Year-end Planning Tips - 9/10 - Review prior year tax returns

They say hindsight is always 20/20 vision.   Sometimes we use it to beat ourselves up on how wrong we read a situation and other times it is to pat ourselves on the back.  With your taxes, however, a timely review of prior years can prove beneficial, for both past, current and future years.  With a through review of our prior year tax returns overlooked tax credits, deductions or tax treatment of income can be highlighted. Amending your tax return may bring about a refund if you had made errors such as not reporting income, dependents, filing status or tax credits.  While you cannot amend a return for maths errors always keep in mind when you can there is a three year statute limitation from the original due date of the return,

Any omissions found in a prior tax return must be noted to see applicability for current and future years.   Depending on the complexity of your tax return it would be advisable to employ the services of an accountant specializing in individual income taxes for qualified competent assistance as this almost always serves you well.

Most of us procrastinate with the preparation and filing of our personal income tax returns.  We go through the year making mental notes as we come across things that can affect our taxable income and yet we seldom take the necessary action that will make these advantageous.  Precious few do any  do any tax planning before year-end.  The new year rolls in, we received our Form W2; 1099 or K1s and we stash them away as April 15th seems so far away.....

Not until we start hearing the final count down on the news channels and commercials for tax preparation software blaring through the airwaves a  few days prior to "Tax Day" do we pay attention and start hastily putting our records together.  This is no way to ensure that the tax return we file in any given year aids us in having tax-efficiency.  Any tax efficiency achieved translates into savings and in turn increases your accumulated wealth.  

Target Security breach - credit and debit cards

It is not as simple as cash vs plastic.  The security breach at Target has many shoppers worried and questioning these security breaches continue to happen and appear to be more grandeur size.  Instead people should be asking what can one do as an individual to minimize such vulnerabilities.  It is not enough to throw it all at the retailers – we, the consumers have made the choice to use plastic instead of cash.   Now I am not saying that the retailers are not obligated to provide an environment as close to secure as possible, where we can shop with minimal worries. For we have, for all intents and purposes, been courted, cultured and nurtured by the same retailers into using plastic.  The convenience of plastic has become sealed into our very being.  But the convenience cuts both ways and therein lies the conundrum.  

 Those of us who are “old school” have held onto using cash and are now patting themselves on the shoulder for not having opened themselves up to the anxiety 40 million shoppers are experiencing today.  Little about the perpetrators is known as yet.  We wait with baited breath as the Secret Service investigates.  For the shoppers themselves none of the above is really important outside from some significant punishment being metered on those who carried it out.

It is important for the 40 million people who are at the heart of this to put into practice simple checks and balances to either keep a close look on the activity of the related accounts.  Some will quickly jump to closing the account opening a new one effort to lessen the anxiety.  It is not every breach that we hear about and therefore our vulnerabilities are there every day.  

In some instances the organizations offer basic credit monitoring but according to the reports when date is stolen in the manner that it was in the Target case fake credit cards are made.  This is why it is essential to monitor your accounts.  

Good practice:

1.  Review your credit statements or bank statement for those using debit cards.

2.  Review your credit card account policy, specifically identity theft coverage

3.  Signing up for alerts is also an option offered by many financial institutions.

4.  If you do decide to close the account and replace it be sure to update all automatic transactions linked to the card being replaced

Is it possible to reinvent yourself - Avoid the pitfalls of the Long term Unemployed

At a holiday party over the weekend I sat next to an economist and the conversation ended up focused on the long-term unemployed.  Quickly one realizes that economist have a brutally different way of thinking.  The gentleman I sat next to said there is nothing that can be done for approximately 40% of the long-term unemployed.  For a staggering number of people like that to be allowed to just fall off and never to be counted again is somehow at minimum unacceptable for me.  Unfortunately, though he is right when you are looking at it from an employer's point of view.  When employers are seeking to hire they do not see through a lens that accommodates for the Great Recession.  But more from a bargaining view as this allows them latitude to negotiate wages better, as such big gaps in employment history are frowned upon.

With what appears to be the end of extended unemployment benefits questions on how this will affect the unemployed in an economic that appears to have found a rhythm without their participation.  For some the economy itself is still in great need of stimulation to create jobs for those who without the benefits will most likely end up on the fringe of a population that is gainfully employed.  Keeping the benefits going is for some its purely unsustainable.  It was a temporary measure used during extraordinary times that should be shut off now.  For others it is a moral issue.  How do you just dump that many people into "wilderness" without offering viable options.

