Monthly Archives: January 2012

Bad Credit the New Scarlet Letter?

In Nathaniel Hawthorne’s classic novel set in the 1850’s the Scarlet Letter, Hester Pyrnne struggled to regain dignity following an adulterous affair. In antiquity, lepers were scorned because people believed they were dirty and being punished by God. In 2012 60% of jobs filled are screened for bad credit ratings. Individuals you may know of good integrity and skills are looked over because they lost their job or faced uninsured health bills, and fell behind on their mortgage or credit card payments.

According to the Wall Street Journal, “For Job-Seekers, a New Push to Keep Financial Skeletons Buried,” it is only illegal in 7 states to run credit reports on prospective employees. 19 additional states are considering similar laws, and on the federal level a bill outlawing this practice is in committee. I’ve met hundreds of good people in the past few years who are struggling financially, some because of bad decisions, others because of unfortunate circumstances. A large majority of them are good honest people and would make excellent employees, yet because of hiring policies in positions that even when credit would not be related to performance or security risk, they are blocked from landing the position they qualify for.

Financial difficulty in society today seems to have more shame and guilt than other struggles that people face. My pastor commented once that in 25 years of pastoring a mega-church, literally hundreds of people have confessed their sexual struggles, but he could only count on one hand the number of people who felt comfortable enough to share their financial problems. It is strange that is a society that admires risk takers, financial strugglers are later day scarlet letters to some people, and in our own self perception.

I am going to write my congressman about moving the bill out of committee.

International Banking Roots

If you are following the European debt crisis, you may be interested to know more about how the international banking system got its start, in a culture dominated by those whose leader’s believed it to be wrong: check out a piece aired on NPR 1/31/12 “In Italy, Art As A Window Into Modern Banking.” Interestingly Florentine merchants financed the Renaissance by going around the Catholic Church’s ban on money-lending. Up until the 14th century both the Catholic Church and Judaism followed the Bible condemnation of usury.  Merchants invented the financial instruments of international trade, which also helped to fuel the expansion of art.

A Review of Monte Carlo Simulation

Conventional retirement projections in most retirement financial planning software packages and calculators looks at everything the moment you enter it, such as your goals, assets, benefits, and expenses coupled with assumptions for taxes, rates-of-return and inflation. Since this is just a calculation it doesn’t measure probability of all of the many variables that could possibly help or hinder your goal achievement. Therefore financial plans require ongoing updates.

Within the last decade most financial planning software programs have added Monte Carol Simulation as one way to visualize and examine the effect of unpredictable financial market volatility and other factors on your retirement plan.

Monte Carlo Simulation introduces random uncertainty into the assumptions and then runs the model a large number of times. Observing results from all these changing results can offer a view of trends, patterns and potential ranges of future outcomes illustrated by the randomly changing simulation conditions. While Monte Carlo Simulation cannot and does not predict your financial future, it may help illustrate for you some of the many different possible hypothetical outcomes.

Ten thousand full financial plan calculations are performed utilizing the volatile annual rates of return in our software program (eFinPLAN.com). The result is ten thousand new hypothetical financial plan results illustrating possible future financial market environments. By the use of random rates from a statistically appropriate collection of annual returns and repetition of the process thousands of times, the resulting collection can be viewed as a representative set of potential future results. The tendencies within the group of Monte Carlo Simulation results—the highs, lows and averages—offer insight into potential plan performance that may occur under various combinations of broad market conditions.

Most Monte Carlo Simulation reports, and those of eFinPLAN provide a:

  • Bold Line
  • Percentage of Monte Carlo Results Above Zero at Selected Ages
  • Monte Carlo Simulation Minimum, Average and Maximum Dollar Results

The Bold Line

The bold line in the Monte Carlo Simulation Results graph tracks the value of assets over the length of the illustration if all rates of return are held stable at the assumed rates of return. The estimate uses annual expected portfolio rates of return and inflation rates to model the growth and use of assets as indicated under Assumptions.

Percentage of Monte Carlo Results Above Zero at Selected Ages

These results represent the percentage of Monte Carlo simulation outcomes that show positive retirement asset value remaining at different ages. A percentage above 70 at last life expectancy is an indication that the underlying retirement plan offers a substantial probability of success even under volatile market conditions. Additional ages shown give the percentage of simulation outcomes with positive asset amounts at various ages.

Monte Carlo Simulation Minimum, Average and Maximum Dollar Results

These values indicate the best, worst and average dollar results at the end of the five thousand Monte Carlo Simulations. These show the range of results (high and low) and the average of all Monte Carlo results. All values are based on results at the life expectancy of the last to die.

