Santa's List for Wealth

Are you Being Naughty or Nice with Your Critical Money Decisions?

Why does Santa check his list not once, but twice? It’s to make sure he’s made the right decisions.  If you can get the big decisions right in your financial life, wealth will follow.

Here’s a list of the 10 most important money decisions you will ever make.   

#1 - How much ownership should I take with my finances?

In this busy world, it may be tempting to put off your financial planning until later or assign the task to someone else. But is this wise?

Consider your physical health for a moment. Would you let someone else choose what’s best for you if you got ill? Would you let someone else make key decisions for you like electing surgery or taking medication without your say? Probably not. Then why would you give up control of your financial health?

How engaged you are in growing your wealth truly matters, so take charge now. Start by reviewing or creating your financial plan. By taking responsibility for your own financial well-being, you increase your odds for success.   

#2 - How much should I save?

This is the biggest driver of your investment growth. After all, if you don’t save, you can’t invest. Aim to sock away at least 10% of your salary every year—more, if possible.

Not good at saving? Then you probably shouldn’t buy that new gas-guzzling SUV, pay for top-of-the-line cell phone or cable plans, or eat out daily. Make it your goal to spend less and save more in 2017, so you can set yourself up for financial security.

#3 - How much should I put into stocks?

The more you invest in a diversified mix of stocks over your lifetime, the higher your return will likely be in the long run.

So what’s considered long term? According to the September edition of JP Morgan’s “Guide to the Markets,” the 10-year rolling return since 1950 of the S&P 500 ranges from -1% to 19%, so 10 years might serve as a good guide. In addition, you should expect negative returns in the stock market at least 1 out of every 5 years; so, each time you hit a pothole in your investments, don’t jump ship. 

While there is a greater chance of short-term losses with stocks, the game of stock investing will be won by the patient and disciplined.  

#4 – Should I be an investor or a speculator? 

It’s not an easy choice. Research has shown that “market timing” most often does not work. But the daily headlines telling you to “buy this stock” and “sell that one” can challenge your investment discipline.

It’s also easy to fall prey to “hot stocks,” even when you know reliable investing results depend on diversification. The trick is to keep the speculative portion of your investments as small as possible. That way, if they do go cold, your temporary losses will be minimal.

#5 - Where should I live? 

Think carefully before picking the mansion over the modest home. If you buy the biggest house you can afford, you’ll have less money available to pay for college or retire early. And here’s something else to ponder: wealth is often found in neighborhoods with old cars and tall trees.

Just look at Warren Buffet. He lives in a 5-bedroom, 2.5-bath house in an old neighborhood in Omaha, Nebraska. Not in a beachside mansion or country manor surrounded by acres of land. The lesson here? Just because you’ve got money doesn’t mean you have to flaunt it. When you’re sitting on a sizable nest egg in retirement, you’ll be glad you didn’t.   

#6 - How can I manage my taxes more effectively?

You are surrounded by investment account options that offer many tax advantages—like IRAs, Roth IRAs, 401(k)s, 529s and health savings accounts (HSAs). Yet very few people maximize these tax shelters. This is a mistake.

When you use them, tax shelters can help you keep more money in your pocket so you can create a more stable financial future. For more on this, read my recent article on tax shelters.

Also, tax strategy should be reviewed carefully with a CPA or enrolled agent in order to ensure smart tax moves.

#7 - How many kids should I have? 

The Department of Agriculture now predicts it will cost $250,000 to raise a child. In California, this figure is closer to $350,000. Eighteen years of childcare, medical bills, groceries, clothes and shoes, summer camps, and piano lessons can really add up.

And don’t forget about college. Four years at a top university can run well over $150,000. As you’re thinking about how large a family you want, keep this in mind: Having kids can be exceptionally rewarding, but it’s also enormously expensive.

#8 – Should I pay off my credit cards every month? 

Carrying credit card debt is an act of financial foolishness. Yet so many of us do it. The average credit card debt in the U.S. is $15,675 at an average interest rate of 15.1%. Ouch! Debt of that size will derail all your other smart financial moves, so put a stop to it before it snowballs out of control. Buy only what you can afford each month, and pay your bills immediately.

#9 – How should I prepare for financial emergencies? 

A rule of thumb from the CFP Board is to have 3-6 months of your spending set aside in liquid, cash type investments like a Money Market Fund or CD. You should also regularly review your insurance coverage like medical, disability, umbrella, life, home and car to make sure it reflects your current needs. 

#10 - Where should I get financial advice? 

