“Real World” Personal Strategy Blog

Roger Menden’s Financial Independence 3: Realistic Numbers

07.21.14 PersThere are too many scolds in this world, in my opinion. (Perhaps that statement even qualifies.)

Turn on the Facebook and there they all are. Eat this, don’t eat that, don’t exercise like this, THIS is killing your children! THIS is destroying your marriage … yada, yada, yada, ad infinitum.

So, as I’ve written the last couple weeks, I’ve sought to be a *resource* — one that you can turn to in the Shakopee, MN area, again and again. We prepare taxes and cut through the financial clutter — and we do it for a living. But that doesn’t mean we can’t speak to the larger issues at play.

Which brings us here, again, to financial independence.

We ALL know that impulse spending and unexpected emergencies can wreak havoc on a budget.

I am NOT here to scold. But sometimes we make the mistake of deliberately budgeting the impossible.

If you purposefully set the required spending in one category too high, you won’t be able to trim other categories to bring your overall spending into harmony — which is where it needs to be.

I want to see all of us make it a point about our money to be thoughtful, industrious, *content* — and thrifty.

So let’s not set ourselves up for failure, right at the jump.

Roger Menden’s Financial Independence 3: Realistic Numbers
“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

This is my third, and final, installment in a continuing series on real financial independence. Now is when I help us see when we may be inadvertently planning for failure…

Too much house
You can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your budget. Too much house is one of the most common mistakes a young family can make.

Try to keep your rent under 20% of your take-home pay after you graduate from college. Aim for all associated expenses (mortgage, insurance, taxes, etc.) to be less than 30% if you own property and some of the payments go toward the principal. And by no means let your housing costs exceed 38%, or your budget will be doomed before it even begins.

Most of us never saw our parents and grandparents in their younger days when they were struggling financially and lived in tight accommodations. It is as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers. To decide how much house is enough, calculate how much house you can buy for 30% of your standard of living.

Transportation
Transportation costs should be under 15% of your lifestyle spending and include insurance and maintenance as well as saving for your next purchase. If you want to actually be smart, only buy a car you can pay for with cash. 

As a result, your first car may be a clunker! Immediately start saving for your next car and the inevitable costly repairs. This strategy will limit the number and quality of cars you can afford. Remember, there are families earning more than you who take public transportation or share rides to work.

Eating out and prepared foods
Starbucks has become the poster child for budget busters. Buying a $4.50 cappuccino when you are young costs you $450 in your retirement account. And spending $4.50 a day costs you $450,000 in your retirement!

It doesn’t have to be a latte. You can generate amazing savings from any expense. But a pricey latte illustrates the huge markup on a dollar coffee. Aim for food to be under 15% of your lifestyle spending. You would like your food to be inexpensive, healthy and convenient, but it can’t be all three. You can usually only pick two.

Healthy food tends to be more expensive per calorie. So do convenience foods. One person eating out can often fund the entire family eating at home. And even when you purchase food in the grocery store, prepared foods can cost more than twice what you would pay for the individual ingredients.

By learning to cook with common staples such as rice, beans, flour, oats, potatoes, and chicken, you can drastically reduce the percentage of your budget spent on food. Save even more by brewing your own gourmet coffee at home.

Other regular expenses
Review monthly, quarterly or annual recurring charges. Research the cheapest basic service for your phone, cable, Internet, and insurance. Often, these really are “commodities” (i.e. those things which it hardly matters who provides them). Compare that to what you are paying now, and ask yourself if those seductive extra features are really worth the cost.

A gym membership used regularly might be a wise choice, but if you haven’t shown up there for weeks, it isn’t. For each expense ask yourself, “Is this really a necessity?” Any way you can reduce your regular bills saves money every year.

In summary, every category of your total budget must stay within a limited percentage. Careful planning and a courageous look at your lifestyle can help you identify those budget busters. Adjusting a few spending excesses could solve all of your spending problems.

And, as always, we here at team Roger Menden are here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.

Warmly,

Roger Menden
952-445-8753

Roger Menden’s Financial Independence 2: No More Surprises

07.14.14 PersLast week, we talked about having a sure hand.

Even if your take-home income is very high — we all need controls on our spending so our spending doesn’t control us.

And I want to be clear: I have NOTHING against becoming very rich, but I am much more interested that all of us (myself very much included) attend to the soul factors connected to money.

Some of us in Shakopee, MN need to break out of a poverty-driven mindset, based on our history (i.e., how money was used and discussed around our original family), and because of our own poor decisions. Too many have grasped after wealth with a hungry eye, and been burned. And then, well, people give up — they imagine themselves to be poor, and seek after the elusive pot at the end of the rainbow to solve all of their problems.

Sometimes I’ve even seen this among those with seven figures on their asset statements.

I’d much rather all of us make it a point about our money to be thoughtful, industrious, *content* — and thrifty.

A big part of the battle is to rein in our grasping impulses. I wrote about this last week. But this is made even easier when we plan for what we spend — including for those things that, well … many people don’t plan for.

This might hurt a little if you don’t already have these things in your budget, but they will hurt much less when they do come up (and they inevitably will), if you’ve accounted for them.

Here we go…

Roger Menden’s Financial Independence 2: No More Surprises
“Wisdom is learning to let go when you want to hang on. Courage is learning to hang on when you want to let go.” – Mark Amend

This is second in a continuing series on real financial independence, and I’m here to alert you to those items in a family’s financial life that can wreck the well-planned budget…

Interest on debt
There’s no excellent reason to buy anything on credit. If you find yourself considering an expensive purchase and then trying to find the payments in your budget, you are planning for failure. The only two loans you should even consider are a home mortgage loan and a student loan for an education or training that increases your earning potential. Money makes money. Credit does the opposite. Debt breeds poverty.

