Blog

2019 End-of-Year Financial Planning

By on October 1, 2019

Is it really time to think about the end of the year?  Well, there are only three months left and there’s the question of whether you really want to try to jam financial planning in with Thanksgiving and Christmas.  So, maybe it’s a good time to think about end-of-year financial planning.  Here are a few of the more common things you might want to consider.

401(k) Plan.  If you participate in a 401(k) plan, it’s a good idea to see if you’re on track to maximize your savings.  If your employer has matching funds, that should be your minimum goal for the year.  Contribute enough to rake in every free dollar that your employer is willing to give you.  If your budget allows, it’s a great idea to contribute the maximum amount allowed by law to your plan.  In 2019 that’s $19,000.

Capital Gains.  If you have realized capital gains this year, the associated taxation can be reduced by up to $3,000 by selling some of your losses.  (There’s also a carry-forward provision that lets you deduct up to a $9,000 loss at $3,000 annually over three years.)

RMDs.  Have you taken your Required Minimum Distributions for the year?  If you’re 70½ or older, you must make these withdrawals by the end of the year or face a 50% tax on the amount you failed to withdraw.  If you’re younger, but have an inherited IRA (also called a stretch IRA), you’re also subject to these rules.

Charitable Donations.  If you itemize your deductions, charitable contributions are a wonderful way to reduce your tax bill.  If you’re subject to an RMD, we suggest that you directly transfer money from your IRAs to get the deduction and to avoid capital gains on the transfer!

HSAs.  If you have a Health Savings Account, try and fund it to the allowed maximum.  This is $3,500 for an individual and $7,000 for a family.  If you’re 75 or older, an individual can add an additional $1,000 and a family can add $2,000.  HSAs can carry over from year to year, so fully funding them each year makes sense.  It may be that your employer contributes to your HAS fund, so be sure to check on that.  Finally, if your health insurance does not qualify for an HSA, be sure to consider an FSA (Flexible Savings Account).

529 Plan.  If you’re using a 529 plan to save for a family member’s college expenses, don’t forget to make your desired contribution in order to benefit from in-state tax deductions.  (For grandkids, don’t forget that you can gift up to $15,000 per year tax free.)

IRA.  If you’re still working, try to contribute as much as possible to an IRA.  2019 contribution limits are $6,000 if you’re under 50 and $7,000 if you’re 50 or older.  Generally it’s advisable to make a contribution to a traditional IRA if your income level allows your contribution to be made using pre-tax dollars.  If you’re earning too much for that, you can still contribute to a traditional IRA using after-tax dollars and then convert it to a Roth IRA for future tax-free distributions.

You can see that there are quite a few things to consider before the end of the year.  Some of them involve IRS rules that must be strictly followed.  If you’d like some help applying these ideas to your personal situation, we’d be happy to help you think this through. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in , , ,

Reducing Your Monthly Mortgage Payment

By on September 1, 2019

Who wouldn’t want to reduce their monthly mortgage cost?  This article reviews two ways that you may be able to accomplish this:  getting a lower rate and eliminating your PMI (Private Mortgage Insurance).

You may have read that the Treasury yields have been dropping.  The 10-year rate began 2019 at 2.66% and had dropped to 1.52% in late August.  This might matter to you because mortgage rates are tied to this bond rate.  So, as the 10-year Treasury rate drops, so do mortgage rates.  The average 30-year fixed mortgage began the year at about 4.7%.  In late August, it was around 3.85%.  This reminds us that it’s a good time to check the cost of our current mortgage.  You might be able to decrease your monthly loan payment and save significantly over the life of the loan.  The details of how to evaluate refinancing were covered in a previous article (Should I Refinance My Home?) and I encourage you to reread it as the fundamentals remain the same.

You may not be quite as familiar with Private Mortgage Insurance (PMI).  It’s an insurance policy that helps to protect your mortgage provider if you default on your loan.  These institutions have figured out that if they have to seize your property and if you home equity value isn’t at least 78% of the loan amount, they might lose money.  Their solution is to protect themselves with insurance.  PMI payments add between 0.55% and 2.25% to your monthly mortgage payment.  And guess who pays for this insurance – correct, it’s you.

