The Best Strategies to Save for Retirement

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What are the best strategies to use to save for retirement?  In this video and in the summary below, I respond to a few questions sent to me regarding the “right” ways to save for retirement.  Specifically, we discuss these three questions:

  • Presuming that a 401(k) alone won’t be sufficient to fund your retirement, what are the “next best” places to put your retirement money?
  • Pre-tax vs. Roth retirement accounts- what’s the best option to choose?
  • How much do you really need to save for retirement?

(Bill’s Note: The video below was originally recorded as a Facebook Live broadcast on November 26, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

The Three Tiers of Retirement Savings

Not all retirement savings accounts are created equal.  If your goal is to save aggressively for retirement, you’ll likely need to make some decisions about where you should be putting your money for retirement. 

I like to think about retirement savings accounts in the context of three different “tiers” that you should contribute to, in the following order:

Tier 1: Employer-Sponsored Retirement Accounts

If you have access to a retirement plan through your work, this should almost always be your first priority to save for retirement.  Typically, these accounts are structured as 401(k) accounts (for private sector workers), 403(b) accounts (for non-profit and education workers), or 457 accounts (for government employees).

If you don’t have access to a 401(k), 403(b), or 457 account through your work, you should skip to Tier 2, with one caveat.  If you are self-employed, there are a myriad of other retirement account options you could set up.  We’ll discuss these in more detail another day.

Assuming you do have a 401(k) or similar account at your job, there are several things you should consider:

  • If your employer matches your contributions, you should, at a minimum, contribute enough to receive the full match.  This is the closest thing to “free money” that you’ll ever get, so take advantage of it!
  • One of my favorite strategies to help people find ways to save more for retirement is to increase your 401(k) contributions by 1% every time you get a raise at work. You won’t notice the money you’re “missing” from your paycheck, since your paycheck is going up, anyway!  But you’d be surprised how big an effect thee gradual changes can have.  By the time I left my corporate job at PwC before starting my own business, I was contributing 12% of my paycheck to my 401(k), simply by following this strategy.
  • Most employer-sponsored retirement accounts are pre-tax accounts.  In other words, you don’t pay income tax on the money you contribute to these accounts (and in return, the money will be taxed when you withdraw funds from these accounts during retirement).  But “Roth-style” 401(k) plans have become increasingly common in recent years, which work the exact opposite way- you pay income taxes on your contributions today, but can withdraw the money tax free in retirement. If you have access to a Roth 401(k), you should seriously consider utilizing it.  More on Roth accounts in a bit.
  • Finally, make sure you know the maximum contribution you’re allowed to make to your retirement accounts every year.  For 2019, the max you can contribute is $19,000 per year (assuming you’re under the age of 50).  Typically, the IRS raises this limit each year (it was $18,500 in 2018, for example.)

But, as the three questions at the beginning of this post strongly implied, 401(k) savings alone typically aren’t sufficient to completely fund your retirement.  So, after setting up your 401(k) contributions, what should your next step be?

Tier 2: Individual Tax-Advantaged Accounts

As you have probably noticed, a key component of optimal retirement savings strategies includes managing taxes on your investments and retirement income.  As a result, you should always look for tax advantages in your retirement savings strategies, whether they’re traditional accounts (no taxes now, but you pay taxes during retirement) or Roth accounts (pay income taxes now, grow and withdraw the funds tax free in retirement). 

There are several different options available to you in Tier 2.  And my favorite one might surprise you.

Health Savings Accounts (HSAs)

Outside of a 401(k)/403(b)/457, HSAs are my absolute favorite way to save for retirement.

Why?  Because HSAs are essentially the last complete tax shelter that exists in America.

When choosing between a Traditional or Roth IRA, you pay taxes on your contributions at some point; whether it’s today or during retirement, your money gets taxed eventually.

But as long as you use the funds in your HSA for qualifying medical expenses, the money you contribute and invest in an HSA is never taxed.  Presuming your HSA account allows you to invest the money in your account, this can be an incredible savings vehicle for retirement.

This probably isn’t a shocker for you, but one of the primary challenges in preparing for retirement is making sure you have enough cash on hand to support your medical bills as you get older. With the rising cost of medical care, using an HSA to save for these retirement expenses is an incredibly efficient way to prepare for this.

Of course, there are a few qualifiers here:

  • You’re only eligible to open and fund an HSA if you have a high-deductible health plan. And if you do, you need to make sure you have a sufficient emergency fund to meet your deductible if you want to use your HSA for long-term investing.
  • The maximum contributions you can make to an HSA are relatively low.
HSA Contribution Limits for 2018 and 2019

HSAs are commonly overlooked as a retirement savings vehicle… but they really shouldn’t be.

NOTE: HSAs and Flexible Spending Accounts (FSAs) are not the same thing.  You should not be using FSAs to save for retirement, because you need to use the money in FSAs each year or it goes away.  Conversely, you are allowed to accumulate money in an HSA.

Traditional/ Roth IRAs

In 2019, you can contribute $6,000 to either a traditional or Roth IRA (up from $5,500 in 2018). Although, it’s worth noting that you have until April 15, 2019 to make that $5,500 contribution to your IRA for the 2018 tax year!

There are several questions you need to answer to determine which is the right type of account to use. Here’s how to decide which one to contribute to:

Can you deduct a traditional IRA contribution?  We’ve already established that “traditional” retirement accounts allow you to deduct your contributions from your taxable income this year.  But here’s the catch: if you have a 401(k) or similar account at work, you likely can’t deduct your IRA contribution on top of that.  The rules are somewhat complicated, and you should seek professional advice to verify your ability to deduct your IRA contributions.  But, this should be the first question you answer before making your decision.

Are you eligible to contribute to a Roth IRA? “Making too much money” is generally a good problem to have.  But, it can make you ineligible to directly contribute to a Roth IRA.  The table below shows the income restrictions on making direct Roth IRA contributions. 

Roth IRA Income Contribution Limits: 2019

Two caveats about this:

  1. These income restrictions do not apply to Roth 401(k) plans.  So, if your employer offers one, it is worth considering regardless of your income levels.
  2. You technically can still get money into a Roth IRA utilizing a Roth IRA conversion strategy. This is a very complicated process and it’s important to make sure you do it the proper way to avoid trouble with the IRS, so you should seek professional help before attempting this on your own.

When will your tax rate be higher: now, or during retirement?  This is the fundamental driver of the Traditional-or-Roth IRA decision.  Simply put, you want to pay taxes when you’re in a lower tax bracket.

If you expect your tax rate to be higher in retirement than it is now, you should pay taxes on your income now and withdraw it tax free in retirement by using a Roth IRA.  If, on the other hand, you expect your income (and income tax rate) to be significantly lower when you retire, a Traditional IRA is probably the right choice for you.

However, this is more complicated than it appears at first glance.  Remember, we’re not looking to compare your tax rate today with what your tax rate today is for your expected retirement income level.  You need to think about how tax rates will change between now and when you retire to make this decision.  Which, given that your retirement date is likely decades from now, is notan easy task.

My personal belief? Particularly after the passage of the Tax Cuts and Jobs Act in late 2017, today’s income tax rates are at all-time lows.  Which makes me inclined to believe that tax rates are likely to be higher when we retire, making Roth IRAs a great option for young people today.  That’s just my opinion, of course; I don’t have any more of a crystal ball to predict the future than you do.  But, particularly if you’re close to exceeding the income limits, you should seriously consider a Roth IRA.

How much flexibility do you need?   One final thing to consider: Roth IRAs are much more flexible than traditional IRAs.  While I don’t typically recommend that you withdraw money from your retirement accounts before retirement, you should know that you can withdraw your contributions to your Roth IRA at any time, without penalty. (As long as your investments haven’t gone down significantly in value of course- you can’t withdraw something that isn’t there!)  You can’t withdraw the investment earnings in your Roth IRA without paying a significant penalty, but you canwithdraw your contributions. 

Make Non-Deductible Contributions to Traditional IRAs

Even if you can’t deduct your traditional IRA contributions, it’s a strategy worth considering.

Even though you won’t be able to deduct a $6,000 (2019 maximum) contribution to a Traditional IRA now, and you’ll pay taxes when you withdraw the money in retirement, there’s still one tax benefit you can take advantage of:  between now and when you retire, you won’t be taxed each year on the investment earnings in your account. 

You might be losing the “primary” benefit of a traditional IRA if you can’t deduct the contributions, but at least you’ll save on taxes every year between now and when you retire by sheltering your investments in this type of account.

Tier 3: Regular Investment Accounts

You should be investing your retirement savings into something.  Which means that once you’ve run out of retirement account options, your final option is to invest in a regular brokerage account.

There are no tax benefits to holding this type of account.  The money you put into this account is after-tax money, your investment earnings will be taxed every year, and you’ll be taxed when you sell your investments.  But, the primary challenge in saving for retirement is making sure your money grows at a faster rate than inflation.  By investing your money as opposed to keeping it in a savings account, you give yourself the best possible shot to make sure that happens, even if there aren’t specific tax benefits for doing so.

What Shouldn’t You Use to Save for Retirement?

In a nutshell: you shouldn’t use permanent life insurance or annuity products to save for retirement. 

I’ve written at length before about why I hate permanent life insurance as an investment vehicle for retirement.  It might come with tax benefits, but the costs of these products far outweigh the benefits for the vast majority of people. 

And for young people, annuities are even worse. Until you’re at least 50 years old, you shouldn’t even consider purchasing an annuity.  And even then, there are still probably better options for you.

I’ll probably do a whole separate article about why I dislike these products.  But until then, if you’re contemplating using life insurance or annuities as a retirement-savings vehicle, you should seek advice from a third party who doesn’t sell these products for a livingto make sure it’s the right fit for you.

How Much Do I Need to Save For Retirement?

Unfortunately, there’s no generic answer I can give to this question.  Everybody’s retirement savings needs are different, so you should work with a financial planner to develop a retirement plan specific to you and your vision for your life to answer this question.

Simply put, the way you want to live in retirement significantly impacts the math on how much you need to save.  Consider two different families:  one of whom wants to purchase a vacation house on the beach when they retire, and the other wants to sell their primary house, downsize to an apartment, and buy an RV to travel the country.

Which person will need more money to support their vision for their life in retirement?  All other things equal, the first one.

You need to develop your own retirement savings plan to determine how much you need to save.  If you want to learn more and get this process started, I encourage you to book a free breakthrough session with me so we can discuss more and start developing your plan of action. 

The Pacesetter Planning Personal Savings Program

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I’m excited to announce the launch of the Pacesetter Planning Personal Savings Program.  The objective of this program, beginning with a four month pilot group on January 1, 2019, is to help you double the amount you’re saving every month.

If you’re interested in participating in the pilot program at a 70% discount, please take 2-3 minutes to complete this application by Wednesday, November 21.  

In the video below, you will learn:

  • Why I’m so excited about this program, and the results you can expect if you participate
  • How the Pacesetter Planning Personal Savings Program works
  • How to participate in the pilot group of the program at a significant discount.

Program Results

I find that about 60% of the value I bring to my comprehensive financial planning clients involves helping them save more on a monthly basis, and helping them figure out where they should be putting their savings.  Because I have seen the enormous value of increasing savings rates in the lives of my clients, I want to create a way to work together that helps with this as a standalone service.

But ultimately, while we call this a “Personal Savings Program”, merely increasing your savings rate is only a small part of what this program will do for you.  By getting your cash flow under control and using your money with purpose and clarity, the potential results you will experience are countless.

  • This is how we gain confidence and reduce anxiety about our financial situation.
  • This is how you can go from being able to afford buying a house in 6 or 7 years, to buying a house in 2 or 3 years.
  • This is how you can go from retiring in your 70s to retiring at 65.
  • This is how you can get the confidence to quit a job that’s burning you out so you can do work that you truly enjoy, even if you need to take a paycut.
  • This is how you can save your money to buy the memories and experiences you want in life.

