“Real World” Personal Strategy Blog

Spring Means Hope!

The way I see it, if you want the rainbow, you gotta put up with the rain.

- Dolly Parton

I don’t know about you, but I get pretty excited about the spring. When the snow is gone, and the trees don’t seem so desolate…and am I right that the angle of the sun is a bit less harsh?

I hope you and your family will have some “spring” this year–whether or not it’s in the next couple months, or it’s in the more figurative sense. The winter always seems longer than it really is (even when it really *is* long!), but I’m reminded of how necessary it really is.

You see, like the lifecycle of an economy, it’s a *good* thing to experience a time of dormancy for a while. Speaking biologically, plants and flowers often need that time of “being withdrawn” to survive the “facts on the ground” (really cold temps!). They’re a classic picture–pull back a little when it’s harsh, but constantly look for the warmer temps and be ready to bloom!

I don’t know all the details of your personal situation. But I do know that you and I have a choice about how we’re gonna weather the different financial seasons. Keep acting like it’s summer (when it’s really winter out there!) and you’ll wither and die. But the opposite is also true–keep staying “shut down” and dormant when the weather is turning up…and, well, you’ll miss your chance to really grow up and blossom.

Ok–I’m an accountant, not a poet, but you get the point. Don’t be afraid to step out again, just because it’s been cold for a while out there.

Yes, there IS some good news in our economy out there. Despite this week’s rough start, don’t forget that home sales are up, durable goods demand is up, and we did have a nice little 2-week rally in the stock market.

(see: http://news.yahoo.com/s/ap/20090325/ap_on_bi_ge/economy )

Speaking of delivering good (or bad) news, this week I thought I would take up the topic of how you and your spouse (or significant other) can get on the same page when it comes to finances. I think you’ll enjoy, and as always–post your feedback!

“Real World” Personal Strategy

Talking Finances With Your Spouse?

Do you get a knot in your gut when your spouse asks you how the finances are looking? Do you practice a policy of “Don’t ask, Don’t tell”?

Well, despite the fact that we’re in the thick of tax season, I thought this topic was important enough to give you some real world strategy!

One of the best tools I’ve seen to keep your spouse in the loop about your finances is the simple concept of the monthly report. If you find it useful, and once you’ve established the format, you can also do it twice a month to take a look at how you’re meeting your goals.

Benefits of a Monthly Report

While there are many benefits to the monthly report that are outside the scope of this discussion, some of the major ones that apply to most families are:

· You keep each other accountable. Neither one of you can step too far outside the artificial boundaries you set up for yourselves (budgets, investments, etc), because you know that you have to answer to the other every 15 or 30 days. This helps you avoid making major financial mistakes.

· Awareness of your financial situation. Each one of you is fully aware of your current financial situation at all times, including your account balances and other major metrics.

· An opportunity to discuss goals and progress. Your meetings to review and discuss the report give you the opportunity to talk about your major financial goals, how you’re progressing toward meeting those goals, challenges that lie ahead, and potential changes you might have to make in your financial management to meet those goals.

· You can celebrate successes. Seeing your progress on paper allows you to look back and celebrate how far you’ve come and encourages you to know you’re moving in the right direction.

What Should You Include?

The great thing about setting up a template like this, is that you’ll likely not change it very much at all after the first month or two. I would include the following–and by the way, I’m trying to hold off on the accountant-jargon to keep things simple …

· The date (and whether the report is a mid-month check-in or an end-of-month summary).

· Money In: All income and transfers into your accounts.

· Money Out: All expenses and transfers out, categorized by bills, other expenses, investments/savings, and loans. I also break down the biggest expenses within each of these major categories.

· In Minus Out: Cash flow for the month, and the plan for the resulting shortfall or surplus.

· Net Worth: A quick overview of all assets and liabilities to determine your month-to-month net worth.

· Credit Score: Update of your credit score from a monitoring service, and a comparison to last month’s score.

· Goal Monitoring: If you have any special savings or financial goals set up at the beginning of the year, this is the place where you track them and keep each other accountable.

· Notes: This is where you can explain any unusual activity, or make notes on upcoming expenses or issues. This is also where you can make notes as to important milestones and successes you’ve made, particularly when year-to-year comparisons are important to make.

In particular when one spouse is primarily in charge of handling the finances, this kind of reporting can make a huge difference in your peace of mind–and your marriage!

What kinds of tools have worked for you?

To more of your money in your wallet!

It’s Madness Out There! …

The important work of moving the world forward does not wait to be done by perfect men.
- George Eliot

…well, “March Madness”, that is!