While most of us agree that the job front has changed dramatically over the last two decades -  Gallup shows unemployment - 30-Day Rolling average  of 7.3% and 17.3% underemployed but we are also constantly hearing of 3 millions jobs that employers are finding difficulty in filling.  These 3 million jobs that remain unfilled represent a staggering skills gap where the majority of the unemployed are coming from manufacturing background and the available positions very technical.  There are many suggestions out there on reinventing oneself to meet the needs of the new job market but precious few are psychologically prepared to go through the necessary steps/training.

Failing to reinvent oneself leaves many with the undesirable option of accepting compensation that is way below what they were accustomed to prior to the Great Recession.  Few are able to come to terms with this decrease in earnings and adjusting their living standards accordingly.  Those that fail to make said adjustments then use their IRAs and 401(k) as bank accounts draining all their retirement assets. 

People general misrepresent "wants" and "needs".  At the beginning of our professional lives we generally do not earn a huge amount.  When we first start working we are grateful for income and we general budget and stretch things here and there.  As our income increases so too does our spending.  Living in a retail society are pressured by the constant bombardment of commercials; special offers and introductory prices that soon wants becomes needs.  

Who truly needs 50 pairs of shoes?  Or a brand new television, cell phone, tablet or game?  I often hear people speaking of upgrading - the shows you watch on your TV do not upgrade nor do the conversations you have on your cell phones.  As such that "upgrading" is all about keeping up with the Jones. But the question to ask here would be - do you know what the Jones' true earning power is?  As the economist so love to say - "All things being equal", or as the rest of us love to say but seldom apply appropriately, "comparing apples and oranges".  If your possessions must be on equal footing with those you wish to emulate in the retail world shouldn't first strive to earn as they do?

Year-end Planning Tips 8/10 - Estimated Taxes for 2013

Quarterly estimated tax payments are not only applicable to self-employed income earners.  Alimony and investment earnings, dividends etc, for any income that is not subject to withholding you are required to pay estimated income tax periodically, as you earn it.

Whether you use a tax professional or not, understanding the requirements is of paramount importance as compliance is essential in avoiding penalties and interest.  

Most people find it easier to calculate their current year estimated tax payments at the time their prior year tax return is prepared.  This allows you to use your prior year taxable income as a guide to what you will be paying for the current year.  It is also important to review your income at the end of the year to ensure that any increase income that might not have been calculated at the beginning of the year is taken into consideration when you make your fourth and final quarterly estimated tax payment.

Should you be in a refund position in the prior year applying the funds as a prepayment of current year taxes might be an option worth exploring.  This amount will reduce the safe harbor amount you are required to pay in estimated tax to be compliant for the current year.

Guidance on what is a current year safe harbor amount to pay use the smaller of the following amounts for those with a tax liability of $150,000 or less:

i)  90% of the tax of the current year liability 

ii) 100% of the prior year's liability.

If you tax liability in the prior year was over $150,000 then you are required to pay 110% of the prior year's liability or 100% of current year.

The IRS Form 1040-ES (Estimated Tax for Individuals) is useful in calculating how much you need to pay.  Due dates are as follows - keeping in mind of course that payments must be date stamped on or before the listed dates:

Earnings for period:

January 1           - March 31        - payment due April 15th

April 1              - May 31           - payment due June 15th

June 1               - August 31       - payment due September 15th

September 1     - December 31  - payment due January 15th 

While most of feel they want to delay parting with their money to Uncle Sam as much as is possible it is important to apply a little bit of risk management in this instance. If it just a delaying strategy then you should also think about whether the penalties that come with this delay are worth paying.  If you want to utilize the funds for something else then the gains you earn wherever you are using the funds in the meantime must also earn you enough to cover the penalties.

The IRS will assume you earned evenly throughout the year and therefore will expect quarterly payments. When sending in your payment use a payment voucher.  

Should your earnings be uneven during the year you can use Form 2210 - Underpayment of Estimated Tax by Individuals to annual your earnings thereby avoid penalties.

Tax Avoidance -vs- Tax Evasion

Just because a friend claims to file a particular form and have a particular deduction on their individual income tax return it does not necessarily follow that you too will receive the very same benefit.  No matter how simplified people tell you tax returns are the U. S. Internal Revenue Code is complex. The best way to work around the various forms that feed into Form 1040 on your own is by using tax preparation software that walks you through the process by asking you relevant questions.  TurboTax is one of many that are available.

What others have done in the past is not a justifiable defense should you be audited by the Internal Revenue Service.  That is not to say when someone brings something to your attention that you do not do the necessary research to see how it may affect your personal taxable income.  All things being equal know and understand the difference between tax avoidance (which is working within laws to reduce your taxable income) and tax evasion (which is the deliberate concealment and/or misrepresentation of relevant information in an effort to reduce your taxable income and this is illegal).