Conclusion

Monte Carlo Simulation is a great tool; however, the most important thing to remember that is that financial planning is a process, and part art and part science. Regularly monitor your plan while seeking help from trusted professional advisors. Simulation results demonstrate effects of volatility on rate of return assumptions for education and discussion purposes only. The projections or other information generated by the plan regarding the likelihood of various investment outcomes are hypothetical in nature; they do not reflect actual investment results and are not guarantees of future results. Each Monte Carlo Simulation is unique; results vary with each use and over time.

Monday 1/30/11 Liftoff: Who do we look to?

If you watch or read as much news as I do, you may also come to the conclusion, that the world is looking for something to save us. There is desperation on the evening news, and people look to something to solve the world’s problems of recession, war and terrorism, food shortages, corrupt politicians, bankrupt countries, broken families, crime, and drugs. We look to President or political movements and campaigns. We think more spent on business, environment and social programs is the answer. Talking to the wonderful spouse of a relative of mine, a self-proclaimed atheist and socialist. She cares and ministers deeply to the people in her life, and she cares where the world is heading. Anyone that looks outside of their own cocoon for a moment can’t help but to notice the injustice, poverty and suffering around the world and be concerned. This relative who I admire and love, thinks that perhaps many of the problems could be solved by repositioning of wealth.

Bringing it home, we think of our own financial condition, or the injustices we see or face, our comfort and wonder where our help is going to come from? I ask myself, who or what do you or I look to? Do I live in peace, walking by faith, living for eternity? Is my security in politics, money- income, retirement funds, government programs? The following Bible verse put things in the proper perspective:

 I lift up my eyes to the mountains—
   where does my help come from?
My help comes from the LORD,
   the Maker of heaven and earth. Psalm 121:1,2

I am not advocating heads in the sand Christianity, far from it, I believe Christians are to be salt and light in every walks of life, and be about Kingdom work. God is calling us to be engaged in partnership with him. Don’t believe it, read the old testament and you see it throughout. However when countries, and people and myself go astray is when we look to the wrong things, and not lifting our eyes up the mountain, away from ourselves and surroundings, but to God our helper.

Lord help me to live this way, constantly looking to you and not false things.

Global Warming and Personal Finances

A 1/27/12 column in the Wall Street Journal “No Need for Panic About Global Warming” written by 16 prominent scientists, seems to cast serious doubt in global warming (GW).

GW seems to be quite a divisive issue these days, at least that is what it seems to be if you pay attention to the national media. As a blogger, I try to not have a bias in my writing towards the agenda’s of the right or left. I am concerned though, when changes to economies are proposed that are very dramatic, which may negatively affect a great number of people’s financial stability. Those concerned about GW would also say that if we don’t act quickly enough, global warming will lead to worldwide drought and harm more than people’s finances.

Is the science backing global warming right on? Talking to a scientist at The Ohio State University, I was compelled to maybe believe as he did, after hearing the facts presented, that there may be something to GW. In addition, anecdotally it seems that there is indeed a dramatic reduction in glaciers and some polar ice. Is the change in temperatures caused by man? However after reading the article mentioned, it seems as if we might want to hold back on many of the proposed CO2 far-reaching policies, until there is more good science indicating human induced GW is real.

We are to be good stewards of our planet (Genesis 2:15), to pollute less, use alternative fuels and depend less upon foreign oil by using our own until alternatives can replace them. I think all of us can get behind this, but not when flawed science (maybe), is used to make draconian changes, to the great financial harm to a majority of humanity.

Friday 1/27/12 Blog Roll, Great Reads from Other Blogs

The following are good articles from this past week from other Christian personal finance blogs that I follow:

What Are Investment Policy Statements?

If you decide to hire an investment professional to invest your money for you, one thing you might want to discuss with prospective advisors is the Investment Policy Statement (IPS). The IPS is drafted between you and the advisor that outlines the rules they are to follow when investing your money.

The advisor will typically ask you many questions about your investment goals and objectives, as well as risk tolerance. The IPS will describe the strategy that will be used to achieve these goals. Included in your IPS will be information about risk tolerance, asset allocation, and liquidity needs. The IPS helps to set expectations, and provide guidelines that the advisor is allowed to follow. The relationship between advisor and client often gets strained, especially during bear markets, or if the client has concerns that investments were a match for him or her. Communication is key, and the IPS is a good tool to begin the relationship with, and to refer to when meeting with them for reviews.

Investing – Do It Yourself?

Until these post modern ages, few people did do-it-yourself investment management. With the advent of increased sources of information, no-load mutual funds, and low-transaction-cost brokerage accounts, more people choose to forgo using an investment advisor and manage their investments themselves.