The “process” of the Pacesetter Planning Personal Savings Program might be about budgeting and banking structures, but the results you’ll get are far more important.  Your results, of course, will be unique based on your hopes and dreams for the future, and the state of your finances today.  

But ultimately, this program is about decreasing the regrets you might have at the end of your life, and increasing the kind of memories you want to have with your friends and family.

Program Details

The pilot group of the Pacesetter Planning Personal Savings Program will launch on January 1, 2019 and will run for four months.  I am expecting to officially “launch” the program to people outside the pilot group on April 1. 

But even though we won’t officially start tracking your savings until January, we’ll meet in December to get you set up on the program.  After all, we need to be ready to hit the ground running on New Year’s Day… but the holiday season is not the right time to start trying to increase your savings! 🙂

Quantitatively, the goal of this program will be to help you double your savings rate.  This, of course, isn’t a “guarantee”- hitting this type of goal will depend on your degree of participation in the program.  But, that’s the sort of improvement we are shooting for!

(I should note that this program is modeled off of a similar program developed by an Australian firm – with permission, of course! –  and they find that their clients are able to increase their monthly savings rate by two or three times the savings rate of the average Australian.)

Three Program Components

1. Budgeting

You probably saw this coming.  It’s hard to talk about increasing your savings rate without talking about budgeting.  

I’ve talked at length in the past about why most people fail at budgeting.  So you shouldn’t be surprised to hear that this program is designed to address these challenges. 

We’re going to spend some time developing a realistic budget for you (without giving up your social life and entertainment expenses.)

The goal here isn’t to cut spending across the board, it’s to make sure we’re directing enough money to the things that are important to you, both today and in the future, and making sure that you’re held accountable to these best intentions.

And we’ll spend some time helping you identify what you want to be saving for, too.

One final note on the budgeting component of the program: I’m not going to tell you how much you can spend, and how much you can’t spend.  This program isn’t a dictatorship, it’s a partnership. 

You’ll be responsible for taking 15-20 minutes at the beginning of the program to complete a “trial budget” planner, and we will meet to review it before officially starting the program.  My job is to help you see the outcomes of your budget, and help you prioritize things as necessary.  And, of course, it’s my job to do everything I can to help you stick to the budget!

2. Banking

This is probably the most important piece of the program.  We’ll make sure your bank accounts and credit cards are set up to maximize your ability to see what dollars are “spendable” and which dollars need to be saved.

Most people’s bank account structure is designed to make it very, very difficult to consistently save money.  And “designed” might be a generous word; most of the people I work with don’t have their bank accounts organized in any sort of way when I first meet them.

There’s no shame in that whatsoever.  But before you get started on the Personal Savings Program, we’ll get you set up in a proven bank account structure that will make it much easier for you to hit your savings targets each month.

3. Reporting

This is where this program will really shine.  You’ll get a series of reports from me that will help give you clarity on where your money is going and will hold you accountable to your savings goals.

There are four types of reports you’ll receive throughout the Personal Savings Program:

  • Weekly reports are designed to give you a quick overview on your spending progress against your budget in 4-6 key areas of spending.  In particular, your weekly spending reports will focus on a few areas where you know you’re more likely to overspend.  In this way, these reports function in a similar manner to the text message warnings you get from your cell phone provider when you’re close to going over your data limit.  These reports will keep you focused on the few items that really matter, and help you avoid being distracted by the rest.
  • Monthly reports will show you your progress on hitting your savings targets at the end of each month, and (after the first month) will show you trend lines on a month-to-month basis.
  • Quarterly reports will be the key report we discuss in our quarterly meetings as part of the program.  These reports will show you your progress over the past three months, and if you fell short of your savings targets, will show you where things went wrong.  The quarterly meetings we have to discuss these reports will “reward” you for hitting your savings targets by deciding what we’ll do with the extra savings, and help get you back on track if you fell short.
  • Finally, yearly reports will analyze your progress over the course of the year.  Even more importantly, we’ll use the view of your full year of saving and spending to make any necessary changes to your budget.

Cost

So, what does all this cost?

Costs to participate in the program, if you start after the pilot group launches, will be finalized after I see the results from the pilot group.  But, the fee for this program will likely be about $750 upfront and $97 per month.

But by participating in the pilot group, you will be eligible for a large discount, both for the upfront fee and the first four months of the program.

The cost to participate in the pilot program will be $225 upfront, and $30 per month for the first four months.  This is about a 70% discount off of the eventual price of the program.  

But, I only have room for ten individuals/families in the pilot group.  So if you’re interested, be sure to apply today.  It will only take you a few minutes!

Applications are due on Wednesday, November 21.  If you have any questions about the program in the meantime, feel free to email me (bill at pacesetterplanning dot com) or set up a 15 minute call so we can discuss. 

I hope to see your name in the applicants list!  And I can’t wait to see how far you’ve come by the end of the pilot program in April!

KEEP More of Your 2018 Money, plus What We’ve Got for You in 2019

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In this short video, I’ll tell you what we have in store for you to close 2018 (including how to KEEP more of your 2018 money) and I have a BIG announcement for you at the end of the video!

 Watch the Video ⬇️ 

In the video above, I talk about three simple and practical ways we can work together without (or before) comprehensive financial planning services: through Focused Project Planning services.

Timestamps for your convenience:

1:06 – “Lighter” ways to work together: Focused Project Plans
1:20 – Student Loan Analysis and Payment Planning
1:39 – Health Insurance Plan Selection & Open Enrollment
1:56 – End of Year Tax Loss Harvesting (<< BIGGEST opportunity at this time of year, especially in our current stock market conditions.  There could be a great opportunity to keep more of your 2018 money by saving on taxes!)


⬆️ If you’re interested in working together through Focused Project Planning, please schedule a call with me!


I also made a special announcement in the video (at 4:36)…



YOU
could be one of 10 people
in my Personal Savings Pilot Program 
beginning together on Tuesday, January 1st! 

My program goal is to double your monthly savings amount
without feeling like you’re sacrificing your quality of life.

If you’re ready to challenge yourself
to putting your money where your mouth is…

Click below to apply for your chance 
to be one of just ten people in this program!

2 Options to Keep Holiday Spending Inside Your Budget

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With Halloween behind us, the holiday spending season is here. And with the holiday season comes travel plans, parties, family gatherings, and, of course, gifts.

With all of that comes costs.  Significant ones. 
A study from PwC estimated that millennials spent over $1,000 on holiday-related expenses in 2017, up 26% from 2016.

I’m not writing this to say that holiday spending is a bad thing. 
True story: I’m the lunatic who starts listening to “White Christmas” in October. 🎅🏻 

Here’s my question instead: 
From a financial planning perspective, how do you prevent irregular expenses from destroying your monthly spending projections?

It’s not Just about Holiday Presents

What do I mean by irregular expenses? 
Spending that isn’t completely unpredictable, but doesn’t happen every month.

Breaking your leg and needing to pay for an x ray isn’t an irregular expense- it’s an emergency, and its why I encourage all my clients to have an emergency fund before focusing on other financial goals. 

That’s not what we’re talking about here.  Instead, we’re looking at the money you spend every year or so in a way that’s predictable, but not frequent.

Holiday spending is particularly relevant in December, but this isn’t the only irregular expense that comes up during the year.  This also relates to:

  • Thanksgiving travel (or hosting!) costs
  • Car insurance payments (usually made twice a year)
  • Renters or homeowner’s insurance payments
  • Reoccurring medical expenses (for example, a refill on prescriptions or contact lenses every x months)
  • Annual car registrations and inspections
  • Car maintenance (ex: new tires every 60,000 miles)

Some of these are more predictable than others, but you get the picture.  If you aren’t careful, you can have a huge, irregular expense in your budget every other month.

Getting back to the holidays, I’m not just picking on gifts.  There are a lot of other costs that can add up around this time of year- travel expenses, shipping costs, decorating, cooking/baking, and Christmas cards, just to name a few.

So, what should you do about it?
There are two main ways you can approach irregular spending.

Holiday Spending Option 1:
Keep and Fund an Irregular Expense Account Using Past Average Spending

Personally, this is my favorite method to approach these issues. 

In a nutshell, using this approach you would average out your yearly expenses across every month, and use these savings to cover the holiday spending and expenses when they come due.  Let’s break it down.

Irregular Expense Account Step 1:
Estimate Your Yearly Holiday Spending and Irregular Expenses

In order to plan for your irregular expenses, you have to have a ballpark idea of what they are.  While it can be difficult to calculate some irregular expenses, generally I recommend that you let your own spending history be your guide.

With bank account and credit card information online, it’s not terribly difficult to piece together a ballpark estimate of your past irregular expenses.  And it’s well, well worth the time and effort.

For example, let’s say that on average, you’ve spent $1,000 on holiday spending – gifts/travel/decorating/cooking – every year in December, $500 every March and September on car insurance, and $150 on annual car registrations and inspections.   If these are your only irregular expenses, your total for annual irregular spending is $2,150.

Just to be on the safe side, let’s round up by a couple percentage points and use $2,200 instead.

What does this mean?  On top of your monthly budget for rent, food, etc., you need an extra $2,200 to cover your expenses each year.

Irregular Expense Account Step 2:
Break It Down By Month

In this step, we’re going to divide your annual irregular spending into an average amount per month. Then, add that amount to your current monthly budget.

The idea here is that rather than only thinking about holiday spending in December, it’s best to set aside some money every month so that when the holidays roll around, your budget stays intact. 

Going back to our example, if you spend $2,200 on irregular expenses every year, averaging that out every month means that you’d spend $183.33 per month on these items if you spent it evenly throughout the year.

So, how do you stop irregular expenses from blowing up your budget?

Estimate them on a monthly basis, then save that amount each month.  That way, when it comes time to buy that holiday gift or get your car inspected, you can use cash you’ve saved up in advance to cover it.

Is it easy to save $183.33 each and every month? 
It might be, or it might not be, given your budget.  That isn’t really the point.

The point is that if you did the first step correctly, you’ve been spending that money already in the past year or two.  Rather than dealing with it in large chunks, you’re planning ahead to make it easier on your wallet when the time comes.

Irregular Expense Account Step 3:  
Where to Put the Money in the Meantime?

Saving a set amount each month to cover sporadic expenses and holiday spending is great. 
But that begs the question- where do you put the savings?

I’m a big believer and proponent of having multiple savings accounts for different goals. 

Assuming you aren’t paying fees on your savings accounts (if you are, you shouldn’t be!  There are plenty of free options out there), the only drawback to having multiple savings accounts is keeping track of them.

I’d argue that it’s much easier to keep track of your money if you have different accounts earmarked for different purposes, rather than one or two accounts holding the money for everything.

Your emergency fund is different than your irregular expense fund,
which is different than your travel money,
which is different from your savings to buy a house….
You get the picture.  One of the easiest ways to keep your money allocated for the correct purpose is to use different accounts.

So, if you set up a separate irregular expense account, your goal should be to contribute to it evenly each month to fund these expenses.  Make it easy on yourself, and automate this savings.  Schedule a direct deposit from your paycheck, or an automatic debit from your checking account, once a month to make sure you’re saving what you need to be saving.  Your wallet will thank you when the holidays roll around!

Irregular Expense Account Step 4: 
Reevaluate Annually

I work with all of my comprehensive financial planning clients to update their financial plans annually. 

There’s a good reason for this: things change, and change often.  What worked for you this year might be too much or too little next year. 

Set your targets based on what you’ve done in the past, but make sure to reevaluate at least once a year to make sure you’re saving the appropriate amount.

Tangent

We need to have a brief time out before we go to the second option for how to keep holiday spending from blowing up your budget.

So far, we’ve only talked about irregular expenses. 
But, irregular income works exactly the same way. 

If your cash flow increases once or twice a year, either earmark those funds toward a long-term savings goal, or average out this income each month to treat it more like a raise than a bonus.