Tax planning is all about employing strategies that will reduce your taxable income within the parameters of the law.  In special circumstances where you have done the necessary research within your tax strategies if come across a tax law that is unclear you can apply for a Private Letter Ruling but these are only for a particular tax issue and only for that tax payer that applies for the ruling.  Most situations are covered fully within the Internal Revenue Code.  If you do not utilize the services of a tax professional then make use of the Internal Revenue Service website (IRS website) or alternatively telephone Toll-Free, 1-800-829-1040 for assistance in clarifying any issues you may have. 

For those of you doubting just how serious the ramifications of tax evasion can be take a look at the list below and I am sure all them felt at some point that they would never get caught.  Or maybe they did a simple arithmetic and said "what are the chances?"

1.  Wesley Snipes - Actor
2.  Ty Warner - Creator of Beanie Babies
3.  Lauryn Hill - five-time Grammy winning singer

Year-end Planning Tips 7/10 - Open Enrollment - 401(k) Deferrals

While all the talk right now is about Open Enrollment for Health insurance, healthcare flexible spending and Medicare we cannot forget about our 401(K) deferrals.   Most of us feel overwhelmed by the prospect of retiring.   Most have not done a proper “needs analysis” and therefore the amount needed for retirement is just an unqualified guess.  For those at the beginning of their careers it might seem impossible to think about what your needs might be at the end of your career but it is this generation that is blessed with the gift of time and can take full advantage of the growth opportunities.

If you are 50 years of age and above there are provisions for you to make up for lost time by making an additional catch-up contribution of $5,500 over and above the $17,500 deferral amount.  Traditional IRAs and Roth IRA also have a catch-up of $1,000 and this above the $5,500 annual contribution amount.  One should not be intimidated into contributing the full amount.  You should only contribute what you can afford but neither should you stinge your future needs either. Before you have children there is greater flexibility to put away more but one will need to review one’s situation once the family starts growing. 

Whether you are investing in your 401(k) or IRA, diversification as in every part of your income earnings or preservation of wealth is important to your portfolio.  The Department of Labor -Employee Benefits Security Administration has a guide that is useful for those not in a position to afford the services of Financial Planner.  Either way this is all too important to leave to chance and the links below should provide some guidance. 

Most employer sponsored plans to provide the services of an investment professional that can give you general guidance on your investment choices but this is usually geared to only retirement assets in that particular plan and will not include the other aspects of your life.

Savings Fitness: A GUIDE TO YOUR MONEY AND FINANCIAL FUTURE

Taking the Mystery Out of Retirement Planning

Year-end Planning 6/10 - Keeping Track of Tax Deductible Expenditures - Cyber Monday Purchases

Most of us worked off the turkey dinner by venturing out to the malls Thanksgiving night. Shopping continues today with Cyber Monday.  All in all a substantial amount of shopping will continue over the next day or two as we take advantage of all deals on offer.  Some of the deals available now a more attractive than those on offer during the "Back-to-School" campaigns.

Do not miss out on the opportunity to make the most of the deals by buying items that will have an added benefit of being tax deductible.  While you are searching the web for attractive offers try and keep in minds the needs of your college going children as well as your ends to your business.  Be sure to keep track of your purchases using many of the apps that are available.

While keeping track of what you are buying is important for budgeting purposes some of the items being purchase will qualify for tax deductions too.

Even though the deduction is a good incentive proceed with caution reviewing all return policies carefully as most will come with a shorter period within which you can return items.


Expense Tracker - Android

Income and Expense Tracking - iphone

Year-end Planning Tips 5/10 - Small Business owners and Sole Proprietors

Whether you choose to go it alone or you hand over your records to an accountant for tax preparation, how you keep your records is of paramount importance for various reasons.  On the forefront of these reasons is the ability to see how profitable your business venture is and without accurate records you are unlikely to know the true extent of your expenses.  But profitability aside we all strive to shelter as much of our income from taxes as possible.

Most tax shelters are useful if your timing is right but in order for the timing to be right you need all relevant information available to you so that your decision is an informed one.  Take for an example making contributions to a retirement plan, now there are various options open for small business owners from Defined Benefit Plans to Simple IRA, to name but a few.  Both the tax reporting requirement and allowable contribution will differ from plan to plan.  Knowing what your projected income is for the next two to five years can sway maximizing your contribution amount in Defined Benefit Plan, for the older business owners, to opting for a more restrictive Defined Contribution Plan.  On the other hand younger people just beginning might find that a SEP IRA’s minimal costs for maintaining a plan a more attractive.