Unfortunately, this little national hoops holiday isn’t one which my staff and I get much chance to participate in. We’re too busy doing your taxes!

Yep, this is close to our busiest time of the year–and we’re working like crazy to handle the increased volume this year. With all of the economic uncertainty out there, it’s clear that people want real answers.

But let me say this–though my business does well this time of year, I’d rather things were better and our tax code was simpler! I’d rather the economy was thriving and everyone felt confident enough to handle their own situation!

Yes, the utter complexity of the tax code keeps me in business–to take the hassle from you, and apply our expertise to your situation. But wouldn’t it be more efficient if paying taxes didn’t actually even require so much expertise?

I know…a bit of a controversial statement from an accountant. But I get tired of seeing new clients bring last year’s tax returns to us–and realize that if we’d helped them sooner, they would have saved a bunch of money (fortunately, we can file amended returns!). If things were simpler, people would keep more of their money–and THAT’S one of my passions.

Anyway, I guess I’m in the mood to speak out a little, because I’ve got an article on charitable giving for you below. May ruffle some feathers…but I’d love to see your posted comments!

“Real World” Personal Strategy
Why Do You Give To Charity?

You may have seen the news recently that the administration is considering lowering the “tax deduction value” of charitable giving sometime in the future.

[More details here: http://www.usnews.com/blogs/alpha-consumer/2009/03/05/will-obamas-plan-hurt-charities-.html. I tried to pick a balanced piece--there's been a bunch of partisan hand-wringing about this issue, but that article gives a decent perspective.]

Now, there’s plenty of cheap political points which could be made about this proposal, but lets not go there here. I’ll leave the political shots to others. Instead, I’d like to take the opportunity as your “financial coach” to make a few points about giving to charity.

Why do you give to charity? Is it for the tax deductions…or for a different reason?

Now, as a tax professional, I’ve got no problem helping my clients use all available deductions to their utmost, ethical advantage. But I love it when I see my clients and friends make giving decisions which seem to run counter to immediate, short-term self-interest in their giving.

And, I believe it’s actually “enlightened” self-interest in the long run. And not just in our sense of feeling good.

I see the balance sheets of folks from every walk of life, and over the years I’ve noticed an interesting phenomenon: individuals and families who make giving a priority, even when they aren’t “wealthy”, seem to do better in the long run. And I actually mean financially–not just in their state of mind.

(Though, there are significant “state of mind” reasons for giving. Have you seen, as I have, that those who freely give seem to be more pleasant company?)

Now this is pure assertion, based on anecdotal evidence alone–but I invite you to test me on it.

You see, I make it a point to seek to observe how money works–how it moves from one person or business to the next. And, for some reason–money gets attracted to those who aren’t in hot, desperate pursuit of it. It’s almost like in romance–potential lovers are usually turned off by the overly-aggressive seeker.

So, even if the deduction rate goes down from 35% to 28% (which is NOT too terribly much), may I suggest that you consider increasing your giving? You might be surprised by what happens in your heart…and your wallet.

And a tax note — It’s not too late to contribute to your IRA for 2008. Until April 15, 2009, you can invest up to $5,000-up to $6,000 if you’re age 50 or older. By doing so, you can actually reduce your tax bill from last year. So, I recommend it!

To more of your money in your wallet!

Just Under One Month Left…

“Happiness depends more on how life strikes you than on what happens.”

- Andy Rooney

Well, we’re nearing the home stretch in tax season. Since the deadline for individuals (April 15th) is just under a month out, we’ve been “packing them in” around here!

I’ll tell you what…one of the main reasons we love tax season around here is that we get to sit down with such incredible people. I’ve truly been reminded of how grateful I am for the clients we’ve got this year–and for your trust in us during these “unusual” times.

We’re getting notes around here more and more often as people pass around to their friends the Strategy Notes I email (to those who sign up for them; you can do so here on our site)–people seem to hunger for reality-based hope. I’m glad to be able to say that there *is* reason for anticipating a recovery in our future (I wrote about it last week)…but whatever comes, my staff and I will be here to walk you through the storms.

So, for this week’s Note, I’m re-addressing a question we get a LOT this time of year–”what do I need to bring you for my taxes?” Just in case…

“Real World” Personal Strategy

My Checklist, Revisited

Even if for some strange reason you won’t be using our cost-effective services this year, and because we’re getting so close to April 15th…here is what you’ll need to prepare your taxes.