The average American family carries close to $10,000 in commercial credit. At 18% interest, that’s $1,800 a year or an unnecessary $150 every month per household. If you put that payment into the markets every month over your working years, earning an average 10% return (for calculating our example here), you would retire with an additional $1.5 million.

Unknown unknowns
None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.

Insurance deductibles
Review the insurance coverage for your car and home (if you own). A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.

Medical costs
Medical expenses are rarely planned. To prepare your budget, have some insurance in place that will limit your catastrophic loss. Second, set up an emergency fund that will cover your expenses if they reach that limit.

Car repairs and replacement
Your car won’t last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don’t buy a new $30,000 car and think you won’t have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.

Don’t borrow to buy a car and then start making payments. That’s nearly always a bad idea and simply ensures you won’t save, invest or grow rich. If you can’t afford to save the payments in advance, you are stretching too much. Buy used or wait.

House repairs
Owning a home in Shakopee, MN and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.

So I recommend you set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.

Emergency travel
Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family’s budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.

If you really get strained, I suggest you swallow some pride and ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.

Here’s my bottom line: No budget can anticipate every major expense. Life serves up surprises with some regularity. So if we can all put some healthy margin in our daily living expenses, it will give us the stored resources to weather these major bills and then better plan for them going forward.

And, as always, the Roger Menden team is here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.

Warmly,

Roger Menden
952-445-8753

Roger Menden’s Financial Independence 1: Avoiding Budget Busters

07.07.14 PersonalIf my inbox over the past holiday weekend is any barometer, there is a LOT of talk about independence. And rightly so, of course, given what we celebrated.

But too much of the talk around financial independence surrounds GETTING … when it should be about “keeping”.

You see, in my opinion as a tax professional, frugality is the new status symbol — or at least it ought to be. It is green. It is compassionate. And it brings with it a financial margin for when life colors outside the lines. It helps bring us the priceless gift of serenity and contentment.

I’ve seen Proverbs 10:4 translated as “A poor person is made with a slack palm.” Which means — in order to be wise financially, our hands must remain steady. Extend your hand toward an impulse purchase and with one weak flick of your credit card, all thoughtful budget planning can be hopelessly broken.

And for many Shakopee, MN families, it’s “once on the charge, forever on the card”. Excess spending slows our accumulation of capital to invest. When we are drowning in excess purchases, getting ahead is like trying to sprint through deep water.

Certain purchases that are typically both unnecessary and unplanned are budget busters. Avoiding these financial slips requires hedging some of our worst impulses and constraining our desire for instant gratification. Only by saving enough in discretionary spending can we afford to put 10% of our budget toward those true and unavoidable emergencies.

So, here’s to REAL independence … and how we can all get there.

Roger Menden’s Financial Independence 1: Avoiding Budget Busters
“Tomorrow is often the busiest day of the week.” – Spanish Proverb

This will be the first in a series on TRUE financial independence … and, the first step, really, is getting your spending under control.

In that vein, here are three rules that will help you and your spouse limit impulse buying and better align your spending with your thoughtful values…

First, limit the dollar amount you can spend unless you and your spouse both agree. You owe it to your partner not to undo months of frugality and sacrifice by acting on a whim. Honoring each other in this way helps avoid resentment and alienation that can bust your marriage as well as your budget.

Negotiate the dollar amount. I suggest setting a limit of 1% of your monthly budget. If your annual spending is $60,000 and your monthly budget is $5,000, you would need to confer on any purchase over $50.

The idea of setting a limit may seem more acceptable if you consider the millionaire mindset. Millionaires recognize that saving and investing just $100 a month over the course of your working career produces a million dollars at retirement. They watch their spending carefully. They recognize that frugality is just another way to describe deferred consumption, which is the definition of capital. And capital, once invested, is what produces an ongoing income stream.

Put another way, if the average budget should include 5% taxable savings each month, every time you mindlessly spend over 1% of your budget, you lose more than a fifth of what you should be saving and investing outside of retirement accounts. I’ve seen many financial affairs ruined by the repeated spending of amounts much less than $50 at a time.

If you are struggling financially and having trouble agreeing on your goals, you may want to set the limit lower. As you both begin to feel your spending is under control and your savings exceeds your targets, you can readjust the limit higher. Exceptions can be made for regular bills and necessary purchases such as utilities and groceries.

Talking with someone else about a possible purchase can clarify your thinking not just about the item but also about your other competing financial priorities. It changes the question from “Do I want to buy that?” to “What do I want to give up to buy that?”

The second rule limits the frequency of mistakes. Practically speaking, you can learn to postpone spending one purchase at a time. This is taken from what many parents do with their children: when they are young, they have to wait a week before spending money on a toy. After the seven days, they often want a different toy instead. Then they have to postpone the purchase again.

In my opinion, children should be required to wait as many days as they are years old before being allowed to make a large purchase (that is, more than a week’s allowance). You can use the same technique to strengthen your own slack palm.

When you’re tempted to buy something, wait a week before acting. If you still aren’t sure, wait another week. There is always tomorrow, and most of the time you won’t remember what attracted you to it in the first place. Simply learning to delay and avoid impulse buying can cut your spending in half.

The goal here isn’t to be rich, per se, but instead to be thoughtful, industrious, content and thrifty. If you struggle with Madison Avenue’s mantra of personal fulfillment through excessive spending, turn the image around. Nearly all of our spending is discretionary, and every spending delay can be a way to bring peace into your life.

