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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.

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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.

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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.

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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.

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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.

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What to Do With an Inheritance

By on December 1, 2018

Many of us, but actually not most of us, will receive an inheritance at some point in our lives.  And about one in three of us will have spent/lost that inheritance within two years.  If you inherit $10,000 this may not be a big deal.  But if you inherit $100,000 or even $1,000,000, you may regret parting with it so quickly.  So what should you do if someone leaves you a financial gift?

I recommend to my clients that we meet and make decisions together about what to do with the inheritance.  Since I’m a fee-only advisor, this assures independent financial advice with no fear of a conflict of interest.  If you have some other form of advisor (broker, banker, friend, etc.), be sure that their advice benefits you and not them.  In our meetings on this, we’ll find the best way forward for your own situation.  However, there are some general principles that you can use to think about things on your own.

The first rule of thumb is to take a breath before you do anything.  This is particularly true if you were close to the giver and are therefore are experiencing grief.  For example, if this is your spouse, you may wish to read my earlier article called The Role of a Financial Advisor When a Spouse Dies.  However, significant grief can be felt in other deaths such as a parent, grandparent or a very close friend.  The thing to note is that our decision-making capabilities are impaired when we’re experiencing grief.  So, place your inheritance in a money market account or a similar short-term investment until the grief has diminished.  Even if you’re not experiencing grief, this is a great strategy while you figure out what to do.

Second, it’s always good to consider taxes so that you don’t spend money that you don’t actually have.  You may hear of estate taxes, but they only exist on very large estates and are paid by the estate itself – not by you.  The taxes we need to consider here are called inheritance taxes.  Fortunately for us, there are no federal taxes on inheritance and in Colorado, there are no state taxes.  However, if the inheritance is in an IRA account, there are most likely taxes on distributions.

There are many options for how to use unexpected income.  These options include building/enlarging your rainy-day fund, paying off debt (including credit card debt, mortgage debt, student loan debt and so on),  investing for retirement, investing for your children’s education, making a charitable contribution, investing for your legacy (passing it on) and, yes, having some fun.

There are often some special considerations depending on the kind of assets you inherit.  Naturally a house, valuable jewelry, a car or other specific assets will have their own considerations.  Even financial assets can require some careful consideration.  For example, if you inherit a tax-qualified asset such as an IRA, several distribution methods are available.

As you can see, there are a number of important decisions to make if you receive an inheritance.  We’d be happy discuss your options 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.

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Where to Keep Cash?

By on November 1, 2018

We should all have some very liquid assets (cash-like investments) to pay bills and to allow us to pay for life’s inevitable surprises (auto work, appliance repairs, etc.).  Often we keep these funds in a checking or a savings account.  This is absolutely the right approach for money that we know we’ll need in the short term, but how about your rainy-day fund (6-12 month reserve for emergencies such as job loss)?  This money should be working harder than the still woefully low returns that checking and savings accounts offer.

For most of us, there are three options:   money market accounts, CDs or online savings accounts.  As a review, money market accounts offer a higher rate of return than checking/saving accounts.   You can withdraw money without penalty as needed (with a few rules as to how many times per month, etc.).  The return can depend upon the size of the deposit.  CD rates are higher than money market rates, but they tie up your money for a specified period of time (typically 3 months to several years).  Online savings accounts can offer higher rates because they don’t have the brick-and-mortar overhead that a local bank has.  All three of these investment options should be FDIC insured.

To get specific, I checked a few local banks today and the savings account rates were still 0.1% or less.  Online savings rates were more like 2%.  Money market rates ranged from about 0.5% to about 2%.  CD rates varied from about 0.5% for a 3-month certificate to about 3% for a 5-year certificate.  Since these funds are meant to be cash-like assets, they should be in short-term investments.  This means 1-year or less for CDs.  An additional benefit of shorter-term CDs is that interest rates are now rising so future returns will probably be higher.

Rates are constantly changing and generally increasing at this time so these investments warrant initial research and regular monitoring.  If you’d like to talk about the best way to invest your short-term cash or have other financial questions, we’d be happy to talk with you 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.

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Investing in Gold

By on October 1, 2018

There are two schools of thought on investing in gold.  Those who like the idea say that it is a hedge against inflation, a safe haven in a calamitous world and that it offers protection against a weakening dollar.  The most famous advocate against investing in gold is Warren Buffett.  His basic grievance is that gold does not create wealth.  It just sits there.  It will only increase in value if someone is willing to pay more than you did (and this generally occurs during periods of fear).   Here’s his rather blunt assessment of gold:  “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

You might wonder whether gold ever outperforms the stock market.  The answer to this depends on when you make the comparison.  For example, over the past 30 years, the market has outperformed gold.  However, over the past 15 years the opposite is true.  So, it depends.