Personal Data
Social Security Numbers (including spouse and children)
Child care provider tax I.D. or Social Security Number

Employment & Income Data
W-2 forms for this year
Tax refunds and unemployment compensation: Form 1099-G
Miscellaneous income including rent: Form 1099-MISC
Partnership and trust income
Pensions and annuities
Alimony received
Jury duty pay
Gambling and lottery winnings
Prizes and awards
Scholarships and fellowships
State and local income tax refunds
Unemployment compensation

Homeowner/Renter Data
Residential address(es) for this year
Mortgage interest: Form 1098
Sale of your home or other real estate: Form 1099-S
Second mortgage interest paid
Real estate taxes paid
Rent paid during tax year
Moving expenses
 
Financial Assets
Interest income statements: Form 1099-INT & 1099-OID
Dividend income statements: Form 1099-DIV
Proceeds from broker transactions: Form 1099-B
Retirement plan distribution: Form 1099-R
Capital gains or losses
 
Financial Liabilities
Auto loans and leases  (account numbers and car value) if vehicle used for business
Student loan interest paid
Early withdrawal penalties on CDs and other fixed time deposits
 
Automobiles
Personal property tax information
Department of Motor Vehicles fees
 
Expenses
Gifts to charity (receipts for any single donations of $250 or more)
Unreimbursed expenses related to volunteer work
Unreimbursed expenses related to your job (travel expenses, entertainment, uniforms, union dues, subscriptions)
Investment expenses
Job-hunting expenses
Education expenses (tuition and fees)
Child care expenses
Medical Savings Accounts
Adoption expenses
Alimony paid
Tax return preparation expenses and fees
 
Self-Employment Data
Estimated tax vouchers for the current year
Self-employment tax
Self-employment SEP plans
Self-employed health insurance
K-1s on all partnerships
Receipts or documentation for business-related expenses
Farm income
 
Deduction Documents
State and local income taxes
IRA, Keogh and other retirement plan contributions
Medical expenses
Casualty or theft losses
Other miscellaneous deductions

To more of your money in your wallet!
 

Some Signs of Life in this Economy

“Do not anticipate trouble or worry about what may never happen. Keep in the sunlight.”

- Benjamin Franklin

Last week, I gave six basic steps for being prepared for whatever this economy might throw in your direction. It seems that we’re all starved for some good news–and practical advice for finding “streams in the desert”!

So, may I point out a few more glimmers of hope?

Nationally, consumer incomes–after tax and adjusted for inflation–have increased for five straight months, which is largely from the tax-cut effect of plunging energy prices.

Housing affordability is at a record high around the country. Purchasing-manager surveys are now bottoming out. Fear-based credit spreads continue to decline. The money supply is expanding rapidly. The treasury yield curve is indicating we’re moving away from the worst. And commodity prices are bottoming.

[Some of that is professional money stuff...but the point is that we CAN see some good indicators out there!]

With all of the government stimulus and aid beginning to fly around, we’ll (hopefully) begin to see even more good news. The government is spending trillions of dollars. Hopefully that will be a good thing! [and, for some perspective on that figure, check this out: http://www.pagetutor.com/trillion/index.html ]

So…speaking of government aid, I thought I would take this week’s note to speak to those on the verge of retirement and have a frank conversation about Social Security benefits. If you’re not yet close to filing for Social Security, send the address to this page to somebody who is…they’ll thank you!

Read on…and post your feedback!

“Real World” Personal Strategy

Social Security Decisions Can Make or Break Your Retirement

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value of well over $500,000.00! So, despite the fact that it seems like an easy decision, you need to consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been piled onto it, and have thereby added to the complexity. So to make the best decision about how to file for it, you’ll need to consider four things: 1) health 2) income before retirement and 3) income during retirement and 4) taxes.

Retirees cannot rely on conventional wisdom! Simplistic “rules” such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you’re married, the two of you can mix and match these in more than 16 different ways (!). Each choice results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will offer you the best maximum value.

So these methods differ significantly… they depend on your historical earnings, marital or divorce status, continued work in retirement, life-longevity and rates of return. The choice alone could be worth $250,000 of income or more. Filing options include “early filing,” “standard filing,” “delayed filing,” “file and suspend,” and many combinations of these options for married couples. It is DEFINITELY worth careful study and analysis of each option… yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

So couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband’s benefits are often higher and the wife’s life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. Even worse–the Social Security Administration’s new online filing system enables quick decision-making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of “Retirement Benefits” (Publication No. 05-10035) at the SSA’s site.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well-off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

There’s obviously a lot to consider here. I recommend you sit down with somebody you trust that can walk you through your different options. It could make a BIG difference in your lifestyle!

To more of your money in your wallet!