What am I talking about here? 
For people who have seasonal income, this definitely applies to you, but I bring this up to primarily speak to one irregular source of income that most of us receive each year- your annual tax refund. 

If you get $500 back from the IRS every April, build it into your monthly income budget for the rest of the year, just like we did for your irregular expenses, rather than spending it all at once.

Time to talk about the second option for handling irregular expenses.

Holiday Budgeting Option 2:
Benchmarking and Flexibility

Let’s say that the thought of diligently setting aside money in January and February that you won’t be able to touch until December gives you some anxiety.  What do you do then?

The short answer, of course, is that you need to come up with a way to pay for your holiday spending and expenses in real time.  This can be challenging, but there are a few good ways to go about it.

Benchmarking and Flexibility Step 1:
Set Spending Caps

Before you start your shopping, set some hard caps for yourself. 

Again, this best done in conjunction with your historical spending, but the key is to come up with a realistic number and hold yourself to it.

For example: this year, you might commit to only spending 1.5% of your annual income on holiday-related items.

That’s a great first step, but now it’s time to divide it up. 
Let’s say that 1.5% of your annual income is $1,000 (if your post-tax income is $66,666.67).  How are you going to spend that? 

For example:

  • $50 for decorations
  • $75 for baking expenses
  • $75 for Christmas cards
  • $250 for a train ticket home
  • $550 for gifts

From there, divide each category down even further.  Of the $50 you’re spending on decorations, $35 might go toward a Christmas tree, $15 toward lights.  For your gift budget, break it down by person. 

This way, once you’re browsing your favorite online stores, you have your targets in mind before you buy.

Benchmarking and Flexibility Step 2:
Flexibility

Of course, limiting your expenses this way is great, but it doesn’t completely solve the problem of where the money is going to come from. 

Hopefully, by putting reasonable caps on your holiday expenses, you’ve made the burden light enough to solve the problem through some flexibility in your budget.

Obviously, your rent and electric bill still need to be paid.  But most people I’ve worked with have some discretionary money built into their budget somewhere. 

Maybe its money you set aside for eating out on the weekends, or for going to the bars.  Maybe you like to go to the movies or to sports games. All of those things are great, and they absolutely belong in your budget.  But, when these irregular expenses come up, they should be the first place you look to cover the costs if you haven’t been setting aside money for them.

Saving and cutting down on discretionary money isn’t fun, but your wallet will thank you come New Year’s if you plan accordingly!

The Elephant in the Room

If you’ve made it this far, you may have noticed I left out a step.  I’ve made an assumption and left it unaddressed until this point, but it’s an absolutely crucial one.

I assumed you have a monthly budget.

I don’t think anyone actually likes budgeting. But, I can’t overstate the importance of a monthly budget if you want to make financial improvements in your life.

I was in this position a few years ago.  I never sat down to budget how much I was spending on food, transportation, entertainment, etc. each month.

And guess what?  I wasn’t saving anything.

I also know that in order to achieve just about any financial goal you have, the first step is going to be to make a monthly budget.

It’s okay if you’re still getting your finances organized. I can help.
If you want to learn how to do this and (more importantly) how to make yourself stick to it, click here to schedule a free intro call


Why Budgeting Doesn’t Work For Most People (And How To Make It Work For You!)

Posted on
Visa card example of why budgeting doesn't work
Summary

When most people think about trying to improve the state of their finances, “budgeting” tends to be one of the first words that comes up.

And that’s a shame.  Really.

I’m not sure I’ve ever met anyone who actually likes budgeting.  And there are a few good reasons for not liking traditional budgeting:

  1. Most of us think that “budgeting” means at best, being cheap, and at worst, cutting our spending on things that we like to spend money on.
  2. Budgeting isn’t easy. In fact, the way most of us try to make budgets for ourselves, it takes effort to consistently make it work.

What happens when we make something that isn’t fun difficult as well?  We don’t actually do it.

Which is why I like to approach budgeting with a very different mindset.  In this video, I discuss how to approach budgeting in a way that will make you more aware of where your money is going each month. We also discuss ways to align your budget with what’s actually important to you, in a way that’s easy to maintain.

Most people make it easy to spend a lot of money, and hard to save.  In the video below, I’m going to show you how to make it hard not to save money.

To download a FREE copy of the Newlywed Money Checklist that we discuss in this piece, click here to grab it!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 29, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

Introduction:  How Can I Make My Budget Stick?

Welcome, everyone! Welcome to our weekly Facebook Live chat. We broadcast this at 8:00 PM Eastern time every Monday.  Today, we’re doing a little bit earlier because I’m going to be in a meeting with a client at 8:00 PM.

Today, I want to talk a little bit about budgeting.  And specifically, why I think budgeting tends to not work for people.  And we’ll share some strategies to get around this.

I got a question from someone today who follows the page- let’s call him Eric. (I typically don’t use people’s real names because I know money is a sensitive subject for people. And so, I try to respect everybody’s anonymity for these questions.)

Anyway, I got a question from “Eric”.  It says, “Hi Bill, I’m a big fan of the new video series and have a question that I’d like your opinion on. I recently downloaded your Newlywed Money Checklist and I’m currently working through it with my wife.  We got to the section that discusses creating a budget and we got stuck with it. We’ve tried a few things in the past related to budgeting and they never seem to really work for us. How do we make a budget for our family that actually sticks?”

Amen, Eric! That’s a great question.  One that I get quite a bit actually.  First off, congrats on not only your recent marriage, but taking a step forward and downloading the Newlywed Money Checklist.  And not only just downloading it, but actually working through it. That’s awesome. It’s a big step.  If anyone wants to grab this checklist and follow along as we go, click here to download it.

Most Budgeting Strategies Are Difficult to Maintain

So let’s get to the heart of the question. Budgeting really and truly doesn’t work for a lot of people. And the reason for this is that we make it so difficult for ourselves to actually do it and stick to it.

I’ve seen a lot of different strategies that people have used over the years to try to manage their budget.  Everything from creating spreadsheets- literally typing in all different ways that they spend their money.  Or, using a tracking site like Mint.com, where you sync your credit cards and they pull in your transactions for you.  Sometimes, people try a strategy where they literally only spend cash as a way to really try to prevent yourself from overspending.  And even a derivative of this, which I actually like a lot, called the Dollar Bill Savings Method. I’ll probably talk a little bit about that strategy on another Facebook Live because I do think it’s kind of an interesting strategy for people who are struggling with trying to save.

But ultimately for most people, however you do it, budgeting means keeping track in detail of where your money is going each and every month.

There’s a reason why that doesn’t work and why I don’t like to think about budgeting in this way. It’s really two-fold.

Budgeting Highlights our Weaknesses

First and foremost, I think we tend to overlook it, but most people I talk to have some sort of anxiety, or shame, or even guilt about how they handle their money. It’s not something we’ve ever been taught, and it’s not something we’re inherently good at. We need to practice how to handle our money over time. Most of us are far from perfect in this regard, and we tend to not like to pay close attention to things we’re not perfect at.  As a species, this is something that all of us struggle with.

Here’s the thing- paying close attention to our budget tends to emphasize these weaknesses, or are these things that we’re unhappy with.  And as a result, people just don’t like to pay attention to their budget, which I think is perfectly understandable. But ultimately, it doesn’t help solve the problem

Traditional Budgeting Methods Are Hard

And secondly and probably most importantly, it’s a lot of work. We make it really, really hard for ourselves to actually track our budget.

If we’re using spreadsheets, we need to update them manually.  If you’re using Mint, you actually have to remember to log on to see how you’re doing.  And then once you get there, a bunch of your transactions are categorized incorrectly, so you need to go in and fix those. And finally, they don’t track your cash spending at all on these platforms. So, you have to actually manually input all the different ways you spend your cash.

Budgeting sucks. Plain and simple. It’s not easy. It’s not fun. And if you make it hard on yourself to do something that’s not fun, guess what?  It’s not going to happen. Like most New Year’s resolutions, you start budgeting, you’re excited about it at the beginning, it lasts a couple of weeks, but as soon as things get busy, it’s the first thing that we tend to drop because it’s something that we don’t enjoy and it’s hard.

Introducing… Two New Ways to Think About Budgeting

Which is why I like to think about budgeting in a completely different state of mind. To me, budgeting isn’t about only spending $20 at Starbucks this month. (And if you spend $21, that’s BAD, and Mint’s going to send you a nasty email calling you out on it!  Give me a break.) That’s not healthy. I don’t think that’s the way we should be doing budgeting.

Instead, budgeting is about two “A” words. Awareness of where your money is going (and awareness is never a bad thing, right?)  And aligning your money with what’s actually important to you.

So let’s walk through these one by one, starting with awareness.

Budgeting = Awareness

If you want to start budgeting, this is what I recommend, particularly for people who want to be saving more and find that they’re having a hard time doing it. I want you to do this:  before you start breaking out the spreadsheets or syncing all of your accounts to Mint, walk through this exercise.

This is something that, full disclosure, is not something that I’ve developed myself. For those of you who have followed the page for a while, you’ll know that I consider myself to be a “disciple” of Carl Richards. Carl is a two-time New York Times bestselling author of books about how to manage money.  (If you are serious about making improvements to the way you handle your finances, they are must-reads.  You can find them here and here.) He also writes a weekly column in the New York Times about money that I highly recommend. This is an exercise that he does and I think it’s really instructive here.

If you’re having a hard time budgeting and want to get started, do this for me over the next two weeks. Whenever you go to spend money, no matter what it is, no matter where it is, no matter what you’re spending it on, whether it’s necessary or whether it’s just for fun, do the following.  Whenever you spend money from today until two weeks from now, stop for a minute. And just think about it.

Actively try to think about how you’re spending money. Say to yourself, “Hmmm. I just went to the store and bought $125 worth of clothes. Isn’t that interesting?”

“I just spent $45 a bar… Isn’t that interesting?”  Just stop to think about it for a minute. Literally think about it. There’s no judgment, but whenever you spend money, just stop and be mindful about it for a second before you start rushing to the next thing.

You might be surprised, if you actually stop for a couple of seconds to pay attention, about the trends that you start to notice with where your money goes. You know, I frequently hear from people who do this who didn’t realize how much they were spending in particular categories of expenses that they didn’t actually really care about.

They spend money on whatever it is, they just do it, and it’s habitual. But when they actually stopped to think about it, they started to catch on to some of these trends.  So before you start putting yourself through a ton of work to track your transactions manually, stop and reflect on what you spend money on.  And see what you notice.

If it doesn’t work for you, then move on to the second piece that we’re to talk about, but give it a shot.

Budgeting is about bringing alignment between what your say is important to you financially and where your money actually goes.

Aligning Your Money With What’s Actually Important To You

The second strategy, the other way I want you to try to think about budgeting has to do with aligning where your money goes with what’s actually important to you.  Putting your money toward the things that are important to you, FIRST. This is my preferred method because I think it probably is the easiest one and it’s the fastest way to get results when it comes to your budget. There are a few steps involved.

First and foremost, I want you to figure out how much money is coming in every month, and I’m not talking about your annual salary divided by twelve. I’m talking about how much money actually gets deposited into your bank account every month.  After taxes are taken out, after your 401(k) contributions- how much money is coming in every month?

How Much Do You Actually Need To Save?

The second piece is a little bit harder. And it involves figuring out how much money you actually need to be saving to make sure you’re able to do the things that are important to you.

Never mind what you should be saving. What do you actually need to save?

Look, this is a complicated step.  It’s not easy to calculate how much you need to be saving to retire when you want to 30 or 40 years from now. It’s not easy to figure out how much you need to be saving to pay for a child’s college several years in the future. But you need to actually sit down and do this, first and foremost.

If you need help with that, reach out. I’ll help you figure out what those numbers are for you- but however you do it, you need to figure them out.

To recap this budgeting method so far: step one, how much money is coming in? Step two is how much do you actually need to save?

Automate, Automate, Automate

And then once you have that, I want you to login to your bank and schedule an automatic transfer coming out of your checking account every month to either a savings or an investment account for that dollar amount.