The third rule is to recognize the categories where you make mistakes. Dieting works because you are forced to observe what you are eating and learn which foods tempt you to break your calorie budget. Creating a financial diet works similarly. It creates a system that makes spending money more painful. For example, simply keeping track of all your purchases in a small spiral notebook makes you more mindful.

Refrain from discretionary spending in any budget category that is under pressure. It might be eating out. It might be clothes. It might be household items. If you keep your budget in mind, it will help you not to spend more money than you intended.

Whatever your lifestyle, you probably think everything would be just fine if you had $10,000 more a year. That is the deceptive seduction of wealth. We don’t realize there are people living off $10,000 less than we have who are saying the exact same thing.

Ask yourself, “What will I do when I run out of money?” Whatever you would do then, you should do now to keep your spending under control and live within your means. The best way to learn to be content is by taking money out of our spending categories and saving it. The less we spend, the better we will learn to be satisfied. Just as the harder we train, the better our endurance.

If you must satisfy frivolous spending, limit the amount and budget for it. Set aside a half of a percent each for husband and wife. For a family with a budget of $60,000 a year, this would be $25 a month each. If you wanted to buy a $300 item, you might have to save up for it for an entire year. But only put this in the budget if you are saving adequately for all your other big goals.

An even better way is to lovingly meet each other’s desires through the portion of the budget allocated to giving gifts. Too often family members don’t know what to purchase. Consequently, unwanted or inappropriate gifts represent a great deadweight loss of value. But when we leave our desires in the hands of others by offering, say, a gift certificate from the Shakopee, MN area we can afford, we build family bonds rather than resentments.

Summing up this message, to avoid impulse buying: set limits, wait a week, and watch out for those categories that entice you to break your budget. And when you must spend frivolously, limit those purchases to a small fraction of your budget.

And, as always, the Roger Menden team is here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.

Warmly,

Roger Menden
952-445-8753

Roger Menden’s 13 Ways To Avoid Capital Gains Tax

06.30.14 PersBecause most savvy Shakopee, MN people (or at least those who have a smart Shakopee, MN area tax pro in their corner ;) ) can decide the timing and amount of capital gains they choose to realize each year, the capital gains tax is considered by many economists to be very “elastic”.

And as such, the amount of capital gains we here at Team Roger Menden choose to realize on your behalf depends heavily on the favorability of the capital gains tax rate.

As a result, over half of capital gains in this country are never taxed. They are avoided completely. But that means the effort of avoiding the tax causes capital to be allocated inefficiently in the meantime.

In my opinion, this particular tax can sometimes punish growth and entrepreneurship. Were the capital gains tax to be abolished entirely, some of the “lost” tax would be regained through economic expansion and more efficient and liquid capital markets.

On the other hand, since capital gains taxes have been raised, the slowing of economic growth *could* be reducing tax revenue by more than the additional tax collected.

But all of this is a question for economists, and smarter ones than myself. For you and me here in Shakopee, MN, it is neither here nor there: OUR business is in helping you structure and position your assets so you can AVOID this tax — and, hopefully, income taxes as well. 

So you agree — we might as well hold on to as much as possible for you, yes?

Roger Menden’s 13 Ways To Avoid Capital Gains Tax
“Having a positive mental attitude is asking how something can be done rather than saying it can’t be done.” – Bo Bennett

There are multiple ways that Shakopee, MN area investors and those with capital gains can avoid being taxed on them. Here are 13 of the loopholes the government’s gain tax unintentionally incentivizes. All of these are things we can help you with at Team Roger Menden 

1. Match losses. Investors can realize losses to offset and cancel their gains for a particular year. Savvy investors harvest capital losses as they occur and then use them on current and future taxes. Up to $3,000 of excess losses not used to cancel gains can offset ordinary income. The remainder of the loss can be stored and carried forward indefinitely.

The amount of capital gains realized depends heavily on the favorability of the capital gains tax rate. This encourages investors to sell great investment vehicles during a temporary dip, only to buy them back again 30 days later for a new cost basis.

2. Primary residence exclusion. Individuals can exclude up to $250,000 of capital gains from the sale of their primary residence (or $500,000 for a married couple). As a result, families who stay in the same home for decades suffer a tax that more mobile families avoid. Smart homeowners who might move (or need the capital) will move more frequently to avoid the tax. Needlessly selling and buying a home is an arduous cost to the economy.

3. Home renovation. Sharp Shakopee, MN area real estate agents and home renovators make their under-market investment purchases their primary residence while they are fixing them up. They then flip the houses, selling for a better sales price but avoiding any tax on their gains via the primary residence exclusion.

This bizarre game of paperwork adds no real value to the economy. However, the flipped houses do add a lot of value to the neighborhood, town and economy. In my opinion, the capital gains tax is wrong to discourage such improvement efforts.

4. 1031 exchange. If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange in the relevant section of the tax code. Although the rules are so complex that people have jobs that consist of nothing but 1031 exchanges, no one trying to avoid paying this capital gains tax fails. This piece of valueless paperwork does the trick.

5. Stock exchange. Stock investors with highly appreciated securities can also do a like-kind exchange. Certain services offer investors with one highly appreciated security a way to trade it for an equivalently valued but more diversified portfolio. This expensive service can help investors avoid paying even larger capital gains taxes. But it is an entire field invented by government taxation. If the capital gains tax didn’t exist, all of those valuable workers and capital could be allocated to more economically beneficial means.

6. Exchange-traded funds. ETFs use stock exchanges to avoid triggering capital gains when stocks move in or out of the index on which the ETF is based. Stocks moving out of the index are exchanged for stocks moving into the index. Investor cost basis transfers to the new owners of the securities.