Choosing a platform for record keeping will always depend on your needs as well as what is easier for you to use. Speaking to your accountant about which software to use will probably go a long way toward reducing your tax preparation costs.  Take for an example QuickBooks, which is an Intuit product, has some reasonable monthly packages for online services.  For those that prepare their own taxes using Turbo Tax the two programs work seamlessly.

Year-end Planning Tips 4/10 - Changes to Itemized Deductions for 2013

For those that itemize their deductions on the individual income tax returns it is important to pay special attention to some of the changes that came into play in 2013.

1.       High-income earners will need to keep in mind the phase-out provision of the American Taxpayer Relief Act of 2012.  The phase-out kick in once your AGI's (adjusted gross income) reaches $250,000 for single filers and $300,000 for married filing jointly.  The phase-out of itemized deductions will also raise tax bills for high-income earners by reducing the tax benefit of the certain itemized deductions. These deductions include: mortgage interest; property, income and sales taxes; contributions; and miscellaneous deductions

2.       Medical deduction – beginning January 1^st 2013 unreimbursed medical expenses threshold has been increase to 10% of AGI (adjusted gross income).  For tax payers over 65 years of age or with a spouse who is over 65 the threshold remains at 7.5% until December 31, 2016.

3.       To claim a charitable deduction for cash donation above $250 you are required to have written acknowledgement and/or cancelled check.  In short keep good records!

4.       For 2013 those tax payers that are over 70½ and do not itemize you can still take advantage of charitable donations by making RMD (required minimum distribution) directly to a charitable organization.  This will not be considered a charitable deduction on your tax return but the distribution will be tax-free.

Again year-end tax planning is an essential tool if one is to reduce their tax bill.

Budgeting for Thanksgiving Dinner

Most of us will be heading out over the next few days to fill our grocery carts with Thanksgiving Dinner ingredients.  Whether your goal is to maintain traditions or you are creating new ones, either way sticking to a budget is important.

First plan your meal and before leaving home make a list of the ingredients you will need to buy.  While you can do one-stop-shopping but this is hardly the best way to take advantage of all the lower prices on offer.  Most groceries stores will be running ads that will serve as a good guideline of where to get the best prices. If you have given yourself a target amount then go a step further and divide this amount by the different stores you will need to go to.

Some stores have club membership that offer discounted pricing while others will offer free turkeys with purchases of a certain amount.  Either way for a effective budget comparison shopping is essential and it need not be tedious so make the most of family assistance and remember to be thankful.

Thanksgiving shopping - making the most of the deals!

As we draw closer to Black Friday, correction - do we now call it "Black Week"?  We are already overwhelmed with unending ads as retailers go all out to draw us into their stores. While most of us use this time to buy gifts for family and friends for the upcoming holiday season.  Whether you are looking for gift ideas for the 12 Days of Christmas; or your gifts for 8 Nights of Hanukkah, (which this year starts the night before Thanksgiving) creating a budget will definitely serve you well.  

For those of us using these “door busters” for personal shopping it is important to make a list as things can easily get out of hand.  While credit cards are convenient to have they are not designed to aide you in controlling your spending.  Prepaid cards on the other hand allow you to put on them the exact amount of money you intend on spending. 

Making a list beforehand would be the best way to go.  You can itemize how much you want to spend on each family member  as this is will help you track what your true savings are at the end of your shopping spree.  Using that list you can surf the net and see with retailers are offering the best deals.   Most of us enjoy a good challenge so coming in under your budget should be most rewarding.

In today's world of ultimate convenience do not get caught paying more than you should for a product. Below are links to some apps that you can utilize to comparison shopping before heading out.  And for those of that want to do online shopping these are a perfect tool.  Please note the list is totally random - definitely not rated nor am I endorsing them.  If anyone has other suggestions please share.  Would definitely love to hear from you on what you use.

1.   The Find

2.  RedLaser

3.  Shop Savvy

4.  Amazon

Year-end Planning Tips 3/10 - Medicare Surtax & Net Investment Income Tax

With all the uproar on the Affordable Care Act - the individual mandate and employer's requirement to provide health insurance for their employees have been on the forefront of the battlefield.  Surprisingly the Medicare Surtax and Net Investment Income Tax came into play without what would have been the expected pomp and circumstance.  Could it be that until people actually sit down and work through what these two taxes mean to their final tax bill for the 2013 tax year, will the reality of it all sink in.