If you go through step two and find that you need to save $2,000 every month, I want you, tonight, to go ahead and set up a $2,000 transfer from your checking to your savings account every month.

And that really is the key here. We make it hard on ourselves to save.  For most people, when money comes into the checking account, we spend it and then whatever’s left over, we save it… if we actually remember to log in and transfer it to your savings account.

I want you to set this transfer up automatically. Make it hard for yourself not to save.

Remember, this isn’t permanent. If there are some months where you have higher expenses – if a car breaks down, if you just want to spend a little bit more money that month – that’s OK. You can always go to your savings account and transfer money back to your checking account.

But make that the hard step.  Pay yourself first, and then, if you actually need a little bit more money, you can pull a little bit out of savings. I’m giving you permission to do that.

But don’t make it easy for yourself to just spend that money. Actually put it away and make it so you actively have to think about taking it out. And if you do that, you’re going to be much, much more likely to actually make your budget work for you.

Spend the Rest, Guilt-Free!

And once you do that, once you set up the transfer for how much you need to save every month, spend the rest however you want. I don’t care.

If you’re able to save as much as you need to in order to accomplish the things that are important to you, I really don’t care where the rest of your money goes. And frankly, neither should you.

As long as you’re actively putting money toward the things that are most important to you, do whatever you want with the rest. Don’t worry about it, and don’t feel guilty about it. You’re saving as much as you need to. It’s really that easy.

It’s Not Always That Simple

Now, there’s one caveat. If you tend to actually spend more than you have left after putting money into savings, that’s when this strategy can get a little bit more difficult. And then, and only then, is when I want you to just start thinking through budgeting in the “traditional” sense. At this point, you’ll need to look to cut spending from particular places.

If we’re able to save as much as we need to save and you have a little bit of money left over, you don’t need to worry about it. But if you find that you’re having a hard time saving what you want to be saving, this is when we’re going to start trying to find ways to cut back.

And from there, here’s what I would do, in order, if you’re looking to solve this problem.

There Are Two Components to Budgeting.  Start with the One that Nobody Ever Talks About

First and foremost, when we talk about budgeting, there’s two components to it. There’s the income side and the spending side.

Most people tend to only focus on the expenses, but if you really are having a hard time saving as much as you need to every month, I want you to actually start by looking at the income side. Are there ways you could grow your income? From putting your money into investments that actually pay you income that could help potentially close that gap, to negotiating a higher salary at work if you think you’re underpaid and can back that up, to even starting some sort of side hustle. You might not actually need to cut your spending at all.

When we think about budgeting traditionally, we tend to only focus on the spending piece. But we really should be taking a look at the income side as well. So first and foremost, let’s start there.

Find the Easiest and Most Impactful Ways to Trim Spending

If that’s not enough, or if growing your income isn’t an option for you for whatever reason, the next step is not to start nickel and diming on your coffee every month.  That’s the hardest way to actually do this.  Instead, what are your top three or four categories of expenses every month? Where does most of your money actually go?

Now, for most people, this is some sort of combination of your rent or mortgage payments, student loan payments, transportation costs, food or even clothing. Pull all that stuff together in those big categories and ask yourself, what’s the easiest and least impactful cut that you can make to your biggest areas of expense?

In other words, if the goal is to cut your spending by a certain dollar amount every month, what’s the easiest way to actually do that? For most people, that’s not going to be coffee, right? Start with the biggest areas of expenses.

So maybe it means that it might make sense for you to move to a cheaper apartment the next time your lease is up. Or taking the bus or subway a little bit more rather than taking Ubers. Or if you have student loans, trying to switch your student loan repayment plan might be a good idea (if you have federal loans).  If you have private student loans, maybe trying to refinance them is a good idea. Or trying to cook a little bit more at home might be a good idea if you spend a lot on food.

The point is, there’s a lot of different ways to do this.  And each one is different, depending on what you actually need to be doing.

Make That Your Goal.  Not Just Budgeting

But only if you need to, write and make that your New Year’s Resolution. Don’t just make budgeting your resolution, but actually find the easiest and most impactful areas to cut if you need to. And when you do that, you’re going to find your budget tends to just come in order.

Make it as easy as you can on yourself. Make it hard not to save for yourself and from there, only if you need to cut spending, cut the pieces that are the easiest and most impactful for you to cut.

But ultimately, if you take anything away from this video here today, recognize that if you’re struggling with traditional budgeting and you feel like it doesn’t work for you, you are not alone.

Make Budgeting As Easy As It Can Be

The best thing you can do to make your budget work is to figure out how much you need to save every month and set it up to save that amount automatically. Move it from your checking to your savings account without thinking about it, without actually going in and doing it every month, and make the rest of your spending revolve around that. If you need to pull some of that money out of savings for whatever reason, you always can do that, but make that the hard part.

It doesn’t take a lot of time to do this. But you should be making it easy for yourself to save rather than the other way around.

Anyway, I hope this was helpful. Thanks so much to “Eric” for sending in this great question and working through our Newlywed Money Guide.  You can download that guide here if you’d like to learn more.

And again, if you have any questions about figuring out how much exactly you need to be saving every month, reach out and I’d be glad to help you out however I can. Thanks so much for joining us, and I hope you have a great day.

 

 

Should I Invest in Bitcoin?

Posted on
Should I Invest in Bitcoin?
Summary

It’s hard to escape the investing phenomena that Bitcoin has become.  The rapid growth of the investment in 2017 caused many people to wonder whether they should invest in Bitcoin.

In this article, we discuss whether or not it makes sense to put some money in Bitcoin. As we will discuss, I’d invite you to ask yourselves three “Why?” questions before deciding whether or not this makes sense for you.

First, we’ll discuss why you are thinking about investing in Bitcoin now, and the risks involved in putting money into investments that have recently taken off in value.

From there, we discuss why Bitcoin specifically is the investment venture of interest, particularly since there are numerous other opportunities to put money into crypto and/or blockchain technology.  We’ll also discuss how Bitcoin compares and contrasts to two previous investment “bubbles”, and what they can teach us about the future of investing in blockchain.

Finally, we’ll discuss how Bitcoin fits into your overall investing strategy.  There are a lot of factors to consider, and you need to take several factors into account before picking your investments.  “Making a lot of money” is a dream- it’s not a strategy that you can consistently execute.  We’ll talk about some of the factors you should take into account before deciding where to put your money.

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 22, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

Introduction

Welcome, everyone.  Welcome to our weekly Facebook Live broadcast, which we’re going to hold every Monday at 8 PM Eastern.

Today, I want to talk a little bit about investing strategies.  You’ve probably noticed this isn’t necessarily something I cover a lot here- I like to focus my content on what I think are the very real, important decisions we need to make when it comes to how we approach money day-to-day- and even just from an emotional standpoint.

But ultimately, investing is a big part of how we handle our money, so today I wanted to cover a question today that I’ve probably fielded somewhere between twelve to fifteen or times in the past two months.  And this question has to do with Bitcoin.  What’s all the fuss about, should you be investing in Bitcoin?  Is it a good idea for you to be putting your money into Bitcoin?

Why?

And my response to you here today is one word.

Why?

Literally. Why?  I don’t necessarily mean that in a negative way.  I know I sound sarcastic, but seriously:  Why?  Why do you want to invest in Bitcoin? And specifically, I have three different “why” questions I want to pose back to you here today.  I really encourage you to think through these – both about Bitcoin specifically if that’s something you’re interested in, but also about how you manage your investments in general. These three “why” questions that I have are really important when it comes to thinking through how to approach this subject.

Question 1: Why Now?

The first question I have for you is: “Why now?”  Why is Bitcoin a topic that is coming up right now?

Bitcoin is not a new thing.  It’s been around for several years, and I’ve never heard anybody ask me whether or not they should be investing in Bitcoin up until mid-December 2017 or so.  Like I said, I’ve probably gotten a dozen questions about this particular topic since then.  I didn’t hear anyone asking about whether they should invest in Bitcoin when it was $100 to invest in June 2013. Or when it was $500 in November 2015.  Or even when it was $1,000 in January 2017.  Nobody asked me about it until it was over $15,000 in December 2017.

We have a natural tendency when we’re making investment decisions to want to buy when things are going up.  The investment has done well, so it will continue to do so, right?  And it very well could.

The problem is that just because it’s gone up before, doesn’t mean it will necessarily continue to go up in the future.  And in fact, that’s a very, very dangerous assumption to make when it comes to choosing investments.

Which Investment Would You Pick?

Case in point, I had a client a few years back who had two investments with me.  I don’t remember exactly what they were, that’s not necessarily the point, but we’ll call them Investment A and Investment B.

I met with the client about six months after we had invested her money into those two investments.  She had some more money to invest.  She wanted to put some more money into at least one of these investments.  Now, Investment A had done really well over the prior six months.  It had really good returns, and she made a decent amount of money off of it.  On the other hand, Investment B was still a good fund, but it hadn’t really done well over the prior six months.  It may have even gone down in value, I don’t remember the specific details.

Guess which investment my client wanted to put more money into, when it came tothis new money she was looking to invest.  I’ll give you a hint:  she didn’t choose the one that hadn’t done well recently.  She wanted to put more money into Investment A. It had done well, so why not put more money into it?

We naturally look at how things have done in the past and use that as the basis for our decision making when it comes to making investments.

Buy High, Sell… Low?

But there’s a problem with that.

And the problem is that if that’s the way you’re making your investment decisions, that’s a really, really good way to lock yourself into buying investments when they’re priced high and selling them when they’re low.  We know intuitively that we want to buy investments when they’re low, and sell them when they’re high.  That’s how we make money of them.  We want to choose things that have done well because they might continue to do well, and they might….

But what if they don’t? If these investments have done well up until this point and then they don’t do well – and there’s a decent chance that they actually might not – you’re creating a structure for yourself to invest at high prices and then lose out when the investment falls in price.

We don’t know what Bitcoin is going to do tomorrow.  We don’t know if it’s going to get more expensive or less expensive to invest in.  But the point is buying it just because it’s gone up lately is really, really dangerous.  Because if you do this consistently, you’re really setting yourself up to buy investments when they’re high and sell them when they’re low.  Which we know isn’t what we’re supposed to do, but ultimately this is just a bias that we have.  We want to invest in things that have done well, because they might continue to do well.  But we can’t assume that.

Question 2: Why Bitcoin Specifically?

The second why question I have for you is: Why Bitcoin specifically?

And full disclosure here:  I am not a technology expert.  I’m a finance guy- that’s my area of expertise, but technology really isn’t. If you have some more technical questions about how any of the information below works, I’d be happy to connect you to some people in my network who can tell you more about this.

The key takeaway here: there’s a difference between Bitcoin itself and the technology behind it, which is called blockchain technology.  It’s a very real technology that’s here to stay, and it has value.

Can Tulips Teach Us About Bitcoin?

I’ve heard some people describe Bitcoin as a “speculative bubble”, or even I’ve seen a reference to Bitcoin as a “tulip bubble”.  The “tulip bubble” reference is a very specific one, that I think is worth digging into a bit.  Is Bitcoin the next “tulip bubble”?

And my answer to that is no, for reasons that we will discuss.  But before we get to why, we need to talk about what we mean by “tulip bubble”.

This actually goes back to the 1600’s in Europe.  The very first investment bubble that existed had to do with buying tulip bulbs (i.e., the bulbs that you plant in the ground to grow tulips).  Tulips aren’t native to Europe, apparently.  Traders brought them into Europe in the 1600’s, and people really liked them for some reason.  To the point where there wasn’t a big supply, but everybody wanted them, so prices went up.  A lot.

Not only did prices go up due to supply and demand, but people started to game the system.  Some investment-savvy people at the time asked, “what if we were able to buy up a lot of tulip bulbs and try to sell them off at higher prices later?”

The price of tulips in Europe at this time went very, very high.  To the point where the price of a tulip bulb was many times the annual income for most people.