You are a smart and intelligent person and probably capable of doing a lot of your own investing, but since we all have different skill sets and personality styles, not everyone is equipped to do a great job of it. Some people are motivated to consider doing their own investing because:

  • It looks easy considering all of the information available on the internet
  • I had a bad experience with an investment advisor in the past
  • I feel investment advisors charge too much for their services
  • I feel I can do it better myself

I think though before doing it all yourself, it makes some sense to do some self assessment about whether the role of investment manager is a good one for you.   Answer the following True False:

  1. Analytical: I’m an analytical person, I enjoy analyzing technical information and making mathematical calculations
  2. Not Emotional: I am not emotional about financial matters. For example, if the market had a big one-day drop, I would not automatically panic and move my money
  3. Decision maker: When presented with all of the important facts, I am able to make a decision without over deliberation and analysis-paralysis
  4. Instincts: I have a very good history of investments and avoiding bad decisions, including schemes
  5. Time: I have ample time to make my own investment analysis, I have time for this to be one of my main interests
  6. Research:If I am not already skilled in investment analysis, I am willing to devote many hours to take courses and read books about investment theory and practice
If you don’t answer all of these questions True, then you should probably hire an investment manager. However, either way, it is good for all people to expand their knowledge and awareness of investments and investing. Better-informed people are able to avoid bad investments and investment advisors. They also make better-educated investment decisions working in a team environment with their investment professional.

Some Fundamentals of Investing: A Primer

Investment Management has sometimes been defined as: Managing assets and resources in relationship to your personal and financial goals, in order to most efficiently accomplish desired results.

Achieving financial goals involves the use of many techniques, financial concepts, and tools. Perhaps one of the most important is the proper use of savings, investments, and retirement accounts. During your financial life you will accumulate funds from various sources, including savings, your surplus income, inheritances, gifts, company contributions to retirement accounts, and other types of financial resources.

Since savings and investment accounts are acquired over a broad timeframe, it is not unusual to find that the funds have been put into savings or investment accounts with inadequate thought as to how the various accounts relate to each other, or how they fit with your own long-term goals for financial success.

One objective of any financial plan is to determine the proper mix of asset types, classes, or groups. In order to achieve the desired results for your financial future, it may be prudent to consider repositioning assets from an existing account to other accounts that more appropriately match your goals and comfort level. 

The Three Investment Methods

Every investment decision uses one or more of the following, and every investor should be aware of how they work.     

  • Asset Allocation: Invest in asset classes matched to client risk, to provide the  most favorable results.
  • Security Selection: Buying and Selling of Individual Securities using an analysis of individual securities to provide the best investment opportunities
  • Market Timing: Analysis of Economics, Markets, Market Sectors & Types of Securities to forecasting trends to predict the best places to invest

Security Selection

Security selection is deciding which stock or bond to purchase or sell. This gets the most attention in the media because it is interesting. Business news shows like to highlight stock pickers from Wall Street who talk about up-and-coming companies.     

In order to be a good stock picker, careful evaluation of which stock to purchase is required. The goal, of course, is to purchase low and sell high. In order to make good decisions, you need a lot of information about all stocks. Security selection is challenging because of the large number of stocks that are available to purchase. Secondly, it is difficult to find accurate, up-to-the-minute information about companies, and the information becomes quickly outdated. In addition, a lot of knowledge and experience are required to be able to process and interpret the information. Investment skill requires understanding and knowledge of economics, demographics, accounting, corporations, industries, and countries, to name a few. 

Great stock pickers are hard to find; however, if you do your research you will find the minority of stock pickers who have consistently beat their respective index. Stock pickers can be stockbrokers who sell stock. Or they may be private money managers who usually have a staff of research people who pick stocks for clients. Investors are required to give them a minimum amount of money to invest. Mutual fund companies employ a large staff of expert researchers and analysts to help them pick securities.     

Market Timing

Market timing is seeing where a market or security currently is, and then betting where it may be going, and when. To win at market timing, accuracy of over 60% of the time is required to cover the losses caused by mistakes of the other 40%. It is not 50/50 because of commissions, taxes, and other transaction costs associated with trading securities. You have to be right in all four decisions: what to buy, when to buy it, what to sell, and when to sell it. A mistake in any of these may eliminate the gains in the other three. Very few market timers have shown a consistent track record of being correct more than they are incorrect.

Asset Allocation

Asset allocation is based on the famous and comprehensive study by Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower in 1991. They found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not market timing or security selection.

You don’t hear that much about asset allocation in the media, since it is boring and it doesn’t make exciting news. In addition, it is sure to draw a yawn at a cocktail party as compared to a hot new stock you may have heard about.