If homes have appreciated in recent years where you live, the appreciation will have increased your home equity and that may put you closer to the magic 78% threshold.  Let’s take an example to clarify this.  Suppose you bought a home for $380,000 in Fort Collins back in 2014 with a down payment of $20,000.  So your loan amount was $360,000.  360,000/380,000 is about 95% — not yet below the magic 78% threshold.  If your loan was taken out at a 5% rate, your loan balance is now about $326,000.  That loan results in a loan-to-value (LTV) of about 86% (326,000/380,000).  Still not down to 78%…  Fear not, your home has appreciated during this 5-year period.  The average annual appreciation rate from 2014-2018 in Fort Collins was 9.54%.  So appreciation increased your home’s value to almost $600,000.  LTV is now 326,000/600,000 or about 54%.  Bingo, you no longer need PMI!  All you’ll need to do is get a current appraisal when you refinance.

Hopefully you can see that it’s worth evaluating a new loan for your home.  A lower rate and the elimination of PMI payments can significantly reduce your monthly housing costs.  There are quite a few important details in evaluating your personal situation and we’d be happy to help you think this through. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Monthly Payments Add Up

By on August 1, 2019

It can be so tempting to finance a new purchase.  Rather than pay out a decent amount of cash at the time of purchase, it can feel better to pay over time.  Retailers offer such plans because they know we’re susceptible to their allure.

The issue with financing is it’s just too easy to inadvertently commit to a number of monthly payments that collectively make it difficult to meet your other financial requirements and goals.  Such payments often become somewhat invisible when they’re scheduled as auto-payments.  (Indeed, some advisors refer to this as the automatic-payment trap.)  Additionally, there’s normally either an interest charge or you may forego a lower price in order to get an attractive interest rate.

Generally, I recommend paying cash for purchases.  This forces each of us to delay purchasing things we really can’t afford at the moment.  Examples of what we should pay cash for include furniture, electronics, RVs, a second home, a remodeling project, appliances and so forth.  Naturally there are a few things that we must have and that are just too expensive to purchase outright.  A new home is a classic example of this.  A car is often another example. (In the case of a car, keep the loan period to four years or less.  Also, you may get a better price on the vehicle if you decline their financing – at least until the price of the car is agreed upon.)  Finally, you might be asking, but how about unplanned emergencies such as a medical problem, a broken appliance or some needed car repairs?  Such expenses are unpredictable in terms of timing, but they’re very predictable in terms of their likelihood of happening at some point in time.  A recent article helps you prepare for such expenses without the need to finance them.

If you have questions about how to avoid the automatic-payment trap, or have other financial questions, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Rainy Day & Emergency Funds

By on July 1, 2019

Could your car need repairs?  Might your water heater go out?  Is it possible you might lose your job during a corporate reorganization?  Sure they can.  Wouldn’t you like to reduce your stress and avoid going into debt by being ready for the unexpected?  Fortunately, there are two financial planning tools to help you deal with life’s surprises.

The first is a rainy day fund.  It’s used for those lower-cost items that are likely to occur, but whose timing is uncertain.  Car repairs and appliance replacements are examples of this.  Medical co-pays, roof repairs and other such expense fall into this category too.  The amount you should have in such a fund depends on your lifestyle, expense history and other personal characteristics.  Experts often say you should have at least $1,000-$2,000 in this fund.

The second is an emergency fund.  It’s used for those higher-cost items that may or may not occur.  Job loss is the classic example of this.  An unexpected surgery would be another example.  Experts often recommend having 3-6 months of monthly expenses put aside.  (If you don’t track your expenses, a good approximation is 3-6 months of your take-home pay.)

Recognizing the importance of these two funds is one thing, but saving for them can be a different matter.  Funding these objectives is like saving for anything else.  The main thing is to get started.  Then think about how long you want to wait to reach your savings objectives and how much you can free up from your current cash flow.  These funds are important enough that they should not be funded if there’s anything left over at the end of the month.  Rather, they should be treated as a normal monthly expense.  If you have an actual budget, add a line item for each fund so they’re in your plan.