The problem is that this price spike wasn’t actually based on anything.  There was no value behind it.  The price was based purely on the whims of the ongoing fad of the day.  So eventually, after a relatively short amount of time, people got sick of tulips, and the price of the tulip went down to basically nothing.  People who “invested” at the top lost just about everything.

There’s a Better Comparison

This what I’ve been seeing people compare Bitcoin to today.  And I really don’t think that’s the right comparison to make.  Because of the underlying blockchain technology, which is something that has actual value and I think is here to stay. The value of Bitcoin is not based on nothing.  It’s something that has some inherent value to it.

But I do think it has some “bubble-like” qualities.  The comparison that I’d actually make isn’t to this “tulip bubble”, but rather what happened to the United States in the technology industry during the 1990’s and early 2000’s.

This was the dawn of the internet.  Tech startups, companies that produced computers and internet-related technology, were popping up left and right.  A lot of new technology stocks hit the market during this time, which everybody wanted to buy into because the internet was the “new big thing”.  And most of the startup companies didn’t make it.  Some of them did – and the ones that made it are the companies that have done really well, like Amazon and Google. But as a whole, ultimately prices went up so high, some companies started to fail, and there was a price crash.  Prices in the technology industry came down in the early 2000’s.

The Next Netscape?

And I think that this really is a much better comparison to what’s happening to Bitcoin today.  Let me ask you this:  at the beginning of the tech boom in the 1990s, when all of these startups were launching and tech stock prices were going up and up and up, what was the first big, new technology stock back in the mid 1990s?  Google started a little bit later as did some of the other names you might guess, but the biggest technology stock, the one that everybody was talking about and quickly went up in price, was Netscape.

Some of you probably don’t even remember what Netscape is, because it’s not around anymore.  Netscape was one of the first main internet browsers that competed with America Online back in the early days of the internet.  This was the stock that everybody was excited about.  The introduction of Netscape stock was huge, the price went up astronomically in value, and a couple of years later, AOL bought Netscape for a fraction of what it was worth, and the browser has long been defunct.

There are Other Crypto Investment Opportunities

I think that this sort of frame of reference is a really good one.  I’d encourage you to think about Bitcoin and other crypto investment opportunities in this context.

I would suspect that all of these blockchain “firms” that you’re seeing launch right now, I’d expect that about 15% or so of them will succeed and  actually make it (and the ones that do may do very well, just like Google and Amazon did back in the 90’s).  Unfortunately, we don’t know which ones those are.

And, at least as of this recording, there’s no such thing as a “blockchain or crypto mutual fund”, or at least one that I have a lot of faith in. That may well come along in time, but right now there’s no way to buy into this phenomena as a whole right now. You’d essentially need to pick and choose from one venture to another, or don’t do it at all.

Ultimately, if I think that 15% of them will succeed, means that you might have an 85% chance of losing everything, if you choose to invest in one that fails.

Should I Invest in Bitcoin?

To answer the actual question, “Should I invest in Bitcoin?”, my answer is:  if you have the capacity to invest in something with that level of risk – if you’re ok with investing in something that risky – then I’d say sure… but only with some “fun money”.  I wouldn’t invest anything that you’re relying on, just in case it doesn’t work out.

Before you invest in one of these companies, I’d ask yourself:  “What would happen if this investment went to zero?”  What happens if you literally lose the entire investment?

If you’re comfortable with taking that risk with a little bit of money here and there, then go for it.  I encourage people to invest a little bit of money into specific investments that interest them… but only with “fun money”.  Don’t do your serious investing in these sorts of products.

However, I have one caveat to this.

Watch out for scams.  These crypto or blockchain investment ventures aren’t (yet) regulated in the same way that other investments are.  The SEC has started to crack down on this, but I’ve seen several “opportunities” that have been advertised that I would bet just about everything are scams.  There isn’t the regulatory structure in place behind these sorts of products to enforce these investments.

So, I’d be very careful.  Make sure that if you do invest in something like this, that it’s legitimate and only with money that you’d be comfortable with losing entirely.

Question 3:  Why Do You Think Bitcoin is The Right Investment (For You)?

But, there’s one more “why” question that we need to answer: why do you think it’s the right investment for you?

Does it fit with your investing plan?  Does it fit with your investing philosophy, or is it just a fad that you’ve heard about and are looking to get in on.

“Making a lot of money” isn’t an investing plan.  That’s not how you should be framing this decision, at least on it’s own.  There’s a lot more that you need to take into account. How you invest is important, too.

How do you want your money to serve you?  What exactly is it that you’re looking for from your investments?  Are you primarily looking for your investment to grow over time?  Or, are you looking for something that’s going to grow really quickly and then sell it off before it crashes? Or, would you rather have an investment that will pay you some sort of income stream?  A lot of investments can do this for you.

How much risk do you like to take?  I know a few people who almost get ill thinking about their investments dropping in value. Bitcoin is probably not the right thing for that person.  You have to be comfortable taking risk in order to pursue this venture.

And finally, what are you investing for?  Is this for something longer term like retirement, or something you’re looking to spend in a few years?

You Need A Strategy

You need to know the answers to these questions before you and actually pick the right kind of investment.

And frankly, this goes beyond Bitcoin.  It certainly applies here, but all of your investments, you should have a strategy in place.  So, while Bitcoin or any of the other crypto investments out there could be the right thing for a little bit of your money, you need to make sure it fits in with the rest of what you’re trying to do.  And don’t risk your entire investment strategy for something that doesn’t entirely fit.

I hope this was helpful in terms of talking about Bitcoin.  We broadcast one of these videos every Monday at 8 PM Eastern, and I typically base these on questions that come in.  So, if you have a topic you’d like to hear about for ten to fifteen minutes or so, go ahead and leave a comment on this video or send me an email.  I’d be happy to add your question to the queue.  Thanks so much everyone, have a great day!

 

The Unintended Consequence of the Tax Reform Law for Student Loan Borrowers

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tax reform law
Executive Summary

When married couples with student loan debt go onto an Income-Driven Repayment plan, there’s a choice to be made:  is it better to file your taxes jointly (but base your income-capped student loan payments on both you and your spouse’s income) or to file taxes separately (and only count your income when calculating your student loan payment)?

Although it didn’t address student loans directly, the passage of the Tax Cuts and Jobs Act of 2017 has a big unintended consequence for these student loan borrowers.  This decision around whether to file taxes jointly or separately when on an Income Driven Repayment plan should be made by comparing the amount of money you’d save on taxes by filing jointly with how much more you’d need to pay each year on your student loans.  Since the tax reform law cuts taxes for most people, the difference in the amount you’d save on taxes by filing jointly versus separately will shrink for most people.  Which means that you’re now more likely to be better off filing taxes separately and saving money each month on student loans than you were under the old tax code.

Download our free student loan guide to learn more about Income Driven Repayment plans.  And if you’re interested in learning more about how to save money on taxes under the new tax law, check out our list of #taxhacks today!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 9, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

Introduction

Hello and welcome!  Happy New Year to everybody.  Today I want to have our very first weekly chat that we’re going to have on the Pacesetter Planning Facebook Page (and will be published here every Thursday).  Normally we’ll broadcast live at 8 PM Eastern time on Mondays.

Each week, we’re going to do a deep dive into a financial topic.  Typically, these will be driven by questions that people either ask me in person while I’m out and about in Philadelphia, or are submitted through the website or our Facebook page.  And I’ll share my response to these questions here.

So, if you have an idea, anything you’re curious about hearing, shoot me a message or leave a comment on this video or post, and I’d be more than happy to talk through it. I already have a few questions that we’ll be covering over the next few weeks.

Tax Reform and Student Loans

But for today, I want to talk about something that I think is timely, given current events, and that is the potential side effects of the passage of the recent tax reform law that was enacted before the holidays.  There’s a new opportunity that I think is out there for student loan borrowers, particularly borrowers who are on an Income-Driven Repayment plan (IDR).

To give you a heads up in advance, this is going to primarily involve people who are on an IDR for their student loans who are married.  Now, if you’re not married yet but you’re on one of these plans, and you see yourself potentially getting married over the course of your student loan payments, stick around and you’ll pick up on some things that will help you someday down the road.

Before we dive into exactly what this effect is, I think it’s worth pausing to make a quick note.  We did a deep dive into the Tax Cuts and Jobs Act right after it was passed in December 2017.  We’re not going to rehash that today, but just to reiterate:  there were NO direct effects on student loans in the law itself.

There were a lot of rumors going around through the legislative process that there were going to be some changes made to student loan policy, particularly to your ability to deduct student loan interest.  None of that actually happened.  So, everything in that light is exactly the way it was before.  If your income is below a certain threshold, you’re still able to deduct up to $2,500 in interest paid on your student loans from your taxes every year.  Nothing’s changed in that light.

Income-Driven Repayment Plans

What has changed, though, is the ways that we calculate student loan payments under these Income-Driven Repayment plans- or at least it has the potential to change, depending on your circumstances.

What do I mean by that?  The starting point needs to be: what is an Income-Driven Repayment plan?

For those of you who aren’t on one of these plans already, typically when you borrow student loans, you have a six- to nine-month grace period before you need to start making payments.  Your student loan servicer typically puts you on a standard, ten-year repayment plan.  They’ll tell you how much you owe based on how much you borrowed and the interest rate.  You make the monthly payment that they tell you to make, and ten years later it’s completely paid off and you’re good to go.

But for most student loans (note: not all of them, but most student loans will qualify), if you have a particularly high amount of loans compared to your income, you have a few options.  And one of them is going on an Income-Driven Repayment plan.  There are a wide variety of IDRs, but we’re going to treat them all as the same today (even though they are not the same).  There are some pretty substantial differences between them- if you want some more information on this, go ahead and download our free student loan guide. It’s about thirty pages long and it’s the most popular giveaway we’ve ever posted on our site.  It will walk you through exactly what you need to know about all of these different repayment plans, what they consist of, and will help you identify which one is right for you.  Click the link to download this guide.

But generally speaking, these IDRs tie the amount you owe every month on your student loans to your income level.  If you aren’t making a lot of money, or you have much higher levels of student loan debt than your income, it essentially allows you to scale your student loan payments back to a reasonable level based on your income.

How Do Married Couples Calculate Their Income for IDR Repayment Plans?

The question, though, is what actually counts as your income? Now if you’re single, this is pretty straightforward.  Your income itself is your income.  Whatever you make at your job, any other income you have, that’s what they base it on.  Nothing too complicated.

But, when you get married, it’s a little bit more complicated.  You have your personal income, and if you’re spouse works, they have income as well.  So- what does your student loan servicer base your payment on?  Is it based on just your salary, or is it based on you and your spouse’s?

Obviously, if your goal is to lower your student loan payment, you want to have the payments based on a lower amount.  So ideally, you’d just count your salary.

The answer to the question of how student loan servicers treat your income is that they actually let you choose which one to use.  You can either report just your income, or you and your spouses income- you have the choice.

So, that begs the question, why is that not a no-brainer?  Like I said, if you have the option to pay your loans based on a lower salary or a higher salary, your monthly payment is going to be lower based on just your income.  So, why wouldn’t you do that?

Your Tax Filing Status Determines What Income They Count

Unfortunately, there definitely is a catch to it.  And the catch is this:  however you decide to report your income (to base your student loans payment on), you need to file your taxes the same way too.  In other words, if you want to report just your income to lower your student loan payment every month, you need to file your taxes “married filing separately” from your spouse.  Or inversely, if you file your taxes “married filing jointly”, your loan servicer will look at both of your incomes when they calculate what you owe on your loans every month.

For most couples, you’re going to save more on taxes by filing jointly rather than separately.  There are a few big exceptions (we wrote on the blog last year a list of some of those particular exceptions), but particularly for most young couples, you’re going to find that you save more on taxes by filing jointly rather than separately.  But- that means that you’re going to owe more on your student loan payments if you’re on an IDR because you’re filing jointly and they’ll base your payments on your combined incomes.