Asset allocation means that money in a portfolio gets divided up between the different asset classes. Most investments can be categorized into one of four asset classes: stocks, bonds, tangibles (things you can touch), and cash. There are dozens of asset classes in theU.S., and most also have mirror images in the foreign markets.

An asset allocation should be tailor-designed for each investor based on their comfort level of risk and volatility, the rate of return they hope to achieve and their individual goals.

Lastly, asset allocation has some critics out there, especially in light of the present economic condition, so be sure to discuss this with your investment professional.

Risk

In every aspect of life, we are faced with varying degrees of unknown outcomes. These uncertainties in life are sometimes referred to as areas of “risk”. In particular, financial matters are commonly described as either “safe” or “risky” or somewhere in between the two extremes.

It is important to recognize that the term “risk” can refer to more than simply the loss of your money. Some of the different examples of these risk areas are described below.       

Loss of Principal

Imagine that you have $10,000 invested in a stock, the stock declines in value to $5,000, and you sell the stock, then you have suffered a loss of principal. On the other hand, if you do NOT sell the stock while the value is down, and the stock recovers to $10,000, then you have not suffered a loss. Time and diversification are keys to mitigating this type of loss.

Loss of Purchasing Power

If you own a $10,000 certificate of deposit earning 5% interest, you will receive $500 per year interest. Since the account is insured by the FDIC, and the interest is guaranteed for a set timeframe, this may seem like a “safe” investment. If we experience inflation at the rate of 3% per year, the purchasing power of the $500 income will be reduced after the first year to $485, and after 10 years to $372. The purchasing power of the $10,000 after 10 years will be reduced to $7,441. This loss is a permanent one with no chance for recovery unless our economy goes into a protracted deflationary cycle. Considering interest rates on CDs and savings are very low these days, wise investing is even more prudent now.

Tax Loss

Using the same $10,000 as above, and assuming you are in the 25% tax bracket, the $500 interest would be reduced to $375 after taxes. After 10 years, the $500 interest after taxes and inflation would provide purchasing power of only $277.

Liquidity

If you place all or most of your financial assets into illiquid assets (like real estate, mortgages or notes, small business interests or even tax-deferred retirement accounts with severe early withdrawal penalties), you may find that you no longer have control of your financial future. If your personal financial affairs take a turn for the worse because of a disability, loss of employment, death in the family or any other unforeseen event and you cannot readily reposition your assets to meet your new needs, then you are exposed to the risk of not being in control of your financial wellbeing.

Although there are other types of risk that could be considered, the above examples illustrate that it is important to properly plan and balance your financial assets so that all possibilities are considered.

Index Investing

Because of the popularity of index funds, any discussion about investing should include them. Index Mutual Funds are those Mutual Funds that invest only in the securities that are in the index, or a more modern evolution in this area ETF exchange traded funds (will be covered in a later article). For example, the Standard and Poors 500 Index Funds offered by many mutual fund companies invest in only those 500 companies represented in the index. The research has clearly established that investing in Index Mutual Funds will outperform most stock pickers. Does this mean that you should only invest in Index Funds? Some very smart people have concluded this; however, consider:     

  • Some mutual fund managers have consistently out-performed their respective index
  • Some mutual fund managers have consistently out-performed their index or have performed nearly as good, but have invested in securities that have less risk and volatility than the index
  • Investing in a portfolio of mutual funds may provide more diversification

Summary

The following are simple steps to begin implementation of an investment plan that is suitable for you. First, you should decide which investment method you prefer: Asset Allocation, Stock Picking, or Market Timing. If you are doing asset allocation, follow these steps to begin the process:                                                                                                                                                                     

  1. Complete a financial plan to determine your goals and asset allocation.                                                                
  2. Decide if you want to use index funds or investments selected by an investment advisor.                                       
  3. Find an investment advisor. Be sure to have them provide information regarding:  a. Philosophy of investing: Security Selection, Market Timing, or Asset Allocation.  b. Investment Profiling: Methods to determine how they construct a portfolio for you.   c. Investment Policy Statement (IPS): Some investment advisors will construct an IPS for every client.  d. Investment Selection Process: Policy, methodology, and systems for selecting investments.  e. Investment Performance: They may or may not be able to provide this for you. It depends on how they construct portfolios and how the security regulatory agencies permit reporting.                                                                                 
  4. Reallocate investments into the funds chosen according to your asset allocation and investment policy statement. Evaluate tax exposure to changes prior to re-allocation.
  5. If you have funds in an employer-provided retirement plan, reallocate current balances and future contributions into those funds that fit your asset allocation. Obtain performance information from the retirement plan provider and discuss with your investment advisor. If you have retirement funds left at a previous employer, open up an IRA account and roll over those assets into it. Invest those assets according to your asset allocation.
  6. Review your investments quarterly. Your investment advisor should provide you with up-to-date information about:  a.  Overall performance.  b. How your performance relates to their respective index.  c. Underlying fund information   d. Current asset allocation balances compared to your prescribed asset allocation