Newspapers and money programs are designed to entertain, so it’s easy to get caught up in the hoopla. Sensible investing, on the other hand, is often rather dull. Rather than following “hot stories,” read books and articles from the best investment gurus on the planet like Charlie Munger, David Swensen, and Warren Buffett.

Aside from the misleading financial media, people often turn to family or friends for investment ideas. Unless your cousin is investment legend Jack Bogle, you may want to look elsewhere.

And then there are local financial advisors, who very well might be a great place to start. Just make sure their motives are in line with yours, and be sure you understand how they are paid.

• Do they make more money by generating trades?

• Are they compensated to sell certain products over others? 

• Are they limited to certain products through their firm that carry high fees, such as mutual fund fees over 1%? 

  If so, you may want to look for an independent, fee-only “fiduciary.” This is a professional who has specific credentials such as CFP (certified financial planner) or CFA (chartered financial analyst). Before investing, be sure you’re clear about the fees you’re paying for both the advisor and his or her recommendations.

  As the year comes to a close, take a few moments to consider the critical financial decisions that you have made. The decisions above should not be taken lightly: these are the most important money decisions you’ll ever make. If you are married or someone else is active in your financial life, sit down together and review where you stand. Santa might bring you plenty of nice things, but only you can give yourself the gift of a strong financial life. 

Painless Ways to Live Below Your Means

Spending less than you earn is quite simply how everyday Americans get rich.

Yet for a lot of people, there is nothing simple about it.  Many find it nearly impossible to live within their means.  So what should you do? Here are 9 ideas:

1. Start by knowing where your money goes. Track your spending with one of the plethora of tools that are available today: mint.com, Personal Capital, online bank account summaries, or an old-fashioned spreadsheet.  It’s like dieting. If you write down everything you eat, you will eat less.

2. Crack an axe at reducing re-occurring monthly services like cable, internet, phone, newspapers, and other online memberships by putting on your chief negotiator hat. After doing a little research, dial them up and have the following call, “Mrs. CS agent, I have been a loyal customer for XX years; and I am in a financial bind and need to drop (or replace) your service.  I thought before I did that I should call you and see if you can help me reduce my costs.”  Be willing to drop their service for 3-6 months and then see what discount they will offer to lure you back.  Want to maximize your negotiation, have this call with someone else on the phone with you like your spouse or financial advisor.

3. Reduce the frequency of services like house-keeping and gardening.  Perhaps investing in lower maintenance plants or indulging in a good vacuum cleaner and hiring your kids to pitch in can lead you to drop these services altogether.

4. Hunt for the lowest prices, especially with big ticket item purchases; and the biggest store in the world is right at your fingertips.  It’s called Amazon for a reason.  You will be amazed at what you can find on Amazon and Ebay these days, and you will also save gas money and time.

5. Change your life for the better.  Do you need exercise? Consider riding your bike work. Do you need time? Reduce eating out at lunch.  Are you all about saving the planet? Find a carpool or rideshare near you at https://www.erideshare.com/carpool.

6. Slash your insurance costs.  A good place to start is the internet.  Try quickquote.com. There has been a feeding frenzy for cheap term life insurance, which is making rates incredibly competitive.  Rebid auto, home, and umbrella policies, and search financial bloggers like “MMM Recommends” for best places to start.  Also look into saving money by boosting deductibles on your auto and home insurance.  Consider whether collision insurance makes sense on your vehicle with the help of a good agent.  

7. Take full advantage of health savings accounts and retirement savings accounts.  With these employer-sponsored plans, you get to save and spend out of pre-tax dollars.  In many cases, an employer match is also offered, which is the easiest way to get free money. 

8. Free entertainment abounds. Whether it is the beach or our beautiful libraries, keep a list of favorite “free things to do” and focus your time on those activities.  Free stuff can bring more joy, peace of mind, and less hassle.

9. The best way to save on expenses is to move to a place where the cost of living is cheaper.  It may be difficult if you are working now, but it certainly should be a consideration as you move into retirement. Sometimes a lower cost of living is less than 15 minutes away.  And, if you really want to hit the jackpot of lower living costs– pay off your mortgage. One extra payment a year can reduce a 30 year mortgage by 5 years or more. 