Without too many financial changes most of us go on the assumption that our tax bill will be the same as last year but unfortunately this year there are two new taxes that require thorough tax planning before the close of year.  Some might say planning should really have started during the year as people made changes to their portfolios.

Net Investment Income Tax - 3.8% - using a Form 8960 (still in draft form) - will be used to report the income on the US Individual Income Tax Return beginning with the filing of the 2013 tax return.  Individuals with income threshold of $250,000 and up for those married filing jointly and $125,000 for single filers will be required to pay this tax on their investment income.  Investment income includes the following listed items but by no means limited to this list interest:

• Gains from the sale of stocks, bonds, and mutual funds.
• Capital gain distributions from mutual funds.
• Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
• Passive income - income from partnerships and S Corporations

All in all these are big changes that will have a sizable impact on one's tax bill and unfortunately are not only limited to individual income but also Estates and Trusts will be subject to the Net Investment Income Tax, if they have undistributed Net Investment Income.  The threshold for Estates and Trusts is $11,650.

Medicare Surtax - 0.9% - Since employers should have built into the withholding for all $200,000 threshold employees an additional 0.9% medicare withholding the people most impacted by this will be individuals have more than one job (two or three jobs accumulative income above the threshold).  These individual will not have made the necessary withholding adjustments.  Another group of tax payers that might be caught short here will be joint filers as your employers are not necessary going to make adjustments for income that is not earned through them.

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$200,000

Year-end Planning Tips 2/10 - Health Insurance

With the year coming to an end it is time to do the dreaded year-end planning.  Depending on one’s source of income the planning will vary.

With the buzz lately being centered on the "flawed" launch of the "Health.gov" website it goes without saying planning this year is an across the board necessity.  Regardless of which side of the political aisle you place yourself health insurance is not a political tool.  It is as with other forms of insurance a risk management tool.  One generally does not wait to buy flood insurance as your basement is flooding.  Instead of personally taking on the risk to having to use your hard earned savings to pay for emergency hospital care would it not be better to pass the risk on.

For those entering the health insurance industry for the first time estimating income for the coming year along with a thorough review of the types of policies available is necessary.  It may all seem daunting but since it is an investment into your own future health care coverage it to tg a sie when he look at siais worth the effort.  If your state does not have alternatives maybe try and go directly to the different health insurance providers.

For those retaining their employer sponsored health insurance a thorough look at your coverage is still necessary as there may be some slight changes that can have financial ramifications.  If you do not understand anything - even if it is just one sentence it is better to ask for clarification.  Asking your neighbor or someone at your local gym does not qualify as getting proper clarification.    Your employer should have a contact person at the insurance company for you to speak to.  Make the time so that your decisions are informed decisions.

Most of us use FSA (Flexible Spending Arrangement).  Since this is subject to the "use-it-or-lose-it” a thorough review of what your particular policy allows is needed. You would not want to differ $2,500 for 2014 only to have allowable expenses amounting to $990.  That would mean that you are losing $490 since the IRS only allows a rollover of only $500 for the following year's allowable expenses.  No amount of money is too little for you to save – you earned it.

Every penny adds up towards your wealth building goal!

Year-end Planning Tips 1/10 – RMD (Required Minimum Distribution)

At age 70 ½ the Internal Revenue Service requires that you begin taking Required Minimum distributions out of your Traditional Individual Retirement Account – IRA.  In most cases either the brokerage house or mutual fund company where your account is held will send you a reminder to you between three and two months prior to year-end.  Generally they will have calculated the amount you must take for the current year.  Failure to take said distribution comes with a penalty of 50% of the amount you should have taken. If your RMD was $4500 for the year and you did not take it then your penalty would be $2,250.   This amount will of course increase your federal taxable income and as such it would be advisable to with taxes withheld that the time of distribution.

Non-spousal inherited IRAs are they tricky ones.  I have yet to come across a financial institution holding the assets of a non-spousal IRA (IRA BDA) that will remind you or calculate the amount for that matter.  The IRS does require that you take withdrawals but the calculation is a little different from how you would calculate your own or a spousal IRA.  In the case of spousal inherited IRA you are permitted to treat that as your own and as such you would not the calculator below.

Beneficiary required minimum distribution Calculator 

It is important to note after attaining age 70 ½ you can no longer make contributions to your traditional IRA.  Roth IRAs, while similar in allowing withdrawals at age 59 ½ without penalty like the regular IRAs but that is where the similarities end.  Roth IRAs allow contributions after age 70 ½ and do not impose required minimum distributions either after attaining age 70 ½.