Monday AM Liftoff 1/23/12: Jesus Wants Our Hearts, Not Our Money

My command is this: Love each other as I have loved you. Greater love has no one than this: to lay down one’s life for one’s friends. You are my friends if you do what I command. I no longer call you servants, because a servant does not know his master’s business. Instead, I have called you friends, for everything that I learned from my Father I have made known to you. John 15:12-15

Jesus didn’t come to set a lot of rules, in fact if you read about his life you can see that he broke many of the religious laws of the day. Jesus didn’t come as a conquering angel to set up a kingdom, slay his enemies and reign in a new law-abiding era, as was hoped and anticipated by many. Jesus, God manifest in human form, visited earth to illustrate his true nature exemplified by kindness, compassion, love, understanding, healing, to give his life for others, to take away suffering by putting it on himself. Jesus came to illustrate God’s infinite kindness and love to us, his friends. He came to remove sin, so that there would not be a barrier anymore between us and Him, in fact he calls us friends, not rule abiding servants. It is unfathomable that the creator of the universe, deeply desires us to continually relate to Him as friends.

How does this relate to money? It is considered conventional wisdom in Christian circles that tithing is pretty much a given, something just expected of good Christians. Digging into the Bible, it seems pretty apparent, that we are not any longer under laws, including tithe, although there are some pretty strong verses that indicate the necessity of tithing. Does that get us off the hook from having to tithe 10% of everything we earn? Proverbs 15:22 says that “Plans fail for lack of counsel, but with many advisors they succeed.” If we consider the wise people in the Bible as our counselors, it seems that throughout the Old Testament dozens of Godly men and women gave. It clearly indicates it is a Godly principle of people who know God to want to respond to Him generously, and a good place to start is 10%. I sometimes imagine that there is a reason that one of the 10 Commandments isn’t to tithe.

Back to the friends verse. I ask myself am I totally sold out in love back to Christ. Is that my center? Do I deeply desire to give more to Him, in all areas of my life, without reservations, whatever that means, even if more than the 10% tithe? Do I want to lay down my life for my friends, for Jesus’s friends, laying aside the things I desperately desire for fun and enjoyment? According to C.S. Lewis “I am afraid the only safe rule is to give more than we can spare. In other words, if our expenditure on comforts, luxuries, amusements, etc., is up to the standard common among those with the same income as our own, we are probably giving away too little. If our charities do not at all pinch or hamper us, I should say they are too small. There ought to be things we should like to do and cannot do because our charitable expenditure excludes them. Mere Christianity, bk. III, chap. 3, para. 7, pp. 81-82

My goal of all of this is to not heap a bunch of guilt on anyone, but to consider Christ, and His word that can do its work “For the word of God is living and active and sharper than any two-edged sword, and piercing as far as the division of soul and spirit, of both joints and marrow, and able to judge the thoughts and intentions of the heart.” Hebrews 4:12 and so that we might be reminded that our lives have so much more to live, when we live them not under habitual giving laws, or distracted by the comforts, but in close friendship with our daily walks with Christ. Our giving back to Him is as a generous head over heals lover in abundance. Giving to God was never intended to be a law, but an act of adoration and praise.

$2k in Grocery Savings

Saturday morning is the time my wife and I usually grocery shop together. By then she has clipped all of the coupons, we have discussed the list of things we think we need and how much we want to spend. She has also run a report from www.thegrocerygame.com, which is a nice list of deals that includes in-store specials, manufacturers coupons, and other seemingly secret non-advertised specials.

Watching our diets closely these days for weight loss and health, we buy no snack items, pop, deserts and little manufactured foods like frozen pizza bites. We buy a lot of fresh fruits, vegetables, and try to buy organic when it is available at a low-cost. Therefore, we might not save as much as others, but we do pretty good.

We start out shopping at Aldi’s for certain items that know we could not have gotten at a lower cost anywhere else, but are of good quality, and spent about $16. Aldi’s and other stores like that have very low-cost items, mostly all non national named brand.

The second trip was to Meijer ( upper Mid-western chain). We spent $82.74, and we saved $38.46. This represents $3 in online store promotions (you have to sign up for this), $20.66 in non-coupon savings, $14.80 in coupon savings. We would have spent $121.20 had we not planned together, and used coupons and these other tactics.  My wife is a little embarrassed that we didn’t save more, because she has been doing The Grocery Game and couponing for about 5 years, and our savings is usually greater. But using this example as an average, because sometime we do better and worse, $38.46 in savings represents $1,999.92 savings per year.