You can think of this like a balance scale (like the ones we used back in school) where you weigh one thing against the other.  On one hand, we have the amount of taxes you’re going to owe.  If you file jointly, that’s likely going to be a lower number and if you file separately, it’s likely going to be a higher number.  On the other side of the scale, you have your monthly student loan payments.  And that works the exact opposite way:  if you file jointly, you’ll probably save on taxes, but you’ll owe more on your student loans.  And vice versa, if you file separately, you’ll probably owe more on taxes every year but you’ll save on your monthly student loan payments.

You can imagine that there’s a point at which these things will balance out.  For example, let’s say that if you file taxes jointly with your spouse, you’re going to save $2,000 more on your taxes every year than if you filed separately.  But, doing so might cost you an extra $2,000 in student loan payments across the whole year when you add up your monthly payments.  If this is the case, it doesn’t actually matter what you do: you’ll save $2,000 on taxes, and pay $2,000 extra toward your student loans every year.  It washes out.  (Technically, under this scenario I’d recommend that you file jointly and pay more on your student loans, since this method will cost you less in the long run!)

How Does the Tax Reform Law Change Things?

But typically, it doesn’t balance out.  There’s typically a better answer for you whether you should file separately and reduce your loan payments, or file jointly and pay more every month.  Usually, there’s going to be a clear cut answer.

And that brings us back to the tax reform law.

Because what this law has effectively done (it’s not intentional that it worked out this way, but it is the effect if you’re one of the IDR plans) is that the way you calculate your student loan payments hasn’t changed – your income is still the same, the options are still the same – but they’ve reduced  the other side of the scale for most people.  Most people are going to have tax cuts under the new law, which means the gap between how much you’re going to owe if you file jointly vs separately is less than it was under the old tax law for most people.  They’ve taken the equilibrium point between the two and threw it off a little bit.

Which means that there’s going to be more people that are going to be better off filing taxes separately and taking a lower student loan payment every month going forward than there was under the old tax law.  The balance point has shifted, which means that more people are going to better off filing taxes separately than there were before.

To be clear, for most people you’re still going to owe more on taxes filing separately than you would if you file jointly.  That hasn’t changed.

But what has changed is the magnitude of the difference.  If the overall dollar amount of your taxes is going down because of the way they drew the brackets, for most people the gap between what you’d owe if you file jointly vs. separately has shrunk- by a real dollar amount.

Which means, for more people than there were before, you’re going to be better off filing separately and reducing your student loan payments every month.  Not for everyone– there will be still people who are better off filing jointly and paying more on your student loans.  But, you need to go back and revisit the math, because the math has fundamentally changed as of January 1, 2018.

Not Too Late To Change

Now the good news is that you have the ability to decide this every single year.  If you’re already on one of the IDR plans and have been filing your taxes jointly and reporting the higher income number, you can change that every single year.  Every year, you file your taxes and you have to recertify your income level- if you’re already on one of the IDR plans, you’ve gone through this before.  So, I’d invite you to revisit this.  Try to figure it out on your own- are you still better off doing what was right for you under the old tax law, or has it changed?  Because there’s a very real chance that it could have potentially changed.

So, if you’re on an IDR and you’re filing jointly now, take a hard look at this to make sure it’s still the right option for you.  And if you qualify for an IDR, and just haven’t gotten around to signing up for one, there could be a higher benefit to you than there was before.  It might be a little bit more of an attractive option now than it was under the old tax law.  I’d invite you to take a look at this.

A Few Important Details: Other Factors You Need to Consider

Now, a couple quick details that I think are important to note before we wrap up.  I’ve tried to keep this at a fairly conceptual level, but there are some details you need to be aware of.

As I mentioned before, there are several different types of these Income-Driven Repayment plans.  Primarily, there are five different types.  You need to be aware that one of these five main types of IDRs actually doesn’t give you the choice to separate your income from your spouse’s.  We’ve spend this time talking about how you have the choice to file separately or jointly and report your income likewise, but if you’re on one particular type of IDR, you unfortunately don’t have the ability to make this choice.

The plan in question is called the Revised Pay As You Earn plan (you’ll usually see it abbreviated as “REPAYE”). If you’re on this plan, you unfortunately don’t have the option to split your income up- you need to report you and your spouse’s income jointly.  Which means that if IDRs are something that you’re looking into – like I said at the top, if you’re single now but you’re envisioning getting married down the road while you’re still making student loan payments – you might want to think twice about choosing REPAYE.

Now, there are some unique benefits to REPAYE- it’s not worth forsaking it altogether – but it is something you should take into account.  Under REPAYE, you won’t have the ability to separate your income (which might be a more attractive option now than it was under the old tax law).

(Note:  to be clear, the plan is question is REPAYE.  There’s another IDR called “Pay as You Earn”, or “PAYE”, that does give you the ability to separate your income from your spouse’s.  Congress has really mucked up the student loan policy over the past decade or so, with some assistance from the Department of Education.  There’s a lot of different types of IDRs, they all sound the same, but we’re talking today about REPAYE, not PAYE.)

Second key detail:  this principle of weighing the two sides of the balance scale is the right idea, but be aware that the calculation is a little bit more complicated than this.  There’s one other factor that you need to take into account before you decide to file separately and lower your student loan payments.

And that is that when you file separately, you lose the ability to claim the student loan interest deduction that I mentioned up at the top.  Right now, you can deduct $2,500 in student loan interest that you paid over the course of the year from your taxable income.  You can do that if you file jointly, as long as your income doesn’t exceed relevant thresholds.  But if you file separately, you lose the ability to do this.

The concept of balancing the two sides of the scale is the same… but you can almost think of the loss of the student loan interest deduction if you file separately as a “thumb on the scale” in favor of filing jointly.  It makes filing jointly a little bit more appealing.

The principle stands: more people today are going to be better off filing separately and reducing your student loan payments than there were under the old tax law.  But, there is a separate factor that you need to factor into your decision.

Student Loan Analysis is Complicated

To wrap up, this is complicated stuff.  Like I said, the way that we’ve come to the current student loan landscape doesn’t really make sense.  This is something that I help my financial planning clients with on an ongoing basis.  I help my clients do this sort of analysis to help figure out what steps need to be taken.

But, I actually offer a separate, standalone Student Loan Analysis service.  For people who don’t want, can’t afford, or don’t have any interest in doing Comprehensive Financial Planning, I offer this as a separate service.  We would meet via a video conference for 45 minutes to an hour, I’d collect your individual student loan data so we can understand what you specifically qualify for, discuss your goals for your student loans- are you trying to minimize your monthly payment, or are you trying to pay them off as quickly as possible?  Those are two good answers, depending on your circumstances, but they’re completely opposite strategies.  We discuss all of these things, and within two days I’ll send you a list of recommendations for what to do with your loans.

If this is something you’re interested in or would like to learn more about, I do offer free consultations.  Click here to set up a no-obligation, free strategy session to talk through this issue we’re talking about today, or any other issue when it comes to your loans.

In closing, I think there’s a very real, unintended consequence that came about from this change in tax law that really is an opportunity for a lot of people- if you decide to take advantage of it.  I encourage you to do so.

Again, Happy New Year!  We’re going to be holding these chats on our Facebook Page, usually live at 8 PM on Mondays.  If you have any questions or things you’d like me to cover, shoot me an email or leave a comment on this video.  Thanks so much, and have a great day!

 

How Will the Tax Cuts and Jobs Act Affect You?

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How Will the Tax Cuts and Jobs Act Affect You?

Like just about everything these days, most of the coverage around the “Tax Cuts and Jobs Act” has been viewed with an overwhelmingly partisan lens.  Most of this has to do with the nature of the corporate tax cuts in the law, perhaps justifiably so.  But in my opinion, there’s been far too little discussion about the actual impact the law will have on individuals and families in our generation.

Now that the political bickering is over (at least on this issue…) and the tax proposal has been finalized, let’s take a look at exactly how this tax overhaul will affect you.  This is a mammoth piece of legislation, so I won’t be able to cover every detail, but we will cover the major pieces.

One note: all of these changes apply to the 2018 tax year, with two major exceptions.  Your 2017 taxes, due April 15, 2018, will be unaffected unless you are itemizing medical expense deductions.  And, the Individual Mandate repeal doesn’t kick in until 2019.

That being said, the change in tax law has created some unique opportunities to save on taxes, both in 2017 and beyond.  I’ve compiled a list of twelve tax hacks to save you money on taxes based on the new law.  Download the list today!

 

[Note:  the day after Congress passed the Tax Cuts and Jobs Act in December 2017, I hosted a Facebook Live chat summarizing the provisions of the bill.  The video is available below.]

What’s NOT in the Law?

Before we dive into exactly what the new tax code says, we need to quickly talk about what it doesn’t say.  There were several controversial elements inside the draft bill that got a lot of media attention.  Several of these were stripped out of the final version- you no longer have to worry about any of these rumored changes.  These include:

  • The provision that would have treated graduate student tuition waivers as taxable income is gone from the final version of the law. This would have increased taxes on graduate students by as much as 400%, but it was removed from the final law.

 

  • At one time, there was a proposal to remove the ability to deduct student loan interest payments from your taxable income. This provision was removed as well.  You can still deduct the amount you pay in interest toward your student loans, up to $2,500 in interest per year.

 

  • There was also a provision that would have caused tuition payments made by your employer to be fully taxable to you. This was also removed- your employer can give you $5,250 tax-free for tuition, which is unchanged from the old tax law.
Tax Rate Changes

Now, let’s talk through the major changes that have been introduced, starting with tax rates themselves.

  • For most Americans, your marginal tax rates will be going down (albeit temporarily- these cuts expire in 2025, although Congress may extend them). Find your income level in the tables below to see how your tax rates compare in the old and new tax code.

  • A few key items to note:
    • While most people will see a decrease in their tax rate, there’s one group of people who will see an increase: unmarried people who have a yearly taxable income roughly between $157,000 and $416,000.  The logic behind drawing the boundaries of the tax rates in this way is unclear.
    • There are also some income ranges, both for individual and married taxpayers, where there is no change in the marginal rate. For example, a married couple with $450,000 in annual income is in the 35% tax bracket in the old tax code, and the 35% tax bracket in the new tax code.  (Although, it is worth noting that even though the marginal tax brackets are unchanged, the total taxes owed is less due to the decreased marginal brackets below the 35% bracket.)
    • There’s a distortion in the tax code if you are married and both you and your spouse make a high income, frequently called the “Marriage Penalty”. For example, let’s say you and your spouse make $400,000 each.  If you were filing individually, you each would fall in the 35% tax bracket.  However, if you’re married filing jointly, you have $800,000 in taxable income as a household, which puts you in the 37% tax bracket.

 

  • Taxes on investment income (dividends and long-term capital gains) have not changed under the new tax law. Depending on your income, you’ll either pay 0%, 15%, or 20% in taxes on dividends or capital gains.
Personal Income Tax Reductions and Pass Through Businesses
  • There’s one other change in how income is taxed, and it’s a big one. The change relates to “pass through” businesses, which are businesses that don’t pay corporate income taxes, but instead “pass through” their earnings to individuals who pay the tax at their individual tax rates. Under the new law, these “pass through” businesses are allowed to deduct 20% of their income (or 50% of the wages they pay, whichever is less) from their total taxable income.  In plain English, if a pass through business makes $100,000 in income, they are allowed to reduce their taxable income by 20%- meaning that the individual who gets the pass through income only pays taxes on $80,000 worth of income.

 

  • This is a bigger deal for you than you may realize. A pass through business doesn’t have to be a big company; in fact, more often than not these businesses are really just individuals who are self-employed.  For example, independent contractors and sole proprietors are typically set up as pass through businesses.  Which means that if you and a friend do the same exact job, but you are an employee of a big firm and your friend is an independent contractor, your friend will pay taxes on 20% less income than you.  This likely to accelerate the growing trend of workers becoming independent contractors rather than full-time employees– there’s now a clear tax benefit to doing so.