7. Traditional IRA and 401k. If you are in the higher tax brackets during your working career, you can benefit from contributing to a traditional IRA or 401k. This both reduces your income while you are in the higher brackets, and eliminates any capital gains as a result of trading in the account. Selling appreciated asset classes in a tax-deferred account avoids the capital gains tax normally associated with such trading. During gap years, between retirement and age 70, withdrawals from these accounts could be made in the lower tax brackets.

8. Roth IRA and 401k. These accounts can postpone taxes to a more favorable year, but Roth accounts can avoid them altogether. Having paid tax on deposits, a Roth account allows tax-free growth for the remainder of not only your life, but also the lifetime of your heirs. Unless you are in the higher tax brackets and approaching the gap years, Roth accounts are usually an excellent tax strategy.

However, all of the tax-advantaged accounts described are further paperwork at the end of the day. No real economic value is gained from this complicated shuffle of assets, even though you clearly benefit by retaining more of your assets.

9. Give stocks to family members. If you are facing a high capital gains rate, you can give your highly appreciated securities to family members who are in lower brackets. Those receiving the gift do assume your cost basis for computing the gain, but use their own tax rate.

10. Move to a lower tax bracket state. State taxes are added on to federal gains tax rates and vary depending on your location. California has the highest U.S. capital gains rate and the second highest internationally, with a top rate of 37.1%. In the United States, nine states add nothing to the federal top rate of 23.8%: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. No national value is added by moving, although individuals can certainly gain from living in a state that taxes their particular assets favorably.

11. Gift to charity. Instead of giving cash to charities you support, you can give appreciated stock. You receive the same tax deduction. When the charity sells the stock, it is not subject to any capital gains tax. The cash you would have given is the same amount you would have had for selling the stock and paying no capital gains yourself.

12. Buy and hold. Many investors buy good index funds that never need to be sold. Even if you re-balance regularly, rebalancing can often be accomplished by using the interest and dividends paid to purchase whichever investments need to be bolstered. The downside is that your capital is locked inside the investment vehicles and not free to be used for greater economic gain.

13. Wait until you die. Most people die holding highly appreciated investments. When you die, your heirs get a step up in cost basis and therefore pay no capital gains tax on a lifetime of growth.

All of the above (and more) are strategies we can look at as we examine your future tax burdens. The last one, however … well, let’s not settle for that one, shall we?

Warmly,

Roger Menden
952-445-8753

Roger Menden Wants You To Get a Little Radical: Investing In Gratitude

06.23.14 PersYes, yes — I’m sure we all woke up here in sunny Shakopee, MN this morning wondering how to do exactly that.

Well, I’m going to answer it for you … but because it’s my hope that it will give you vision for beyond just one Peruvian man — and also for the way that doing so might, in fact, unlock something for you.

Handling finances for Shakopee, MN area families and businesses, as we do around here in our tax preparation work at Team Roger Menden, I’ve become fully aware that money is in many ways, an expression of our deepest values and hearts. We put finances towards what we value, plain and simple — that’s its very purpose.

And no matter how you slice it, no matter your net worth … you are VERY well off here in Shakopee, MN. Even Solomon in all of his splendor could not have imagined the wonder of central plumbing, air conditioning, video on-demand and ready access to a smorgasbord of food options — all of which are right at the fingertips of probably over 99% of US citizens.

I do NOT think you should feel at all guilty about your good favor. To the contrary, let’s receive our blessings with gratitude! And concomitant to that gratitude, of course, is finding a simple way to pass that blessing along.

Here’s one idea.

Roger Menden Wants You To Get a Little Radical: Investing In Gratitude
“In the end, it is important to remember that we cannot become what we need to be, by remaining what we are.” – Max DePree

For the world’s poor who survive on less than $2 per day, banking services are unavailable. Without access to a safe place to store savings, the poor cannot get a loan to start a business. And without a job or collateral for a loan, no bank is willing to lend.

In the 1970s, economics professor Muhammad Yunus began visiting the poorest women in Jobra, Bangladesh. He found they could not get loans except from moneylenders at exorbitant interest rates. Without loans, the women could not buy the bamboo they needed to make goods for market. But with the loans, after selling their goods and paying the interest on the loan, almost nothing was left.

This realization led Yunus to a simple truth: A small loan with moderate interest rates to the village women would have a profound and lasting effect on their ability to improve their lives forever.

Yunus created and popularized the modern idea of microfinance. He first began lending to the poor out of his own pocket. Later he founded the Grameen Bank in 1983. In 2006, the Grameen Bank and Yunus won the Nobel Peace Prize for their work in creating the simple yet revolutionary microcredit system.

In 2003, Yunus gave a lecture at Stanford Business School. In the audience were Matt Flanner and Jessica Jackley, who cofounded Kiva, which means “unity” in Swahili, two years later.

Unlike the Grameen Bank, Kiva has carefully selected 246 field partners in 76 countries to manage the loans. Once Kiva has collected enough money for the loan, the funds are sent to the field partner. Over the course of the loan, entrepreneurs gradually repay the loan from their profits. As repayments are made, the money is deposited back into a user’s account. Users can then withdraw the funds or provide the money again to another entrepreneur.

The Kiva website provides the online bridge between the savings of donors in the developed world and the needy entrepreneurs in the developing world. And it also puts checks and balances on the process.

Kiva holds the rates and practices of field partners accountable. If the partner charges too much or complains about their lending practices, Kiva drops them and finds alternative lending partners.