Is couponing worth it?  That is two grand towards your choice: vacation, car repairs, debt reduction, increase in contribution to retirement or college education plan.

I will review The Grocery Game and other things mentioned here in future articles but I want to mention one deals. We both take our lunches, however we dislike nitrates that are in most lunch meats. I went to an organic food store the other day, and their organic and nitrate free lunch meats were about $13 per pound. I try to stay away from nitrates because I have read that they trigger my migraine headaches, but we can’t afford $13 per pound or $1.23 per ounce. I was surprised to see something for the first time, Hormel lunch meet without preservatives. It was on sale for $2.63 per 8 ounce package , and if we bought two we got a loaf of Brownberry bread for free. The cost per ounce is 33 cents, not organic but no preservatives and a great deal.

Friday 1/20/12 Blog Roll, Great Reads from Other Blogs

The following are good articles from the past week from other Christian personal finance blogs that follow:

Obama Rejects Keystone Pipeline: Jobs, Energy, Politics and Money

We have not heard the end of the story of the trans-American pipeline to bring Canadian oil sand derived crude though a 1,700 mile pipeline, that Obama rejected yesterday (1/18/12). Conservationists are celebrating, since they believe the negative environment consequences of the line and special process to remove the oil from the sands. It seems that this is a result less of a values decision, since this seems like a win win on both sides, and more related to politics- too bad there is so much fighting in Washington and little cooperation.

The cost to personal finances in the short-term will be less job opportunities, higher cost of energy, and the risk that this oil could easily go to China potentially harming our international economic competitiveness and security. Stay posted on this important issue.

Indiana and the Right to Work Laws

The Indiana legislature is battling over putting the Right to Work referendum on the ballot.

Right-to-work laws exist ins 22 states, which prohibit agreements between labor unions and employers that make membership, and union dues a condition of employment.

What this means to worker’s personal finances in the short run is having to pay mandatory dues, so a workers income could slightly increase. Labor unions argue that workers who benefit from them, shouldn’t be exempt from having to pay for them. They might also argue in the long run, that with less dues, they will have less funding to fight for workers. Some union dues payers are not always happy because their dues may be used to back issues or candidates for which they don’t support.

There are plenty of more arguments on both sides, and many states are watching the goings on in Indiana, to see how they might deal with the issue in their own state. Interesting information can be found at The New York TimesPal-item.com and on Wikipedia.

Cooking on a Budget

I like to cook, and my wife says I’m pretty good at it. I have to admit I have watched a few cooking shows like Paula Deen, Rachael Ray, and Steven Raichlen’s Barbeque U. These shows provide good ideas for putting dishes together, use of ingredients and spices. However I seldom use the recipes, either because the ingredients are not always readily available, or just too expensive and not healthy. The media is shinning light on this due to Dean’s recent news about having Type 2 diabetes, although research seems to indicate that fat content in food doesn’t contribute to diabetes, eating healthy is incontrovertibly been proven to aid in good health.

Ray is great because her meals can be prepared in a short period of time, and sometimes has an eye on the budget and health. Cooking Light also has some good recipes. Lastly, E-mealz is a great service that helps to plan recipes and grocery shopping together, providing economical and tasty meals.

Low Cost Smartphone Alternatives

Good article in the Wall Street Journal about some good alternatives to the expensive full featured smartphones.  Those on an extremely tight budget may want to avoid these all together, and stick with a regular phone to save themselves high monthly data usage bills, unless they really need one for business. The monthly savings could be used for debt reduction and accumulating savings. Sometimes it is hard to wait when it seems as if everyone else has the coolest smartphone, but the newest latest and greatest model is always around the corner for those willing to wait.

9 Common Overlooked Tax Areas

The Ernst and Young Tax Guide for 2012 listed 50 of the most easily overlooked deductions. You may want to purchase this large book or look at what is listed on their website.  Also see IRS.gov for a list of highlights and Whats Hot. My list will touch on a few of them that I often see. Remember – some of these deductions are phased out due to income, circumstance or “floor” limits required.  Check with your tax professional to see if these or others are applicable to you.