 

  • But, there’s a catch. Pass through businesses that engage in a “service-based” business have some restrictions on how much you can make to qualify for the 20% deduction.  If your pass through business income is more than $157,500 for individuals (or $315,000 for married couples), your ability to deduct 20% of your taxable income starts to phase out.

 

  • What counts as a “service-based business”? Most occupations that involve selling a service to another person, including accounting, health, law, financial services, and consulting.  Oddly enough, two services were specifically excluded from the income phaseouts:  engineers and architects.  If you work in either of these fields, your income can grow as much as you’d like without losing the ability to deduct 20%.
Standard Deductions and Personal Exemptions

The income-component to the tax code change is relatively straightforward:  most people will have a reduction in their overall tax rate, except for the specific groups I outlined about.  However, this only tells part of the story.

Note: It’s a little bit more complicated to tell if these changes will be a net benefit or net loss for you, as they tend to offset each other.  I’m going to lay out the changes and give you the tools you need to get an idea whether this will have a net positive or net negative impact on you, but it’s always a good idea to talk to a CPA about your unique circumstances.

  • Once you calculate how much you have in taxable income, you are allowed to either deduct a variety of expenditures from your taxable income (we’ll get to that in a minute), or take what’s called a Standard Deduction. The standard deduction directly reduces your taxable income.  Under the old law, individuals could claim a $6,350 standard deduction, and married couples could claim a $12,700 standard deduction.  Under the new law, the standard deductions have nearly doubled.  Now, individuals can reduce $12,000 and couples can reduce $24,000 in taxable income under the new standard deduction.

Clearly, this is a net benefit, right?   Sort of.

  • Under the old tax code, you also had the ability to claim a personal exemption of $4,050 for yourself ($8,100 for a married couple), and another $4,050 exemption for each child that you have. These exemptions, like the standard deduction, reduce your taxable income.  Under the new tax law, these exemptions have been eliminated

It’s critical to note that the amount of the personal exemption being removed ($4,050) is less than the increase in the standard deduction (a $5,650 increase for individuals and a $11,300 increase for couples).  So, for people without children, this is a net win.  But, particularly for large families who claimed the $4,050 exemption for each child, your taxable income is going up considerably.  However…

  • There are two changes to the Child Tax Credit under the new law that likely will more than make up for the loss of the exemptions for families with children:
    • The amount of the tax credit has doubled, from $1,000 to $2,000 per child, per year. Note that, unlike the discussion around exemptions and deductions (that referred to taxable income), the $2,000 tax credit is literally a $2,000 reduction in the taxes that you owe. Which makes it a considerably better benefit than a $4,050 reduction in taxable income.  One other note:  if your final tax calculation comes out that you don’t owe any money in taxes, $1,400 of the $2,000 credit is refundable to you.
    • There are income restrictions for who is eligible for the Child Tax Credit, but these have been greatly expanded under the new law to make the credits more accessible to more families. Now, individuals who make less than $200,000 per year or married couples who make less than $400,000 per year can claim this credit.

As an example, let’s look at a household that consists of a husband, wife, and three children.  Both the husband and wife make $175,000 each.

Even though they have a greater taxable income under the old tax code, they save over $18,000 in taxes, both because of the decrease in marginal tax rate and the substantial Child Tax Credit.

To summarize:  your standard deduction has gotten better, your ability to claim exemptions has been removed/gotten worse (particularly for large families), and the expansion of the Child Tax Credit has gotten significantly better for families with children under certain income thresholds.

LOTS of Changes in Itemized Deductions

As I mentioned above, everyone can claim the standard deduction.  But, if you can list a set of qualified expenses that exceed the amount of the standard deduction, you are still allowed to use the itemized deduction process.  It wasn’t common to itemize deductions before, and now that the standard deduction has been doubled, it will be even less common now (since you need to have nearly double the amount of expenditures in order to be better off itemizing).  But, if you do itemize, here’s what you need to know about the changes to the types of expenses that qualify for itemization:

  • Charitable Contributions- There were a lot of rumors that we would be losing the ability to deduct charitable contributions under this law. That fear proved to be unfounded:  the amount you can itemize for charitable contributions has actually increased (from 50% to 60%).  But, of course, fewer people will take advantage of this now that the threshold to exceed the standard deduction has nearly doubled.

 

  • Mortgage Interest– There are two big changes here:
    • You are still able to deduct the amount of interest paid on a mortgage, but the amount of interest that qualifies has been reduced. Before, you could deduct interest paid on the first $1,000,000 of mortgage principal; this has now been reduced to $750,000.  But, it’s critical to note that all mortgages in existence before December 15, 2017 have been grandfathered in and are not subject to the new rules.
    • Interest paid on Home Equity Loans or Home Equity Lines of Credit is no longer deductible.

 

  • State and Local Taxes– this one has gotten a lot of press coverage. Before, you were able to deduct the amount you pay in state taxes and local taxes on your federal tax return.  There was a lot of talk about removing this provision entirely, but in the end, the final tax law merely put restrictions on this ability rather than eliminating it altogether.  You are now able to deduct a maximum of $10,000 in state and local taxes, rather than unlimited amount.  This particularly hurts high-income individuals in states and cities with high tax rates.

 

  • Your ability to deduct medical expenses has temporarily expanded, even though this was another item that Congress nearly eliminated. If you have medical expenses that exceed 7.5% of your income, you can deduct these expenses in 2017 and 2018, which is down from a 10% of income threshold.  But, in 2019, the ability to deduct medical expenses goes back to 10% of income.  One other note:  this is, I believe, the only change that applies to your 2017 income taxes (that are due April 15, 2018).

 

  • The IRS had a long list of Miscellaneous Expenses that could be deducted if they exceed 2% of your taxable income. Most commonly, the ability to deduct expenses relating to tax preparation fell under this category.  The ability to make these deductions has now been eliminated.

 

  • You are no longer allowed to deduct moving expenses. (With one exception:  you are still allowed to deduct moving expenses if you’re in the military and you are required to move for a military job).

 

  • Finally, alimony payments are no longer treated as a taxable transfer. Under the old rules, the person who pays alimony to an ex-spouse was allowed to deduct the alimony amount, and the person who received the alimony payment needed to count it as taxable income.  This is no longer the case, but similar to the grandfathering under the mortgage interest deduction, the new rules only apply to new or modified alimony agreements in 2018 and beyond.
Other Big Changes

There are a few other big changes to the tax code that don’t relate to the tax rates or various deductions available:

  • The Individual Mandate that requires you to pay taxes if you don’t have health insurance under the Affordable Care Act (“Obamacare”) hasn’t technically been repealed…. But the taxable penalty for not having health insurance is $0, starting in 2019. This doesn’t mean that you shouldn’t have health insurance (you should), but it does mean that you won’t be taxed if you don’t have health coverage.  But again, note that this provision starts in 2019.  If you don’t have health insurance in 2017 or 2018, you’ll still need to pay the tax.

 

  • There are several changes to the use of 529 Accounts. Historically, these accounts have been one of the most tax-advantaged accounts to save for college- contributions are tax free at the federal level and can be tax free at the state level as well, and withdrawals are tax free if used for qualified higher education expenses.  Under the new code, they now can also be used to fund K-12 education expenses- they’re not just for college savings anymore. Under the new rules, you’re allowed to withdraw $10,000, per child, per year, for qualifying K-12 education expenses (including private school tuition).  There was a provision in the bill that would have extended these accounts to be able to be used for homeschooling education expenses, but this was removed from the final version of the law.  529’s can now be used for college expenses and K-12 expenses, but not homeschooling.

 

  • There are two other huge changes that are much less likely to affect younger people, so I’m going to gloss over them. But you should be aware that they exist:
    • The Alternative Minimum Tax (AMT) is still around, but it’s now much harder to actually qualify to pay the AMT. The AMT is a method of making sure that very rich people can’t use too many loopholes to avoid paying taxes. Essentially, under the AMT, you need to calculate the amount of taxes you owe twice– once under the standard tax rules, and once under the AMT rules.  If you owe more in AMT taxes, you need to pay the AMT.  This is still in existence, but it’s going to be much harder for people to actually need to pay the AMT.  If you have a very high income, this is something to keep on your radar, but most people don’t need to worry about this at this time.
    • The Estate Tax, like the AMT, is still around, but almost nobody will qualify for it anymore. The estate tax is a vehicle used to tax the amount of wealth someone has after they die, before the wealth is inherited by the next generation.  The estate tax still exists, but your estate needs to be double the size it used to be in order to be subject to the estate tax.  Until you have $11.2 million dollars saved up (or $22.4 million for couples), you don’t need to worry about it!
Conclusion

When they began the tax reform process in early 2017, Republican leaders in Congress claimed that they wanted to make it so easy to file your taxes that most Americans would be able to file taxes on a postcard.  As you can probably tell from the summary above, they fell… just a little short of that goal.

That being said, the fact remains that for most taxpayers, the filing process will be somewhat expedited, primarily by doubling the standard deduction.  For many people, you’ll just need to calculate your taxable income, take your standard deduction (and, potentially, your Child Tax Credit), and you’ll be good to go.

What do you think?  How will the new tax law affect the amount of taxes you pay?  And if you want some ideas on how to use the change in the tax code to save some money on your taxes, click here to download my twelve #taxhacks based on the new law.

The Conversation About Money You Need to Have With Your Spouse

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The Conversation About Money You Need to Have With Your Spouse

Nobody likes to talk about money.

In many ways, finances are the last big “taboo” in our society.  There’s even some research to back it up – a study from University College London surveyed 15,000 men and women in Great Britain a few years ago and found that people are seven times more likely to tell a stranger details about their sex life than they are to tell a stranger their salary.

One of the central missions of my work is to help millennials get more comfortable talking about money.

Because it’s absolutely critical that we do so, particularly as we enter serious relationships.  As a generation, we are moving in with partners and getting married at a later age than our parents and grandparents did.  Which means that couples have more established habits around money when they start to combine finances.  And that, ultimately, can lead to friction in a relationship.

There’s been some research done on this subject, too.  And it isn’t good news.  Money issues are the number one cause of stress in relationships and can be a leading indicator of divorce.

As uncomfortable as it might be to have a serious, in-depth conversation around money with a boyfriend/girlfriend/fiancé/spouse, we need to learn how to have these discussions.  And more importantly, we need to learn how to have these discussions in a way that doesn’t cause us to fight.

[Note: This article is one of an ongoing series about the way managing your money changes when you get married.  To get instant access to the entire list, click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your partner.]

What a Money Conversation Should Cover

Talking about money with a partner should be an open dialogue.  To make it easy for you, I’ve prepared a list of fifty-four questions about money that I think every couple should discuss.

Before we talk about what it should cover, though, we need to talk about what this money conversation shouldn’t include.  Primarily, judgment.

This needs to be a judgment-free conversation.  Your objective is to understand your partner’s habits and values as they relate to money, not to criticize them.  Once everything is out on the table, only then can you begin to craft financial strategies that will work for your family.

I truly believe that this is the only way to reduce or prevent conflict around your finances.  Have a serious, no-judgment dialogue about your history with money, and use the perspectives you get from the conversation to shape your family’s financial vision.

Here’s what you need to cover, as I outline in this free checklist:

Your Money Histories

Who you are as a person is often a direct reflection of how you were raised.  The way you handle your finances today is the result of your history with money to date.  Therefore, you need to know your spouse’s money history in order to understand and appreciate how they interact with money.

Before you start making big financial decisions with your partner, it’s critical to understand “where they’ve been” when it comes to money, and vice versa.  Doing so will help give you perspective on how they make decisions that might be different from those that you would make on your own.  Which, in turn, can reduce fighting about money.

Your Money Habits

If the discussion about your money history is about where you’ve been in the past when it comes to finances, the discussion around money habits reflects where you each are today.