Kiva users hold field partners accountable to make honest loans to worthy borrowers. If users don’t find the project commendable, they won’t donate to them and the field partner must fund the loan by themselves.

Creating an account at Kiva is free. Over 1.1 million users have become Kiva lenders. The average for lenders is less than 20 loans or about $479. But the total value of loans made through Kiva is over $550 million. Small amounts make a significant impact over time.

Microfinance cannot solve every cause of world poverty. A loan to buy a calf, raise it and then sell it makes sense in many parts of the world. But if you live in an area where armed bandits will come and steal your cow, microfinance doesn’t work. It is even worse when those bandits are corrupt government officials.

Microfinance is also not a solution for families on the brink of starvation. Given the choice between feeding the calf and feeding her children, no mother is going to preserve the investment in the calf. Microfinance makes the most sense when it is short-term loans for less than two years.

A sample story is of a loan made to Jehiner, a 26-year-old living with his parents in Chiclayo, Peru. He drove a taxicab but needed $725 (2,000 Peruvian soles) to repair his cab. Edpyme Alternativa, the field partner, loaned him the money. Kiva was asked to backfill the loan so the field partner could make another loan. It took Kiva about 10 days to find 29 users willing to loan $25 each. Jehiner had 14 months to repay the loan. Because of the loan, he could continue to earn a living rather than being unemployed.

The detailed personal stories help the lenders see people who need capital in the developing world as real people with real needs.

Microfinance sometimes does wonders, but it is not the solution to every problem. It only makes sense for those who have some way to repay the loan. But Kiva’s repayment rate is 98.95%.

Processing microfinance is just as expensive as big banking, but the profits are smaller. As a result, fees and interest are higher than traditional loans. Kiva helps keep those costs down somewhat.

Optional fees and donations help support the cost of running Kiva. But nothing is taken directly out of the loans. As a result, only the in-country operational expenses burden the loans.

Microfinance is an interesting field, and you can get involved in several ways. With as little as $25 you can begin loaning money to developing world entrepreneurs. Or you can give a gift certificate to someone you know who might be interested.

You can search by multiple criteria to target a very specific type of loan. You can search by gender, country, industry, popularity or timeliness.

And Kiva is not the only such organization. More organizations like it are sprouting up, but here is a short list of other popular ones:

https://www.microplace.com/
http://www.grameenfoundation.org/
http://www.accion.org/
http://www.vittana.org/
http://www.globalgiving.org/

Kiva and organizations like it help alleviate poverty in developing countries as well as alleviate materialism in developed nations. Seeing stories in the developing countries helps us distinguish between needs and wants.

By living a simple lifestyle here in Shakopee, MN, your savings can enable others around the world to simply live. Microfinance helps foster this generous attitude, and also provides a forum for what to do with the money you are not spending.

So why not do something small for you … but very, very big at the same time?

Warmly,

Roger Menden
952-445-8753

Roger Menden, Shakopee, MN Tax Accountant On: When College Has a Negative ROI

06.16.14 PersonalWriting to you from Shakopee, MN tax preparation headquarters, and Team Menden … and with graduation season pretty much behind us, there are a slew of high school graduates who are enjoying their last golden summer, before … well, before that time that many consider to be another golden four years.

[I fondly remember those halcyon days before the real world hits! Even in college while preparing for my glorious career in preparing taxes for our fair Shakopee, MN area, I remember thinking: Wow, am I ever BUSY! All of these social events to juggle!!! But alas, "real life" isn't quite so bubble-wrapped.]

But over the last couple decades, there has been a rising chorus of critics who point to skyrocketing tuitions (about which I have written previously), and the corresponding skyrocketing debt-loads, and are just wondering: is it ACTUALLY worth it?

Well, for some schools, the answer is a resounding: NO.

Roger Menden, Shakopee, MN Tax Accountant On: When College Has a Negative ROI
“What’s right isn’t always popular. What’s popular isn’t always right.” – Howard Cosell

As many have claimed (such as the US Census Bureau, for example:http://www.census.gov/prod/2002pubs/p23-210.pdf ), a typical college degree is worth up to a million bucks over a career — but that’s not true for every degree.

What’s becoming more and more apparent is that prospective Shakopee, MN area college students need to do their homework beforehand, because some degrees simply aren’t worth the investment.

Of the 1312 colleges evaluated in the 2014 PayScale College ROI Report (found here:http://www.payscale.com/college-roi/full-list/financial-aid/yes ), graduates from 58 institutions are estimated to be worse off after 20 years compared with those who skipped college and went straight to work. These 58 lackluster institutions make up 4.42% of all the colleges surveyed. The lowest grade goes to Shaw University in Raleigh, North Carolina, where PayScale estimates that grads will be $121,000 worse off after 20 years for earning a degree.

To calculate this estimate, PayScale uses an opportunity cost measure they call return on investment (ROI). After factoring all the net college costs, the report compares 20 years of estimated income of a college graduate versus 24 years of income from a high school graduate who started working immediately and didn’t have to pay college expenses (or take loans).

Future college students (and their parents) must realize that not all colleges are equal.

The graduates from the lowest ranking schools report earning less income after graduation. The PayScale website is helpful because it allows you to see reported earnings of graduates from over a thousand colleges. I also assume that low-performing schools in this report tend to offer less financial assistance, which leaves their graduates with larger debt burdens.

However, the most highly endowed colleges can reduce their cost of attendance with grants and scholarships. For example, Stanford is one of the most expensive schools based on sticker price, but its financial assistance is typically generous. So the net cost is very competitive, and their ranking is number 4 based on the PayScale study.