  1. Be aware of AMT – the Alternative Minimum Tax: AMT affects more people now than ever, and sneaks up and surprises many people with large tax bills. The alternative minimum tax (AMT) attempts to prevent some who benefit from tax savings (deductions and credits) by making sure they pay a minimum tax. For middle Americans, the most typical cause of AMT tax is the level or amount of State, Local and Property Tax combined with miscellaneous deductions like unreimbursed employee costs; especially if your household income is over $100,000.  You can see if the AMT affects you by consulting the AMT worksheet in the Form 1040 instructions. People with more complex financial situations should probably consult a good accountant to help them calculate what they might owe.
  2. Higher Education Expense Deductions and Credits: You may be able deduct $2,000 or $4,000 of qualifying tuition expenses, depending on your income. It applies to expenses for post-high school education for you, your spouse, or your dependents regardless if you had to take out loans to pay for the cost.  It even counts for Grandma to pay for grandson’s college!  Grandma can get the deduction. The Hope Credit or the Lifetime Learning Credit have stricter income limits than higher education deductions to qualify, but provide greater tax savings because they reduce your taxes dollar for dollar. Because both of these types of educational deductions and credits are dependent upon income levels, year in school, and many other factors, it’s not an easy choice which one is right for your case.  Run all the scenarios or consult your tax advisor for the best treatment.
  3. Medical expense deductions: To be able to deduct qualifying medical expenses you must itemize and expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). Given the high rate of health care inflation, more people are eligible for this than in years past. Be sure to keep records of all medical expenses to see if you qualify each year.
  4. Reinvested stock dividends: This is a tip to avoid double taxation. When mutual fund and qualified stocks pay dividends to investors they are taxed in that year, whether or not those dividend monies were paid out to you in cash or reinvested. Most investors automatically re-invest them in additional shares. When you own investments, keep all of your statements. When an investor subsequently sells qualified shares of stock or the mutual fund, they are taxed on their gain. Meaning if you invested $9,500 and it grew to $12,000, $2,500 could be subject to tax in that year. However let’s assume that $9,500 generated $500 worth of dividends that were reinvested only $2,000 would be subject to tax. Many people do not keep good records and end up paying unnecessary tax. Many mutual fund companies will provide you with records if you do not have them.  Each year when your broker “sells” stocks, a 1099-Div will be generated.  You will need to compare the cost basis of these stocks against their sale price less commission in order to truly know how much gain to include in your taxable income.
  5. Donations and out-of-pocket expenses for charities and not for profits: You can write off donations to and out-of-pocket costs you incur while doing good works for nonprofit organizations such as churches, food pantries and schools. Keep records of item or cash given,  purchased and costs incurred, such as miles driven. Many people give and don’t keep good records and loose good source of deductions:
  6. Child care credit: You may be eligible for the child care tax credit up to 35% of your qualifying expenses (depending upon your income) you paid someone to care for your child (under age 13) or dependents unable to care for themselves (because of physical or mental reasons) while you work or look for work. You may use up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. If you have a tax-favored reimbursement plan at work, you can pay up to $5,000 of work related child care expenses. If you max-out the $5,000 through work but spend more, you may be eligible for an additional $1,000.
  7. Estate tax on income in respect of a decedent. Did you inherit an IRA or other ‘income in respect of a decedent,’ or IRD? Secondly, was their estate large enough that it was subject to federal estate tax? If so, you may be eligible for a deduction for the amount of estate tax paid on the IRD assets.
  8. Self employment business expenses: If you had any expenses related to self employment, be sure to keep good records. See your accountant and read books like Sandy Botkin’s for more information.
  9. Miscellaneous deductions: See  http://www.irs.gov/publications/p17/ch28.html for a list of some that you might have missed.

8 General Tax & Accounting Tips

A very important part of personal financial planning is tax planning. As you prepare for tax season, here some general things to consider: 