Some advisors advocate owning some gold for diversification since the price of gold is not correlated to stocks or bonds.  If you decide to invest in gold, there are a number of ways to do so.  You can buy physical gold such as bars, coins and jewelry.  You need to watch the markup costs, storage costs and insurance costs.  You can buy a gold exchange-traded fund (ETF).  This eliminates the negatives of physically owning and storing gold.  Your ETF owns the gold and backs your investment with gold assets.  There are risks such as a failure of the bank that holds the gold.  You can also buy gold-mining stocks.  These magnify the effect of gold spot-price changes.  You can expect regular 20-30% increases and decreases in gold stock value.  Other gold-investment vehicles include futures and mutual funds.

You can see that there are pros and cons to investing in gold and that caution is warranted.  If you’d like to discuss gold investments more or have other financial questions you’d like to discuss, we’d be happy to talk with you 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.

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Donor-Advised Funds

By on September 1, 2018

Donor-Advised Funds, or DAFs, are merely a tax-efficient way to make charitable contributions.  They work pretty simply.  You make a contribution to a DAF and they distribute it to a qualified charity.  You can advise them on how much to give to each charity.  (Strictly speaking, DAFs do not have to heed your advice, but reputable ones do act on your instructions wherever legally possible.)  You get the tax deduction in the year that you make a contribution, but you can distribute to a particular charity at some point in the future (for up to five years).

The most immediate tax effect is to reduce your adjusted gross income, or AGI.  You might recall that your AGI is simply all of your income reduced by certain IRS-allowed expenses such as IRA contributions and college tuition.  Now your AGI can be further reduced by either the standard deduction or your itemized deductions.  In 2018, the itemized deduction for joint filers has increased to $24,000.  This means your AGI will be reduced by at least $24,000.  However, if your total itemized deductions exceed $24,000, then your AGI will be reduced even more.  And that can be very useful as taxes are calculated based on your “taxable income” (that is, on your AGI minus either the standard or itemized deductions).  Further, reducing your AGI might get you into a lower effective tax bracket.  There are a couple of rules that limit your total charitable deductions.  The deductions cannot exceed 60% of your AGI for cash contributions or 30% for appreciated asset contributions.

In addition to a reduction in your AGI, DAF contributions can lower capital gain and estate taxes as well as your alternative minimum tax (if applicable).  Any appreciation of your contributions within the DAF is also protected from any taxes.

For many of us, the new standard deduction will preclude the use of itemized deductions.  However, when evaluating the best tax strategy, don’t forget that itemized deductions include items other than charitable contributions such as medical and home interest (with a $750,000 mortgage limit) expenses.  What some taxpayers are doing is to accumulate their charitable contributions and contribute them less frequently (such as every two years).  This increases your standard deduction in the year that you make the contribution.

Naturally there are some important details which need to be considered such as the DAF administration and investment fees.  If you’d like help with these details or with a more comprehensive DAF discussion, we’d be happy to talk with you 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.

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Yield Curves

By on August 1, 2018

Yield curves are simply graphs of the interest rates of bonds with different maturities versus time.  A commonly cited example is the yield curve for U.S. government securities.  The rate for 3-month, 2-year, 5-year, 10-year and 30-year treasury securities are plotted on the vertical axis and the maturity period is graphed on the horizontal axis.  Such a graph looks something like this:

This is what is called a normalized yield curve where longer borrowing periods receive higher interest rates.  The reason for the higher future interest rate is the uncertainty of the future – particularly with regard to inflation.  There are other forms of this curve such as a flat yield curve (short and long-term rates are similar) and an inverted yield curve (short-term rates are higher than long-term rates).  The shape of this curve tells us something about how investors feel about the future.  A positive outlook (economic expansion) leads to a normal curve.  A negative outlook (recession) leads to an inverted curve.  A belief that the economy is about to transition from a recession to an expansion (or vice versa) leads to a flat curve.

What’s particularly interesting about the yield curve is how accurately it forecasts a recession.  The Federal Reserve Bank in San Francisco points out that an inverted yield curve has preceded all of the last nine recessions since 1955.  (There was one false positive when the economy slowed down rather than going into an actual recession.)

Currently, government securities have a normal yield curve.  (However, the difference between the 2-year and the 10-year government securities narrowed to 34 basis points (0.34%) in late July.)  In addition, a JPMorgan global bond index recently inverted for the first time since 2007.  So, while not foolproof, it is probably wise to be ready for a potential recession.

If you’d like to see if your portfolio is ready for a recession or discuss any other financial questions you might have, we’d be happy to talk with you 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.

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