For employer sponsored plans the Third Party administrator will usually take the responsibility of keeping you in compliance and informing you according as and when distributions are required.  If you are still actively employed you are not required to take RMDs but there is an exception for the owner of the business who has attained 70 ½.  Even though they are required to take RMD on an annual basis they are also permitted to make contributions should they wish to.

Preparing for a disaster - are you?

Along with many of us, I too have been watching with utter shock at the extent of devastation caused by Typhoon Haiyan.  This has become a regular occurrence worldwide - causes ranging from earthquakes, hurricanes to torrential rains.  But this is where the differences end.  The devastation to our way of life is repeated over and over again regardless of where in the world the disaster has occurred. 

All of this begs the question as much as we see this over and over again how prepared are we?  Do we do our part?  We are all too well aware of the limitations of our various governments or the non-for-profit organizations that seem to step in time after time.  Do we realistically think they can save all of us within hours? Or do we have a duty as citizens to do our part to prepare.  

I must confess over the years FEMA puts these ads on radio, TV and newspapers etc about preparing for a disaster but it was not until this morning that I decided to actually take a look at the information offered.  Driven more by the photographs of the people at the airport in Tacloban, Philippines – mind you I am not faulting them.  But I merely understand their desperation enough to question my own expectations.

’Do they want me to die in this airport?’ Chaos in Tacloban as 3,000 try to board two planes

We need to make a concerted effort to be more appreciative of first responders.  But more importantly make their jobs easier by being more personally prepared.  Doing our part.  When disaster strikes “time to gather things and prepare” is a luxury that will not be available to you and besides you will be so panicked that you will not think straight anyway.  Conventional wisdom says practice makes perfect – run drills with your family.  Have a plan!  Know where and how to communicate in case you are separated.  Have cash and batteries to sustain until things come back to normal.

Below is a link to the FEMA website – please make the time read through their guidelines.

http://www.ready.gov/individuals-access-functional-needs

Choosing the perfect partner for you

From a very young age most of us have an idea of the type of person we want to marry.  But for some of us that choice is not ours to make.  On the surface I truly believe there is no right way or wrong way.  Those of us who have arranged marriages are culturally conditioned to accept this as the normal way of life.  With globalization this number is sadly diminishing.  The rest of us are left to our own devices on making one of the biggest decisions of our lives.  We generally go it alone without ever reading the manual.  Not that said manual ever went into print or is on a website somewhere easily accessible.  No such luck!  And people wonder why divorces are on the increase.

Most of us select our life partner for pure love - "how do I feel when I am with them".  I would venture further and ask when say you love someone how well do you really know them?  Yes I know there is "unconditional love" but personally I feel that should only between parents and children. If intending on spending the rest of your life with someone is it not necessary to really know them? Generally we only know of people what they want us to see.  The wealthy tend use prenuptial agreements and this tends to afford certain protections but life being what it is some find ways around said protections depending on how well written they are of course.

Marriage is about bringing two lives together - it goes beyond just the good laughs and happy memories.  Do you know your future spouse's spending saving and spending habits?  Do these habits compliment yours? Some at least ask how many children they want to have before tying the knot but how many ask about credit score?  Do you ask how much debt your future partner is bringing to the table?  Most of us have some sort of debt - student loans etc but it matters how well the debt is serviced because all that they are will become part of who you are too. How well they handle their debt will affect what mortgage interest rates you qualify for.  You can end up paying more – the consequences are tangible.

There are, of course, ways to protect yourself should you find you have married someone who is not quite as responsible as you are.  Take for an example with paying taxes.  Some couples live very independent financial lives having separate bank accounts etc but when it comes to filing taxes it is not easy to go your separate ways.  It is not enough to say "my husband takes cares of all of that" - if you are signing documentation that certifies everything you have disclosed herein is "true and correct" then its the responsible thing to understand whether ALL the income is declared or if the expenses/deductions have all the necessary back up.

Taking a look at what is available to you is always an option - a good example is Injured-or-Innocent-Spouse-Tax-Relief.- but that only covers the actual refund.  Since by filing a joint return you are "joint and several liability" you want to look into protections that go beyond just the one return and Request for Innocent Spouse Relief.

Now I am not saying that you should only marry someone with a great FICO score - no not at all.  All I am saying is go into it with your eyes open.  Make an informed decision about both the love and financial stability of your future.  If one of you has bad financial habits at least you know you have your work cut out for you instead of finding out 3 - 10 years into marriage.

Plan your future as much as you can – do not let it just happen to you!.

Pay day loans... Know your station in life

Pay Day loans and title loans are harmful instruments that the poor more often than not reach out to as a quick solution to their financial woes.  These types of loans are like a savage cancer - a metastatic tumor that just eats into your earnings (present and future - and way into the future).