You should invest these funds into something that’s very liquid since you’ll probably need the money quickly once the unexpected occurs.  Higher-interest savings accounts (such as online savings) are good choices here.  CDs are not a good choice due to the early-withdrawal penalties.  You should have separate accounts for each of these two funds and not co-mingle them with each other or with other savings.  It’s best to have a monthly contribution for each account taken from your paycheck automatically.  In addition to your regular deposits, unplanned sources of money should be directed towards these goals.  A raise, an inheritance and a tax refund are examples of such windfall income.

If you’d like some help figuring out how much to put in each fund and how to do it, or have other financial questions, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in ,

A Hidden Expense: Subscription Services

By on June 1, 2019

Are there any of us who don’t subscribe to a number of subscription services, probably not.  Just think about it.  Do you have a cell phone plan, do you subscribe to Netflix or Amazon Prime.  Many of us do.  And the companies love you for doing so.  Companies call this annuity-based or recurring revenue.  It just means you are paying them regularly (often monthly) without any sales effort on their part.  Not a bad deal – for them.

A recent Waterstone Management Group study found that its respondents spent $237/month on average for subscriptions.  They also found that 84% of those surveyed underestimated their monthly subscription costs.  The first observation is that we spend serious money on subscriptions — $2,844 per year on average.  (That’s about $37,000 over ten years assuming a 5% interest rate.)  Secondly, most of us do not monitor this expense category and so it’s quite possible that we are paying for things we no longer need or are paying too much for services that we do want.

Now certain monthly expenses may be exactly what you want – cell phones, Wi-Fi, TV and movie services, music streaming and so forth.  But even in these cases, do you monitor the charges from time to time?  Comcast is famous for increasing your charges without notice once your discounted agreement expires.  New cell phone plans are frequently coming on the market and they might save you money.

Other plans might be more discretionary and should be examined from time to time (at least annually) to be sure they’re still worth it.  This might include digital magazines, free-shipping services (part of Amazon Prime), dating services, travel site subscriptions and so forth.

Here’s an approach to controlling these expenses that often proves useful.  First, be thoughtful in signing up for new services.  Anytime you’re asked for credit card information for a free subscription, you can bet it will be extended after the free period and often you won’t be notified that you’re now paying.  Also, some companies make it very difficult to cancel subscriptions once they’re initiated.

Second, examine your subscription expenses from time to time (at least annually).  There are tools to help you do this such as AskTrim.com, ClarityMoney.com and Truebill.com.  One thing to watch if you go this route is that many tools get access to your credit card and/or banking account in order to get the data to analyze things.  Perhaps you don’t want to give them such access and would rather review your own statements.  During your review, ask yourself questions like do I still get value out of each service; has the cost of the service increased without my knowledge; are there cheaper ways to get a similar service now?

Keeping tabs on your expenses is an important part of managing your finances.  If you’d like some help reviewing your subscription or other expenses, or have other financial questions, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Dealing with Debt

By on May 1, 2019

Did you know that 77% of Americans carry some amount of debt?  Now part of that is to be expected.  For most of us, we simply can’t purchase a home without borrowing.  However, a 2018 Northwestern Mutual study showed that, exclusive of mortgages, average household debt is $38,000.  Credit card debt makes up the largest part of that followed by student loans and then car loans.

Debt can be a real financial drain.  The Northwestern Mutual study found that 20% of those with debt had to contribute 50-100% of their income towards debt repayment!  Okay, so how do folks dig out once they find themselves with significant debt?

Well, the first thing to do is to stop making things worse.  You must stop adding to debt in order to have a chance at eliminating the debt you already have.  In addition, you want to avoid the large penalty charges by making the minimum monthly payment on all of your debts.  This seems so obvious, but in practice many of us continue to rack up more and more debt.