Even if you’ve been together for years and have fully integrated your finances, this is still an important discussion to have.  At the absolute worst, this discussion will help you better organize your finances.  At best, you’ll learn some critical details about the current state of your finances.

Your Money Goals

We’ve covered where you were in the past, and where you are today when it comes to your finances.  Now, we need to talk about where you’re going.

What is it that you want to accomplish financially in your life?  What does your dream life look like as a family?  We often just go through the motions of our day-to-day life without thinking too much about these things in detail.  I think that this is a mistake.

Use my free question list to have a real discussion about what it is that you each want out of your life.  Once you’re able to articulate these things in detail, you’re that much more likely to actually make them happen.

Your Investing Philosophy

The discussion about your money goals can be a really fun exercise for couples.  But once you’ve talked through some of these goals, you need a roadmap to get you there.  And that typically will involve some sort of investing decisions.

How comfortable are you making investing decisions?  How much risk are you willing to take?  It’s critical to have a discussion about these topics with your partner up front, to reduce conflict about these items later.  Even if you don’t know that much about investing, you still need to be comfortable with the amount of risk you’re taking.

The Important Stuff

I’ve saved this set of questions for the end, even though these are the most important things you’ll discuss.  The last piece you need to address in your money conversation has to do with the role money should play in your lives.

My favorite question to ask whenever I meet with a new client is simply, “Why is money important to you?”  And when I ask this question, I refuse to accept a one word answer like “freedom”, or “security”.  Why does freedom matter to you?  Why does money make you feel secure?  You need to go deep – really deep – into these questions to fully understand the role that money will play in your family.

This isn’t just fluff.  I’m giving you some of my best stuff in this free download.  I’ve had multiple clients literally burst into tears when they go through some of these questions. Not out of sadness, but out of the realization that it’s within their power to use their money to live their dream life.

I truly believe that you can live your dream life too.  But, this only happens when you’re intentional about aligning your finances with that vision.  This list of questions to discuss with your partner is a critical step to help you get there.

Money Conversations are Important for All Couples

I know what some of you are thinking: this conversation isn’t one that you need to have.

Maybe you’re just at the point where you’re thinking about moving in with your boyfriend or girlfriend, and feel uncomfortable bringing money up so early in a relationship.  Or, maybe you’ve been married a few years and think you know all of the important stuff about your spouse’s finances.

Here’s the thing:  it’s never too early to start talking about your future if you’re in a committed relationship.  Money will play a pivotal role in the success of your partnership.  It’s an uncomfortable subject to discuss, but using the questions in this guide will make it easier.

And if you’re already married, you’re absolutely right that you know a lot about your partner’s financial situation already.  Of course you do.

But 99% of the couples I’ve met with have a very superficial knowledge about their partner’s finances.  They know the key numbers and financial data points, but not the why behind the decisions they make with their money.  And it’s this why that’s so important to understand if you want to avoid fighting about money later on.

You might know your partner’s answers to some of the fifty-four questions in this guide.  But I guarantee that if you go through the rest of them, you’re going to find some big surprises.

It’s Awkward, But Critical

Money might be awkward to talk about, but when you’re in a committed relationship, you must talk about it.  The good news is that money can be a powerful tool in your toolbox that you need to use to live your dream life – if you have proactive conversations about it with your spouse.  Use this guide to help facilitate a conversation with your spouse about money.  And while you’re at it, click here to download a free Newlywed Money Checklist that will walk you through each of the financial steps you need to take with your partner when you get married.

Where to Keep Your Savings When Interest Rates are Low

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Saving might be a virtue, but it’s not one that the market tends to reward.

Even as interest rates in the economy as a whole have risen over the past few years, savings account interest rates generally haven’t followed suit.  Banks are quick to raise rates on things that make them money (such as interest rates on loans), but haven’t been nearly as quick to raise savings account rates.

Simply put, savings accounts are terrible right now.

Ask your parents or grandparents where they keep some of their spare cash, and they might tell you that rather than keep money in savings, they put money into Certificates of Deposit (CDs) or into a Money Market Account.  The only problem?  Those rates aren’t very good right now, either.

So, is all hope of earning some decent return on your savings lost? What’s the best place to keep your savings?  And how much do you really need to keep in your savings accounts?

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

You Need to Keep Some Money in Cash

Please don’t misinterpret “Savings accounts are terrible” to mean “You shouldn’t keep any money in savings”.  You should.

You need to keep enough money in savings to cover three to six months of living expenses, just in case you lose your job, your car breaks down, or you have unexpected health expenses.  There’s no getting around it, you need to have cash that you could access at a moment’s notice.

If both you and your spouse have good paying jobs or your fixed monthly expenses (like your rent or student loan payments) are relatively low, three months of spending is usually sufficient.  If your household only has one source of income, or your fixed expenses are relatively high, you should shoot to have six months of spending in a savings account.

Don’t Let That Number Scare You

Three to six months of living expenses is a big number.  If you don’t have that much money in savings today, it can seem like an impossible target to reach.

Rather than focusing on the end target, start by working toward something smaller. Instead, calculate your average spending for one month, and focus on saving that much.  Once you have that amount in the bank, try to double it.  And so on, until you reach your target savings about.

Start small, and focus on saving a month’s worth of expenses at a time.

Once You Have Your Emergency Fund Established, Keep it There

Once you’ve saved three to six months of living expenses, which we call your “emergency fund”, don’t keep adding to it.  Leave your emergency fund alone until you need to actually withdraw funds in a pinch.  (Of course, once the emergency is over, you’ll want to focus on building up this savings back up to three to six months of living expenses.)

But, you still should check in on this account from time to time.  Once or twice a year, you should review your budget to make sure that your spending hasn’t drastically changed.  If you’re spending more than you used to, you may need to add some money to your emergency fund, and vice versa.

In fact, most people will need to add to their emergency fund periodically over time.  Why?

Because savings accounts are terrible.

Simply put, the stuff we buy tends to get more expensive faster than banks raise interest rates on savings accounts. Long term inflation (the rate that prices rise) is around 3% per year in the US.  If the money in your savings account only earns 0.2% interest per year, you’re essentially losing money by keeping money in a savings account.

Which is why it’s so important to review your spending and add to your emergency fund as needed so you could still cover three to six months worth of expenses if you had to.

Beyond Emergencies

We’ve talked about why I don’t like savings accounts, but also why you need to use them anyway for your emergency fund.  We’ll talk through ways to make the most of savings accounts in a bit.

But what about the rest of your money?  Once you have your emergency fund, where should you be putting your savings?

It Depends on When You’re Going to Spend Your Savings

When deciding what to do with your non-emergency savings, the first question you need to answer is, “What’s it for?”  Are you saving money for a down payment on a house in a year or two, or for something more long term?

Unfortunately, finding a place for your money that will earn a higher rate of return than savings accounts will involve taking risk.  And as a general rule, the sooner you actually need the money, the less risk you should take with it.

For example, I usually recommend that most people in their 20s and 30s invest almost all of their retirement savings in the stock market using low cost mutual funds. These are relatively high-risk investments, but they also produce much higher average expected returns every year. If your retirement account were to drop in value by 20%, you might certainly be upset… but since you aren’t going to retire for several more decades, it wouldn’t be catastrophic since you have plenty of time to earn the money back.

However, if you were planning on using your savings to buy a house a year from today, and your savings were to drop in value by 20%, this would be a much bigger deal for you since you’d have much less time to earn the money back.  While long term growth rates in the stock market tend to be good, they can and do fluctuate up and down in the short term.

All of this is a long way of saying:  when deciding what to do with money you’ve saved beyond your emergency fund, the primary thing to consider is when you’re going to spend the money.  The longer you want to keep the money saved, the more risk you can afford to take.

Some Rules of Thumb

Now that we’ve discussed how to think about risk with the money you have saved, consider the following options for your short and longer-term savings.  There are pros and cons to each of these strategies that you should consider before making a decision- if you have any questions about these strategies, shoot me an email.

Short Term Savings (You Expect to Spend the Money in 0 – 2 Years)

For short term savings, you should take as little risk as possible to minimize your risk of loss in the account.  If you’re still up to take some risk, you might consider investing 20% of your short-term savings into stock mutual funds, and the other 80% into bond mutual funds.  This portfolio mix will still fluctuate with the market, but it should offer you a decent expected long run return.

Better yet, you might consider only investing in bond mutual funds and skipping the stock component altogether.  Bond funds still go up and down in value like stocks, but tend to be less volatile in most environments.  A money market mutual fund could also work well, but will offer a lower expected return (in exchange for less volatility).

If you’re looking for places to put your money that don’t pose a substantial threat to drop in value, you could consider a short term individual savings bond or a CD that matures by the time you need to withdraw the money. While rates on these vehicles tend to be relatively low, they are still a safe place to put your savings.  And particularly for 2 year CDs, rates tend to be much better than you’ll get on a savings account.  But, beware:  using either of these investment option, you’re tying your money up for the full term of the bond or CD.  If you buy a 2 year CD, you shouldn’t plan on taking the money out of the CD until the full two years are up.

Finally, particularly if you are looking to use your money in the next few months, you may be stuck keeping your savings in cash.  We’ll talk about ways to improve your returns on these types of funds shortly.

Medium and Long-Term Savings Goals

While any of the short-term strategies I described above could be used for longer term savings goals, I recommend investing your longer-term money into stock and bond mutual funds.  A longer-term CD or individual bond could work for you, but you’ll likely be better off putting your money into the market.

Since stock mutual funds offer more risk and more reward than bond funds, the longer you are looking to invest for, the higher the percentage of your investments should be in stock funds.

For example, if you are looking to buy a house in five years, you might consider investing 50% of your money for this goal into stock mutual funds, and 50% of your money into bond funds.  If you’re looking to invest for your newborn child’s college education, you might invest 80% of your savings into stock mutual funds, and 20% into bond funds.  And if you’re saving for your retirement that’s 35 years away, you might invest 100% of your retirement savings into stocks.

One final note about this, though.  As you get closer and closer to realizing these longer-term goals, you want to make sure that you gradually shift your investments into more conservative positions, all else being equal.  If you want to buy a house five years from now and you decide to invest your savings 50/50 in stocks and bonds, as you get closer to the point in time when you want to buy a house, you should shift your account away from the stock funds and into more bond funds or CDs.

This is All Well and Good, but Where Do I Keep My Cash?

You know the options for where to put your savings beyond your emergency fund, but that still leaves us with the same fundamental problem we had at the beginning.

If savings accounts are terrible, is there another option for where we can keep our emergency fund and maybe even our savings for our short-term savings goals?

The answer is, “sort of”.

Ditch the Traditional Savings Account and Open a High Yield Savings Account

Like just about everything else in our lives, the internet has drastically altered the landscape of personal finance options.  A few decades ago, you would have needed to work with a stockbroker to invest in a stock or mutual fund.  Now, you can open up an account at TD Ameritrade and place a trade on your own with just a few clicks of a button.

The same thing has happened with savings accounts.  A few years ago, you had no other option than to keep your savings with the local branch of a national bank, or maybe a more regional bank or credit union.

No longer.

Over the past decade, several banks have opened high yield savings accounts.  These aren’t banks that you could go to visit in person; instead, they operate 100% online as a way to keep their costs low.  This, in turn, allows them to pay significantly higher interest rates than the traditional savings banks.

Three of my favorite high yield savings accounts are

As of this writing, all three of these banks paid the same interest rate and they have been regularly raising their rates over the past few years.  They also have no monthly fees associated with them, and are FDIC insured.

Best yet, the interest rate on these accounts is literally over 4,000% higher than the interest rate paid on a Bank of America savings account at the time of this writing.

Most savings accounts just aren’t good in today’s interest rate environment.  And even with high yield savings accounts, I still don’t recommend keeping your medium- and long-term savings in one of these accounts.

But, if you’re looking to get a higher return on your emergency fund and even your short-term goal savings, a high yield savings account is the first place I’d start.