More often than not, wealth is the result of smart spending, a lifestyle of hard work, discipline and good planning. In the words of Thomas Stanley, author of the Millionaire Next Door: “Many people who live in expensive homes and drive luxury cars do not actually have much wealth…Many people who have a great deal of wealth do not even live in upscale neighborhoods.”
― Thomas J. Stanley, The Millionaire Next Door: The Surprising Secrets of America's Wealthy

Put More Money In Your Pocket, Not Uncle Sam's

Taxes are everywhere—federal, state, retail, investment, estate—and they can easily eat up over 50% of your income. That’s more than half your money going in Uncle Sam’s pockets.

Wouldn’t you like to keep more of your money in your own pockets?

Luckily, there’s a way to do just that: use tax shelters.

Now I’m not suggesting you fly to the Caymans to open a secret off-shore bank account. The tax shelters I’m talking about are completely legal. In fact, our own politicians created these special account types. The idea is to encourage investors like you and me to save money by offering us certain tax benefits.

To find out which shelters are the most common and what you need to consider when selecting one, read on. I’ll even tell you about the most widely misunderstood option, and why it’s also the best tax shelter of all.

Save Taxes Now - Tax-deferred 401(k)s and Traditional IRAs

The advantage of a 401(k) or traditional IRA is that you can save on taxes now and grow money tax-deferred. The downside is that you’ll pay taxes on this money upon withdrawal. In fact, once you turn 70½, the law requires you to start taking this money out. 

Today many companies offer a 401(k) plan and most match the first 3% - 6% of your contributions. Between the company match and the tax savings, contributing at least up to the match is a no-brainer. For those who don’t have a 401(k) at work, the traditional IRA or a self-employed IRA offers similar tax advantages. Just be sure your CPA gives you the green light before proceeding as income limits do apply.

Lastly, keep in mind that a 401(k) or IRA is a retirement savings tool. That means, with a few exceptions, you won’t be able to take this money out before age 59½. If you do, you’ll pay a 10% penalty.

Save Taxes Later - Roth IRAs

A Roth IRA lets you save after-tax money now, so you can let it grow tax-deferred and never pay taxes on that money again if you play by the rules on withdrawal. 

The real beauty is that it lets you take advantage of a lower tax rate now than you may have in retirement. Often this is the best option if you are younger, starting out in your career, or experiencing low income due to a layoff.   

What most people don’t know about the Roth IRA is that the after-tax money you contribute—what a tax professional calls your “basis”—can be accessed before age 59½ without paying a penalty. But this only applies if the Roth has been open for at least 5 years.

More Ways to Save Taxes Later - 529 Plans

529 plans—the education “gold standard”—offer tax savings for money that will be used in the future for qualified college education expenses. This includes tuition, room and board, and books. Like the Roth, you put after-tax money aside today that grows tax-deferred over many years. 

You can even move this money between family members or use it for yourself. Plus, the accounts never expire.

Save Taxes Now and Later - Health Savings Accounts

The health savings account (HSA) is a tax shelter that is both widely misunderstood and your most appealing option. That’s because it lets you save on taxes now AND later!

This type of account lets you save money for medical expenses over your lifetime. Here’s how it works:

·         You become eligible when you enroll in a high-deductible health medical plan (with a minimum annual deductible of $1,300 for individuals and $2,600 for a family).

• There are annual contribution limits: $3,350 for individual plans and $6,650 for a family plan. 

• Individuals over 55 can contribute another $1,000/year for catch-up. 

• If you’re under 65 and withdraw money for a non-medical use, taxes and penalties will apply. If you’re under 65 and use HSA funds for medical expenses such as co-payments, deductibles, and other non-covered expenses, then taxes and penalties don’t apply. This makes these plans more age flexible than the retirement plans mentioned previously. 

• HSA money can be used to pay for Medicare premiums in retirement or for insurance premiums while on COBRA.

  The money rolls over from one year to the next. 

Since many retirees will spend 30% or more of their income on medical expenses, having a sizeable HSA account as you enter retirement can be a very smart financial move. And it will save on taxes now, too, as a deduction from your current income.  

How to Get Started

Tax savings abound if you’re willing and able to shelter your money. But you need to act fast. Many of these options with annual limits in essence “expire” at the end of the year, meaning you can participate next year, but the annual amount of $18,000 in a 401K for this year of your life expires. As with many aspects of money management, procrastination is not your friend.   

Here’s what you need to do:

• Consult an HR professional for help with logistics.

• Discuss the options with your CPA, preferably before the 2016 tax season hits so there’s time to process the paperwork.   

Using tax shelters can help you keep more money in your pocket and set yourself up for a stable financial future. Happy saving!

All suggestions above are based on current tax law and are subject to change. Investing involves risks. This article is not intended as tax advice. Please consult with a CPA for your particular situation.