After you’ve stopped the bleeding, there are two proven techniques for retiring your existing debt.  In approach one, you simply enter all of your debts into a spreadsheet.  Have the spreadsheet calculate total monthly interest payments (loan balance times the interest rate).  Then you retire the loans as fast as circumstance s permit from highest interest payment to lowest.  Note that as each debt is retired, the minimum payment that you’d been making for that debt can be added to your monthly debt-reduction amount.  For example, suppose you find a way to apply $500/month to debt reduction.  And suppose the minimum monthly payment for the debt you just retired was $55/month.  Once it’s paid off, you now have $555/month available to retire the remaining debts.  As you continue paying off debts, the amount available for debt reduction continues to increase.  This result has been called the Snowball Effect.

In the second approach, you make a list of all you debts as you did in the first approach.    This time you order them from smallest amount owed to largest.  Then you pay them off in that order, adding the retired debt payments to the new loan.  The Snowball Effect still applies.

Which approach is best for you?  That depends on your personal circumstances and psychology.  Approach one minimizes your overall interest expenses, but approach two gives you some early wins that motivate a lot of us to keep at it.  A rule of thumb that I like is to use approach two for the smaller debts that can be retired in 6-12 months.  For the bigger debts, approach one is often the way to go.

If you’d like some help figuring out how best to retire your debts, or have any other financial questions, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Talking Money with Your Partner

By on April 1, 2019

Whether you’re married, living together or in some other type of committed relationship, it’s important to have good communications about relationship issues.  This might include how to parent the kids, life goals, finances and so on.  In many surveys, money is included in the list of topics that can be difficult for couples.  For example, marriage.com lists money as the number two reason for divorce.

Okay, so it’s important, how should we approach it?  Well, the answer to that is as varied as we are, but there are some approaches that are often successful.

For starters, try a financial date.  Yep, set aside some time when the two of you are alone and relaxed.  If one of you isn’t a morning person, then don’t try it then.  If you’ve set a date and one of you had a terrible day, reschedule your date.  You might want to talk over brunch or just get together at home.  And don’t expect to align your financial thinking in just one session.  I recommend that couples have a meeting about finances at least monthly.  (More frequently if circumstances require it – such as an upcoming large expenditure.)

The keys to having this conversation are the same principles used for any effective communications.  Approach things seeking to understand your partner’s feelings about money and don’t criticize them or attempt to change them.  Stephen Covey, author of the 7 Habits of Highly Effective People, describes this as seek first to understand and then to be understood.  You’ve probably heard another principle from the 7 Habits — seek a win-win solution.  That is, employ understanding and compromise to search for financial goals that are shared.  (You may not know that Stephen actually said seek a win-win or no-deal solution.  Basically, he means don’t barge ahead with a plan that isn’t agreeable to both people.)

There are lots of ways to start these conversations, but often it involves talking about the future you want together.  The financial aspect of obtaining this future comes after agreeing on what your shared future looks like.  If your spouse is having trouble getting started on this, you can easily kick things off.  Simply ask them if they could change one thing in how you handle money, what would it be?  In addition, it’s often useful and fun to associate some kind of reward with getting started.  Maybe go out for a nice meal, see a movie that’s been on your list or do something else that’s a treat for both of you.

It’s not uncommon to identify some money matters that are tricky to work through.  For example, one of you may want to spend more on enjoying life now and the other may feel better by saving more money for the future.  There are two key guides to working through this.  First, spend some time understanding why your partner feels the way they do.  Was it because of how their family of origin handled money or maybe something else?  Second, keep in mind that even when people start out with opposing positions, there is normally considerable middle ground to explore.

After these high-empathy, goal-alignment conversations, you can get down to the nitty gritty.  What’s a basic budget look like?  Can you set up automatic deposits to move towards significant financial goals such as buying your first home?

If, after your best efforts, you’re still struggling a bit with this (or any other) aspect of your financial life, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Adjusting Withholding for Taxes

By on March 1, 2019

You probably remember that the government passed some extensive tax law changes late in 2017.  These were called the Tax Cuts and Jobs Act.  Early in 2018, the IRS reduced withholding rates to account for some, but not most, of the tax law changes.  (For many of us, this resulted in higher take-home pay which will cause smaller refunds.)