Debt burdens are relative. A doctor’s salary can more quickly pay off a high-price education loan than can a teacher’s. A good rule of thumb is to avoid incurring college debts that will be more than half of your expected annual income. Limiting loans to no more than 50% of a future salary allows graduates to pay off their debts after five years, using 10% of their future salary.

Some students begin to realize their faulty economics only after they have enrolled. Not surprisingly, those schools with the lowest ROI also have the highest dropout rates in the country. For example, we have Adam’s State, which has a 21% graduation rate and a 20-year net ROI of minus $20,143.

What should be clear from this data is the world of difference between the outcomes of graduates of highly-rated schools, and of those near the bottom of the barrel. Attending a college with a poor ROI is not necessarily a mistake, but the financial aid package had better be sweet. So, Shakopee, MN area students and families, I implore you: treat your college decision like any investment: you also need to do your homework before you commit your time and money to an unknown outcome.

I hope I am helping the college choice discussion for you, rather than hindering!

Warmly,

Roger Menden
952-445-8753

Roger Menden’s Savings Manifesto

Sometimes the best ideas are the simplest. (Even if they do come from a simple Shakopee, MN tax professional!)

Like apple pie + ice cream. Or losing weight = eating clean + exercise.

Well, among the affairs I’m normally tasked with helping my Shakopee, MN tax clients to handle, what I’m writing about today is just such a “simple” maxim, yet it is (unfortunately) too-rarely followed.

The implications — and the payoff — are massive, and there WILL be a tremendous fight against it in your being, as you get it off the ground.

But it is the very stuff of generational inheritance. Stop looking for that windfall “around the corner” … and start the long, quiet road to real achievement as we head into this summer…

Roger Menden’s Savings Manifesto
“The harder the conflict, the more glorious the triumph.” – Thomas Paine

Everything in your financial life begins with savings. All wealth comes from producing more than you consume. Unfortunately, most Americans (including, of course, our residents of the Shakopee, MN area) are better at consuming than producing.

Have you ever met people who always seem to have enough money to do what they want? Their peace of mind and confidence is no accident. Nor is it luck. It comes by carefully planning their spending and savings. They deny themselves some desires now in order to enjoy financial security later.

The character Mr. Micawber from Charles Dickens’s novel David Copperfield shared a kernel of wisdom learned the hard way, now popularly known as the Micawber principle. He said (numbers updated), “Annual income $50,000, annual expenditure $48,750, result happiness. Annual income $50,000, annual expenditure $51,250, result misery.”

Surplus income is wealth. Deferred consumption is the textbook definition of wealth, which can be used as an investment to produce additional wealth. Although by itself money certainly doesn’t guarantee happiness, it can enable us to accomplish many goals in life. Without this surplus, we experience Micawber’s misery.

Mr. Micawber is memorable for trusting that “something would turn up” to solve his financial problems. Americans are perennial Micawbers. The savings rate in America is abysmally low, and those who do try to acquire wealth are chastised by a punitive tax code. Micawberism, in contrast, has been rewarded so much, it is considered patriotic to shop until you drop simply to boost the economy.

Unfortunately, economics doesn’t really work that way.

Most Shakopee, MN families who become mired in credit card debt do so because they fail to plan for emergencies. These unexpected events swamp their cash flow, and they have to resort to plastic. But cars break down. Roofs leak. And children need braces. We recommend saving 10% of your take-home pay just to meet these unanticipated expenses.

Saving fuels the financial engine that makes the rest of your financial growth possible. Whatever your life goals, saving is most likely required to achieve them.

Saving is the logical choice if you have upcoming major expenses. Some Shakopee, MN families need to save small amounts to meet modest needs. Others have elaborate and expensive plans that require more complicated strategies.

One of the most important purposes of saving is financial independence or retirement. There isn’t a simple dollar amount that will be sufficient. What matters is that you have saved enough to support your lifestyle. Having $1 million at retirement doesn’t help if your lifestyle requires $200,000 per year. Dying young is never a good retirement plan.

Saving too little or too late requires more extreme adjustments in savings or lifestyle later in life. Worrying about how to meet your financial objectives should not haunt you. You will know if you are on track only if you know what that track looks like, and you adjust your course regularly as needed.

Saving is powerful, but it is only half the story. If you do not invest your savings, inflation will erode your purchasing power every year. In contrast, savings that are invested grow and appreciate.

You should know how much to save today to exceed the needs and priorities of tomorrow. At a 10% rate of return for example, your savings would double every seven years. So for every seven years you delay saving, you may be cutting your ultimate lifestyle and net worth in half.

All of this wisdom about saving can be summed up by the suggestion to “Start saving now.” Beginning early in life is certainly the most significant factor in building real wealth.

Saving a million dollars isn’t so difficult. Investing just $16.20 a day at a 10% average rate of return would grow to $1 million in 30 years. This phenomenal rate of growth would come simply by having $16.20 more in income than spending each day. By saving $162 a day, you could accrue $10 million after 30 years.

And the most successful way to save is to automate your saving plan. Make savings your default setting. Establish an automatic electronic funds transfer from your checking account to your investment account the day after each paycheck is deposited. You won’t miss what you don’t see.

Making these decisions explicitly is much better than failing to plan and then being forced to take whatever options are still available late in the game, with little time left for course corrections.

Creating a healthy financial life comprises many different elements. But saving is the most fundamental. It is like hydrogen, the first and most basic element. By its energy the sun gives us light and warmth, making all life on earth possible. Harness the energy of saving and put it to use for your life goals.

Most Shakopee, MN families with significant investments are simply the millionaire next door. They live well below their means and save and invest the difference. They grow rich slowly and steadily.