Take These Steps … And Be Prepared

“There are no classes in life for beginners; right away you are always asked to deal with what is most difficult.”
- Rainer Maria Rilke

I like to be the bearer of good news to you, and to point out that there are (still) signs of life on the horizon for our economy…and for you.

First, the bad news:

The unemployment line is getting even longer, as Initial Jobless Claims showed that the number of people collecting benefits reached a record high of 5.11 million. Not surprisingly, Consumer Confidence fell to its lowest reading since records began in 1967. The sour report indicates that the fear of losing one’s job has made the consumer more reluctant to spend.

Gross Domestic Product (GDP) is the broadest measure of economic activity – and for the 4th quarter of 08, came in worse than expectations and at its lowest reading since 1982. You can see the comparison for the last four years in the chart below.

The news on the housing front was also gloomy, as New Home Purchases dropped to the lowest level since data collection began in 1963. Existing Home Sales for January came in lower than expected– however, that number was probably influenced by buyers waiting to see what the government’s Stimulus Plan might have in store for them. We’ll see on that one.

But some good news from Reuters, as they released the results of a survey of 47 professional forecasters, predicting that the economy will begin to recover in the second half of this year
(http://www.reuters.com/article/newsOne/idUSTRE51M1T920090223).

Additionally, the Chicago Purchasing Managers Index was better than expected, and being a forward-looking indicator, gives another bright spot of hope down the road.

But I thought that I would take this week’s Personal Strategy Note, as tax season goes into full-tilt around here, to give you some simple steps to being prepared for WHATEVER the economy might throw in your direction.

Read on…and post your feedback!

“Real World” Personal Strategy
Six Steps for Financial Preparedness — Bracing Yourself for a Storm

Last week, I focused on mindset issues, and it’s my firm belief that how you choose to think about your situation has a subtle, yet profound, impact on how you handle the storms. This week, I thought I’d give you a short run-down on specific, financial steps to put in place so you can be ready for what the rest of the year throws our way.

First, put $1,000 aside. It doesn’t amount to a real emergency fund, but it will do until you get your finances in order. You can accumulate the $1,000 by allocating $10 a day for just over three months. Most people go into debt because they live hand to mouth, spending 100% of their take-home pay. Then life happens. Having a mini-emergency fund can help you get out of debt and stay out of debt.

The second step is to remove yourself from credit card debt–forever. I suggest paying off your credit card by starting with the smallest balance in order to achieve small successes and then working to snowball your payments as you tackle the larger balances. These first two steps, having $1,000 and paying off debt, simply prevent you from facing a financial emergency by starting out wounded and bleeding.

The third step is to improve your ability to handle fluctuating monthly expenses. If you can, set up a monthly budget so your day-to-day expenses are less than 65% of your take-home pay. The difference between those growing rich and those remaining poor is not the salary they make. It is the salary they keep. Relative to their income, the rich are frugal. They save and invest. They spend less than 65% of their take-home pay on day-to-day expenses. They save at least 10% in their retirement accounts and another 5% in taxable savings. They direct another 10% toward unknown big purchases. And they even live frugally enough to give another generous 10% to charities.

Once you’ve set your budget so money is left over after paying the bills each month, in step 4 you automate your cash flow to promote saving and investing.

Every month, have 10% transferred into your retirement account before you receive your paycheck. Then automate the transfer of 25% of your take-home pay into an investment account a day or two after your paycheck is deposited. Automating your savings makes savings a high priority and ensures that you pay yourself first. This investment account will grow over time, and you can use it to pay for big emergencies and charitable gifts.

Step 5 is creating an asset allocation for your investments that’s diversified for safety while being invested for growth. If you make it to this step, you’re well ahead of the game…but the game ain’t over yet! Diversification works, and it’s never more obvious than in times of market turmoil. Without diversification, portfolios can have a zero return over a decade. After being well diversified, the likelihood of no return over a decade drops significantly.

The sixth and final step is mobilizing during an actual emergency. Having the discipline to budget for small financial emergencies will help you be prepared when you encounter larger financial crises. When some unknown spending need strikes, take the money to cover the expense from your growing emergency fund. Then, determine if you have been budgeting for this level of unknown expenses adequately.

Usually emergencies don’t happen. So the money you have socked away makes more money. Keep an emergency fund for several years and it should double in value, giving you an additional emergency fund. Whether you need it or not, being prepared for a financial emergency means peace of mind, knowing that your lifestyle is frugal so you won’t be in trouble.

There’s obviously hard work “in between” these steps…but take it from your trusted advisor. Starting NOW to move in this direction will make a big difference in your life.

To more of your money in your wallet!