Significant errors in withholding are undesirable.  If your withholding is too low, you will owe money at the end of the year and might be subject to interest and penalties.  If your withholding is too high, you will have unnecessarily loaned the government interest-free money.

You adjust withholding through your employer by controlling the number of “allowances” you claim.  The more allowances taken, the lower your withholding will be.  The IRS has created a calculator to help you determine the proper number of allowances to use.  You can find this tool here.

This change in the tax laws is a good reminder to keep an eye on withholding rates.  We should always review this aspect of our finances whenever we have a major change in our life – marriage, divorce, new children or the purchase of a new home.

While 2018 is now in the books, this is a great time to make any necessary adjustments to your withholding rate for 2019.  In fact, your 2018 tax return will provide excellent insight into your tax liability under this new law.

If you have questions on your withholding, how to use the withholding calculator or other aspects of your financial life, we’d be happy discuss your situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in

Higher 401(k) and IRA Limits for 2019

By on February 1, 2019

I know you’re familiar with 401(k) and IRA plans.  Hopefully you’re already contributing to both of them!  If you’d like to reread some previous articles on these savings plans, please check out 2018 Financial Resolutions, Financial Planning Resolutions and Plan Now to Minimize Your Taxes.

As of January 1, you can sock away even more money for retirement.  The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000.  The additional catch-up contribution limit for individuals aged 50 or over remains at $6,000.

The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000.

The combined contribution limit increase of $1,000 ($500 from IRA and $500 from 401(k)) per year can add up.  For example, assuming a 4.5% growth rate and 25 years to retirement, you’ll have an extra $50,000 for retirement!

You may be wondering about the tax treatment of these contributions given the tax-law changes this year.  For many of us, these contributions are still tax deductible for your 401(k) and for your Traditional IRA.  So your Adjusted Gross Income could be reduced by $25,000 ($19,000 + $6,000) if you maxed out your savings for both plans.  However, for some of us, the deductibility of your contributions may have limitations.  These can depend on you income level, whether you are covered by a retirement plan at work and your tax-filing status.  Please review such details with your financial or tax advisor.

Deductibility is one of the specifics that need to be understood in your individual situation.  Another consideration is whether to fund a traditional or a Roth IRA.  We’d be happy discuss your situation in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in , ,

Lifestyle Creep

By on January 1, 2019

Lifestyle creep is simply using income increases to finance a more lavish lifestyle.  It’s natural to want to enjoy increases in your income, but some discipline here can reap large rewards down the road.  Some advisors advocate saving all of your future increases since you’ve gotten along without them so far.  This approach neglects the effects of inflation on maintaining your current lifestyle.  It also denies you the ability to enjoy life now rather than saving all increases for an uncertain future.

My advice to clients is to enjoy life now and to prepare for the future.  Circumstances vary at different points in our lives, so there’s no hard-and-fast rule for everyone.  For example, a 20-something just out of college has different spending needs than a 50-something who’s paying for their kids’ college and also saving for retirement.  No matter what your situation is, putting all of your new eggs in either basket is a warning signal.  A good starting point for thinking about this balance is to enjoy about 25% of your new take-home pay and to save the rest.  (If your increase is large, this might seem like a large amount to save.  However, don’t forget all of the things you may want to save for:  an emergency fund, paying down credit card debt, a down payment on a house, college for your kids and so on.)

What are some of the things that might tempt us to spend more than 25% of our increase now rather than salting it away for future uses?  We might want a nicer apartment or home (size, location, etc.).  We might want a new car.  We might want to eat out more often.  There are numerous temptations.  That’s why the 25/75 guideline is so useful.  It can help us prioritize our current desires (and generally these are truly just desires rather than actual needs).  It may help you figure out the most satisfying way to spend the 25% portion of your increase by setting up an actual budget for these funds.

As you can see, getting the spend-now-versus-save-for-later balance right varies based on where we are in life and our personal circumstances.  We’d be happy discuss the best way to use your increase in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

Posted in ,

« PreviousNext »
« PreviousNext »