Because wealth is what you save, not what you spend.

Take control of your savings today. It is the cornerstone of your entire financial life.

Warmly,

Roger Menden
952-445-8753

Shakopee, MN Tax Accountant Asks: Is A Trust Smart For You?

Every year, despite the challenges and intensity of managing a busy Shakopee, MN tax practice, I find it ESSENTIAL to get away from the Shakopee, MN area and re-charge. I really do think that we can all get so bogged down in working IN our jobs and businesses that we don’t ever really have a chance to think ON them — and where we’re headed.

So, as much as I’d like to completely unplug from my work here at Team Roger Menden — I’ll tell you, I just can’t! Helping Shakopee, MN families and small businesses is my passion, and I get some incredible satisfaction from helping you sleep better at night, knowing that your finances are as well-protected from the IRS’ grasping hands as can be!

We really do love to help you. Don’t let our relationship go to waste :). Even now in the “offseason” there are a wide variety of things we here at Team Roger Menden can do to serve you, whether it be tax planning, or any of a variety of consultations to help your finances.

So, I am planning for that previously-mentioned time away, but in the meantime … last week I wrote about “weaning” our children, financially, and it brought me to a related topic. Do you “trust” your children?

Shakopee, MN Tax Accountant Asks: Is A Trust Smart For You?
“If we wait until we’re ready, we’ll be waiting for the rest of our lives.” – Lemony Snicket

Parenting is more than reading to your children or getting them to eat their vegetables. It’s also about securing their financial future. One way to do that is by drafting a trust and naming a trustee.

This is a great tool to consider, and it supersedes a will in many cases. It’s definitely something that every Shakopee, MN family should look into.

Here are a few questions to ask yourself to determine if a trust is right for your family:

Do you anticipate leaving your children more than a modest sum of money?
A trust may not be worth the effort if you think you’ll only be leaving a child (or children) $100,000 or less. On the other hand, if you’re leaving life insurance money to cover four years of school and you own a home, there’s a good chance a trust would make sense for you.

Do you want to have some say in how your children’s money is spent?
A trust allows you to restrict spending to basic support, including food, clothing, education and health care.

This is something that can’t be done with a custodial account. If the custodian is a soft touch, he could end up lavishing your child with designer jeans and a fancy car, leaving very little left for the college years. Even worse, if the custodian is also the guardian, he could start writing himself large “support” checks to help cover his other expenses.

Would you prefer that your children not inherit the money when they turn 18 or 21?
If you think giving a high-school senior a large sum of cash is a recipe for disaster, then you should consider a trust. The ability to delay inheritance is one of the great benefits of a trust.

Should something happen to both parents, for example, children can receive half of their inheritance at age 30, and the remaining amount when they reach 35 (or some other pre-established benchmark). Our 20′s are such a transitional time that it often makes sense not to burden children with weighty financial decisions.

Do you want the money to be used for a college education?
If you specifically bought life insurance so that there would be enough money to help fund college in the event of your death, then you’ll definitely want to delay the age at which your kids inherit your money. Otherwise, your child could think a red Ferrari is a better investment than a diploma.

Would you like your children to have recourse if their money is mismanaged?
One more benefit of a trust that you don’t get with a custodial account is that a trust is a legal contract; the trustee has an obligation to follow your directions and act in a reasonable and prudent manner. If the beneficiary feels the trustee spent the money frivolously, he can demand an accounting, and can sue for reimbursement if the trustee acted improperly with the funds. It may be pretty tough to prove illegal or improper actions with a trust, but just the threat of a possible lawsuit can keep someone in line.

I hope these questions (and answers!) are helpful. Feel free to forward this information to your Shakopee, MN area (or beyond!) friends.

Warmly,

Roger Menden
952-445-8753

 

Roger Menden Says: Money-Smart Kids Are Weaned Early

05.26.14 PersonalMemorial Day was an important reminder for us here in Shakopee, MN, I think.

With all of the seeming chaos of foreign affairs, troubles in our society here at home (see, UCSB), and our dysfunctional political environment, it’s easy to think we have it really rough right now.

But our Shakopee, MN veterans have faced much worse — and prevailed.

The “Greatest Generation”, during WWII, had meat on a weekly basis, sugar monthly, and faced a level of sacrifice we haven’t had to even think about. It’s right that we paused to consider the sacrifice of so many men and women who went without so much, and especially, on this day, those who paid the ultimate sacrifice — so that we could live the lives we have now.

It’s a good reminder, during these turbulent times. Let’s not give up, in the face of our own fights.

Moving on, we also know many who saw their children graduate from schools here in the Shakopee, MN area over the past couple weeks, and are rightly proud.

It made me think about what is the best way to “graduate” our children into financial smarts, and, hence … here are some of my considered thoughts:

Roger Menden Says: Money-Smart Kids Are Weaned Early
“It is not enough to stare up the steps, we must step up the stairs.” – Vaclav Havel

In my opinion, financial responsibility is more about self-discipline than about knowledge.Think of it like dieting or staying physically fit, not solving math problems. It isn’t simply information you learn from a book, it is a skill you learn by doing.

Did you ever play sports? Well, excellent sports coaches understand how to design exciting games that teach specific skills. They are able to motivate the players about the game and at the same time teach them the skills they need to be successful.

And training to be financially adept requires the same three methods needed in sports:communication, example and application.

Communication alone is the least effective. Imagine I was teaching you the proper way to kick a soccer ball (I know, please don’t laugh). In a textbook you read, “Take aim and then look back to the soccer ball as you shoot. Approach slightly from the side. Plant your non-striking foot beside the ball. Strike the middle. Keep the knee of your kicking leg over the ball. Follow through.”

