450 tax deduction.

Remember that it’s important that we continue to support charitable causes, and it’s not always about the tax deduction. Understanding these guidelines will help you avoid any tax confusion the next time you attend a charitable auction.

Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding any tax penalties imposed by the IRS.

Know Your Limits!

2009-02-02T15:29:00.001-08:00

2009 ushers in a new wave of financial limits that can impact your bottom line. Every year we get a new set of limits based on the guidelines presented by Congress and the IRS. The important point of understanding these limits is to have the ability to take full advantage of them. If you only contribute 1% of your pay to your 401k, then you probably will not need to know that the 2009 401k limit for an employee under age 50 is $16,500. Remember it is how you use this information that’s important!

Useful 2009 Limits:
401k, 403b and 457 contributions limits - $16,500
Catch up provision for those 50 and older - $5500
IRAs and Roth limits - $5000 (under 50) - $6000 (age 50+)
SIMPLE IRA and SIMPLE 401k - $11,500
Catch up provision for those 50 and over - $2500
Social Security Maximum Earnings - $106,800
Annual Gift Exclusion - $13,000 Federal (TN has 2 donor classes that impact the exclusion….$13,000 for class A donees and $3000 for class B).
Standard Deduction – Single $5700, Married Filing Joint $11,400
Personal Exemption - $3650
Federal Estate Tax Exclusion - $3,500,000

The above list includes most of the commonly used limits that impact the majority of society, but this is certainly not an exhaustive list. Use these limits to your financial gain. Maxing out your retirement options reduces your tax burden, which puts money back into your pocket.

Know you limits and use them wisely!

“Help Me Help You!”

2009-01-26T08:20:00.001-08:00

I recall the locker room scene in the movie Jerry McGuire where Tom Cruise was struggling to keep his only sports management client, Rod Tidwell. Jerry was pleading with Tidwell, “Help Me Help You!”

Tax preparation is an area where tax preparers need your help to help you. Sometimes items can fall through the cracks and end up costing you tax dollars. The way to prevent this is by proactively talking with your tax preparer. While I work very hard to know my clients, sometimes CPAs don’t have the luxury, due to the enormous number of returns prepared, to know the goings on in most of their clients’ lives. Due to the time constraints in a normal client –CPA tax meeting, information can get overlooked. This can be costly!

The most important thing you can do as a tax client is to communicate with the preparer. It’s also important that the preparer communicate with you. If you feel you are not getting the communication you deserve, then it is time to find a new tax preparer.

One of the best ways to communicate with the preparer is by asking questions. Most folks don’t understand the IRS tax code, so by asking questions you can stimulate conversations that may lead to the discovery of a deduction.

If the lines of communications are open between you and the preparer, and the preparer knows and understands your situation, the preparer should be able to “Show You The Money!”

When Buying or Refinancing a Home You Should…

2009-01-26T08:19:00.000-08:00

Make sure you understand the fine print!

It’s a great time to buy or refinance a home. Interest rates are extremely low (As of Jan 2009 a no points, 30 year fixed, mortgage rate of 5% is very common). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.

The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!

You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.

Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.

Welcome!

2009-01-26T08:18:00.000-08:00

Welcome to The Financial Minute. This blog is designed for clients and friends of Von Haefen Financial Management. It is my intention to write about topics that you will find useful and interesting. I will also strive to write about timely topics, such as tax information during tax season. Since I know all of you are extremely busy, it is my goal to only take a minute or two of your time. I encourage topic suggestions, so feel free to let me hear your opinions.