  1. Be aware of the different types of taxes: Many people are not aware of the different types of tax systems that we have. The following are the most common systems that may affect you. Income: Federal, State and Local. Real estate tax. Tax on Investments: Dividends, interest, capital gain, and passive income on savings, stocks, bonds, mutual funds, investment real estate. Estate or Inheritance Tax: Federal and state tax due on the estate or the inheritor. Gift tax: tax on giver of large gifts. Entitlement Tax: Social Security and Medicare (FICA), Federal Unemployment (FUTA). Self Employment and Business taxation. Sales tax.
  2. Consider working with a Qualified Tax Professional. Tax planning can be complex for many people. This is due to the complexity of our many tax systems and your personal and business circumstances. I highly recommend working with a trusted professional tax advisor. Tax advisors not only prepare your taxes but can help make decisions that will affect your future. They can serve as advisors for a whole host of matters and they can represent you if you face the dreaded audit. Consider the following when selecting a tax professional: Local: Someone that you can easily meet with face to face. Personable: Someone that you can interact with and who cares about you.  Proactive: Some tax preparers simply look at your previous year’s return and plug your current numbers into last year’s format. This of course assumes that last year’s preparer knew what he/she was doing. Try to find a preparer who knows your situation. A proactive professional will ask questions that will help you anticipate changes in your tax situation to help you properly plan in advance. Reputable: Find a professional with a good reputation. Ask people you admire for a referral. Skilled: Look for an accountant that is very competent. A degree in accounting or law is very difficult to obtain. Designations such as CPA (certified public accountant), EA (enrolled agent) and LLM (master’s degree in tax law) are not prerequisites but may be helpful. Fees: Find out up front what they estimate their fees to be, what they charge to file electronically and whether they will represent you in an IRS audit. Avoid any ‘early refund’ ploys like the plague. Some well-known tax preparation companies ‘provide’ this service which charges a hefty fee (with a lot of small print) and a lot of advertised hype for you to get your refund ‘early’. It is basically a high-interest loan. Just waiting for your actual refund will save you a lot of money.
  3. Remember, tax preparation entails both art and science. The science involves the mathematical calculations that in most instances can be figured using calculators and software, and the infinite number of complex tax laws. The art of tax planning comes into play with interpretation of any special circumstances. There are some areas of tax law that leave the government’s intentions unclear. No law can completely anticipate each person’s situation. You could call a dozen different IRS agents with the same question and get as many different answers. A proactive planner will research any unusual circumstances you may have and help you plan a course of action.
  4. Doing Your Taxes Yourself? I firmly believe in getting professional tax assistance. However, I realize that many people prefer and insist to do their own taxes perhaps to save money. It has been my experience that often the professional tax preparer has saved us the amount of their fee in our taxes. The peace of mind that the taxes are done right has a value all its own. If you made less than $57,000 you can file your taxes electronically for free through the irs.gov website. If you choose to mail your return, go to your local post office and send it ‘Certified Return Receipt’ mail to insure that you have a record that the IRS received your paperwork. This will cost around $10 or less and will be worth every penny should the IRS contest the receipt of your return.
  5. Keep great records. If you are already very organized you may read this section just to feel great about your organization skills or skip to the next section.  If, however you have heard ‘get organized’ many times before and if you are the type of person who balks at the idea of organizing that mess of receipts just remember how you felt last year as tax time approached. You could become organized in only one evening of television viewing with the right tools.  Arm yourself with an accordion file with at least 16 sections.  Label them according to your situation or use the following sections:  Auto, Bank, Business, Credit Cards, Dental, Medical, General Receipts, Grocery, Income, Insurance, Mortgage, Utilities, School, and Taxes.  Now sort your receipts into these sections.  Use a new accordion file every year. Not only will this help you find needed information, it will also help you find a receipt in case you need to return an item you purchased. Your tax professional will be sending you a tax organizer the end of December or the first of January. In this organizer will be a list of information that you will need to gather. Becoming organized will help you easily gather the information you need to fill out your tax organizer.
  6. Start early. Do not procrastinate on your taxes. Tax professionals are unbelievably busy the closer April 15th is.  Firms who prepare business returns also have a crazy March 15 business deadline.  We are providing this information because we want you to get the most attention from your preparer during their craziest season.  As soon as you get your organizer, begin gathering the needed papers. If you are only missing one or two pieces of information return the organizer to your accountant with a note that says what is missing.  They will begin entering the information in their software.  Try to get a January or February meeting with your accountant.  These months are the best to meet because they will have more time to spend with you and they will be able to think proactively.  If you are looking for a professional, start looking now. Another reason to start early is allowing yourself time to look for records, ask financial institutions for copies of lost information, or calling investment companies for statements.
  7. Judicious Paycheck Tax Withholding. Many people like to overpay their taxes, so that they get a nice refund in time for vacations or other wants and needs –  Kind of like a forced savings. Overpaying taxes is like a giving the government an interest free loan of your money. Good financial management involves developing savings habits so that you set aside money in an interest bearing account from each paycheck for future needs, wants and emergencies. This helps you to avoid using credit cards for those things and not having to wait until refund time. Secondly it then allows you to manage how much you can afford or are able to put into 401(k) plans at work. This accomplishes two things, first you are managing your money better and you are saving for retirement. Saving for retirement in tax-deductible retirement plans like 401(k)s will also lower your taxes, enabling you to save more for retirement and everyday needs and wants. If you want to lower the taxes that are being withheld from your paycheck, file a new W-4 form with your employer to claim an additional withholding. Make adjustment for getting married, divorced, having children and for increasing contributions to tax-deductible retirement plans. Your accountant will help you estimate this.
  8. Tax planning is not the tail that wags the dog. Taxes consume a large if not the largest single percentage of your income, therefore good financial planning should strive to lessen them, by whatever means possible as allowed by law. However, tax planning is not the only core issue of good financial planning.  Tax planning works in concert with your overall goals and your individual situation.