If that was the end of the lesson, every player would remain abysmal once they got on the field. Head knowledge isn’t enough, and it doesn’t help you visualize what is possible. Also, knowing how and why is very different than actually being able to do it.

Most coaching involves simply giving players an example. You do something and you say, “Kick the ball like … this.”

Although “like this” could mean a thousand things, children are very good at abstracting what is important. Similarly, our children can learn financial perspectives and habits simply by growing up in our homes.

Our example as parents gives them a default of what to try first. But unfortunately, most families don’t provide a very good model. The average family’s finances are appalling. Credit card debt averages $6,500. Half of American families have no retirement accounts. The other half have only saved $35,000.

Getting your own financial house in order is half the battle. The other half is bringing your children into your circle of trust as they mature. Most children feel they are in the dark regarding family finances. It truly does not need to be this way.

It’s not a bad thing for children heading into adolescence to know their parents’ salaries, to understand what things cost at the store up against that salary, and how financial decisions are made in the home. Parental actions can be ambiguous, but when they are accompanied with a commentary of values and decision-making skills, they offer sage mentoring.

Communication and example are important, but practice is the key to raising financially smart children. Given enough time to practice, even children without guidance and good examples will learn from trial and error, just like young soccer players accidentally learn that spinning balls curve.

The physics that causes a lateral deflection of a spinning object are pretty complex. But with some trial and error, it is much easier just to learn to do it. Even children with no knowledge of physics can ultimately bend or curve a soccer ball around a wall of players and into the corner of the net.

To raise money-smart children, give them as much practice time with real money as you can. Encourage your children to make spending decisions as early as possible. Let them make mistakes and learn from them. Give them practice in spending, investing and earning.

They should not be asking you for money. Let them make the tough calls about needs and wants and be forced to choose. If they are not obligated to make hard decisions, you are giving them too much money or not making them pay for enough things. You learned your best life lessons by experience. You cannot teach your children to live within their means if you keep supplementing their means.

Also, they should only be paying for things you are willing for them not to purchase. For example, if you make them pay for a school trip, you must be willing for them to decide not to go. And if they have spent all of their allowance, do not loan them money. Finding that you want to buy something but you have already spent everything is a critical lesson. Make sure your children don’t miss it.

All of the above are my thoughts, based on clients’ experience — and I would love to hear YOURS! Shoot me back an email.

Roger Menden
952-445-8753


Roger Menden On Caring For Two Generations

Many things have changed, even just around here in the Shakopee, MN area.

Time was, families were used to be dealing with elderly parents, young children … and everything in between, all in one house! This is less common now, and as a result, many Shakopee, MN families are actually unprepared for how to handle it — simply because models are much less plentiful.

So, I have put together some guidance on this for you. The reason I highlight it now, is that we can help — whether with specific practical assistance, or even just dispassionate advicefrom me (Roger Menden) or anyone on “Team Menden”. You might know somebody in this situation — or you could be dealing with it yourself. Go ahead and send this to them … and let them know that we can be part of their *solution*, and help to give them peace of mind.

They’ll thank you. Even if it’s simply by having some authoritative “help” on their side here in Shakopee, MN, we all need to come together in these kinds of situations.

After all, I’m pretty sure our grandparents’ generation didn’t worry about their Facebook profile. Things have indeed changed.

Roger Menden On Caring For Two Generations
“You cannot drive your car looking at the rear view mirror. Focus on going forward.” – Steve Harvey

Depending on your perspective, this can feel like a double-whammy.

Certainly, as with children, it’s always a better idea to focus on the benefits of more time with your parents, etc. … but yes, I’ve seen many times how this can put a major drain on a family.

From what I’ve observed of Shakopee, MN adults thrust into the role of caring for their parents, the biggest struggle often comes from trying to keep their dual responsibilities segregated. They try to ensure that the needs of the aging parent don’t impact what’s going on in their children’s lives.

As an example, the adult children feel like they have to choose between making sure that Mom takes a walk for exercise, and attending a child’s piano recital. No matter what the adult parent chooses, he or she often feels like a failure at everything.

What you need to realize is that this process is not something that you can keep separated in your life. You’ll do your family a great service by viewing it as an experience to be shared with everyone in the family, and maybe even with some members of the outside community.

If you find yourself in this situation here are 3 practical tips I can offer:

1) Get the Actual Facts. You may have avoided talking with your parents about finances in the past. Whether you were taught that those things are private or “it just never came up,” now is not the time for surprises. You need to know how your parents are doing financially and whether they’ve made any provisions in case they become ill or suffer a long-term disability.

2) Ensure the Estate is Set Up Right. At this stage of your parent’s life it’s important to make sure that your parent’s legal house is in order. This can be a tricky conversation to have, but your parents absolutely need to have a financial power of attorney, advance health care directive (a healthcare power of attorney plus a living will), and a simple will. It may not be the fullest estate plan for your parents. It might not be proper Medicaid planning. However, it is the bare minimum you will need to help care for your parents.

3) Insure Against the Future. Now is the time to examine long-term-care insurance or assess whether savings will cover an extended nursing home stay, assisted-living facility costs or extended home-care services. You may be tempted to begin to liquidate your holdings or stop saving for your own benefit to help pay for the cost of your parent’s care. Big mistake.

Remember that there aren’t nearly the same kind of government programs or lending scenarios that will help you pay for your kids, or their college or fund your retirement — as there are to help support aging parents. It’s vital that you continue to save for your retirement.

To more of your money in your savings accounts!

Roger Menden
952-445-8753

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