Procrastination is the biggest enemy because it sets us up for failure.   One is fully aware of when payments are due but seldom do people pay on time or simply acknowledge that they do not have the necessary amount to make the payment.  Thinking ahead affords one the opportunity to reassess one's spending and in turn avails alternatives payments around - staggered or delays offered by the creditor.  People often make the wrong choices of what really needs to get paid, like that young mother in New York who spent $2,500 at Barneys on a purse.  A purse she had no business buying and using her tax refund (bulk of it being earned income credit of course) only goes further to confirm bad or misguided choices.  A few weeks down the road purse put to the side and she will be looking for money to feed the children.  Yet government programs had put in your pocket money as assistance purely because of the income bracket as a single mom.  

A few years ago Prince Charles enraged people by his comments: "What is wrong with people nowadays? Why do they all seem to think they are qualified to do things far above their capabilities?"  Yes MAYBE he should not have voiced out or in his case written such a statement.  But this is not to say that the context of his statement was wrong - there is plenty of truth in that statement - people need to know their station in life - live within your means!

Through sheer desperation people search for quick fixes to their problems without a second thought to the ramifications. It is important to understand what the $100 you are borrowing is going to cost you.  Interest rates for payday loans range from 300% - 750% - the question would then be - 'Is the item that I am borrowing the money for going to give me a return that surpasses the 750%  it has cost me to borrow?' 

In money issues one needs to learn how to make their money work for them and not the other way round especially if you are spiraling into an unending debit cycle.

90 Days Same as Cash

Just how many of us understand the term and all it encompasses and how many take it at face value – “but they say its……”   As holiday season approaches it might a good time for us to review how we choose to pay for those precious holiday gifts that end up under the tree.

The majority of us are efficient readers and we comprehend quite well but usually that only applies to the things that interest us.  Pages and pages of disclosures do not qualify as interesting reading.  Therein the problem lies.

The cashier (or Sales Transaction Associate – as some “big box stores” call them) - is neither your friend nor family member looking out for your best interests.  They have targets to meet and you are prey for the hunters. Simple!  They will smile ever so sweetly – treat you like you are the only customer in the world and it’s just that feeling that your ego has been craving for.  You and only you know what you can afford to buy and what you need to take a pass on.  Sometimes the thought of taking the item home with you that day becomes all too irresistible - you want to please your family so any cautionary note that someone might give you at the point only falls on deaf ears.

While “Same as cash” may seem appealing option to you, taking it means going forward on a lot of assumptions.  On the date of purchase you do not have available to you the required amount, so they give you terms so that they do not lose the sale.  An account is opened for you to make regular payments.  The understanding here is that you will make full payments within the given time – 90 days.  Some may give you six to twelve months – depending on the size of your purchase of course.

You will then receive a statement in the mail stating what the minimum payment required by the next billing cycle is.  And this is where most of us starting going downhill on this supposedly attractive offer.  If you add up the minimum payment over the time you need to pay you will definitely not have paid it off in 90 days.  The ugly side of the transaction is that if you do not pay off the ENTIRE amount due within the 90 days your interest is backdated to the date of purchase and added to the balance due.

Retirement at age 30?

I do not ordinarily listen to the radio on Sundays but yesterday I was stuck in my car waiting on friend. Flipping through my radio channels I came across a talk show on money issues.  Being interviewed at the time was a young woman who had recently lost her job and is currently exploring not looking at not going back onto the job market and retiring.  She feels she has enough in retirement assets and savings to make that choice.  Many questions started running through my mind and I decided to continue listening.

Now I have no idea what she did for a living or how much she was earning either.  Her savings and retirement assets were said to be in the six figures.  I waited and waited for some indication of whether this young woman had taken a close look at her expenses vs her "accumulated wealth". I waited also to find out if she had calculated the possibility of outliving her accumulated wealth.  No answers came.  So I thought maybe she is a trust fund kid so none of my questions come into play.

For those of us that are not trust fund kids to retire at 30 you need to make some serious adjustments to the target generally made by people who retire at normal age 65-70 years old.  The latter needs to accumulate wealth to last 30 - 35 years but with a retirement age of 30 your life in double ordinary retirement numbers. General questions that come up would include things like your current living expenses and what items would not be there once you stopped working.  And on the reverse what expenses are present in retirement that are not necessary there while you are gainfully employed.

Another question I would have loved to ask this young woman is - at age 30 and having had an extremely well paying job you could not have had time to build a family?  Do your retirement assets also include children?

I do believe people tend to causally speak about retirement but seldom do they do the necessary preparation for it because its not only the money but also the quality of life for you and your family.  Not to forget today's hot topic - health insurance.  At age 30 she does not qualify for Medicare as such that is an added expense that will probably drain her accumulated wealth.  I am thinking her employer has offered that to date and as such it has not been an issue she has had to deal with.

Yes most of would like to retire early and do the things we love - travel is a common one but that too cost money.  Even the option of the entertainment locally that too costs money. As the program drew to a close I was convinced that if this young woman does go ahead and retire and she is not a trust fund kid then she maybe moving to some remote country where the standard of living is so low that with her six figures she will be one of the wealthiest residents.

Social Security Benefits.....

Social security benefits will rise up by a mere 1.5% in 2014 and in real dollars this translates to only $19 monthly.  Of all the expenses that seniors shoulder on a fixed income that $19 hardly begins to cover the disparity between needs and available funds. 

For those still in the planning and building stage of their retirement nest egg Congress’ recent inability to find common ground so that they can find resolutions to a growing list of issues is disheartening at best.  The assumed 70% of current benefits will certainly fall short of one’s needs.  To ensure there is enough funds to cover everyone receiving benefits suggested solutions range from a change in the retirement age to an increase in payroll contribution amounts.   At this stage there are plenty of suggestions being debated with no plausible chance of Congress implementing any of the suggestions any time soon.

While your social security benefits on their own are not enough to live on there are ways to increase actual amounts of your benefits by delaying the age at which you start receiving benefits.  Most people want to continue working as long as possible, especially those limited wealth. 

Options are to start claiming at age 62 but the penalty is a reduction of monthly benefits by about 25% less of what you would have received at your regular retirement age of 66 – 67 (age is determined by your year of birth).  Delaying until age 70 does, however, come with bonus of an additional amount which can be up to 8% being added to your benefits. 

There are no benefits to delaying Medicare – so at 65 remember to sign up.

For many years people spoke of the “three legged stool” as an ideal method of saving for retirement.  With current economic conditions we need to take a different approach.  Participation in your employer retirement sponsored plan is a must if offered even though very few employers offer pension any more.  Defined contribution plans are more popular now but these have a significantly lower benefit.  That along with an increase of your regular savings is also necessary.  You can also use your home – either by downsizing or selling it to avail more money for retirement.  Others opt for reverse mortgage as a way to raise fund during retirement.

Social Security Calculator

“Mental Accounting”

I am currently taking a course on “Behavioral Economics” and one of the topics we covered last week really left its mark on me.  I know the older generation (Generation X and prior) are a little more familiar with “Mental Accounting” than Generation Y and/or the Millennials.  

  

The topic left me wondering how everyone else out there is coping in today’s world insofar as making payments is concerned.  I would hazard a guess and say the Millennials are paperless and the Baby boomers still need the ritual of sitting down and writing out checks by hand and balancing their checkbooks while at it.  Generation X, however, we are all over the place for some of us have gone paperless and others are holding on to paper as if their very life depends on it.  They often say “if it worked for my parents it will surely continue to work for me”.  What is the driving force behind your choices – are you simply “old school” and refuse to change just on principle?

Do you belong to the school of thought that divides all your money into “jars”?  Each jar has a specific use and once the jar was empty so too is your ability to make any purchases for that assigned need.  This group does the mental accounting and will be more risk averse by default.

If we do not physically have to part with our money, by not counting what we need to pay out we tend to spend more easily – with less caution.  Counting money out makes one mentally aware of what you are parting with – swiping your credit/debit card does not have the same effect.  If the money in your purse or wallet runs out then you simply stop buying but very few people either keep tabs on the credit limit or acknowledge that they are actually borrowing money with each transaction.

Debit cards on the other hand offer you the ease of swipe without the borrowing but there is a price for the convenience.  Does anyone keep track of these costs?   In the end it all does adds up!

What camp are you in and why? 

Why do I need insurance?

Most us of find it painful to pay insurance premium because what you are purchasing is not tangible.  With the house or car we are constantly seeing and using the item so it makes it easy to relate to the making payments.

Insurance is all about risk management – transferring risk to a company that charges a fee for taking on the risk on your behalf.  It is about protection rather than accumulation.  There are many types of insurances and each is used to protect you or your property different ways.  Some are mandatory and while others it is left to the individual to seek and acquire the protection by transferring to company.  As such it is important to review your own vulnerabilities to see what you need to protect.  If however it is a matter of limited cash available to pay the necessary premiums then one needs to look having just the important coverage.

1.  Health insurance is the most important.  This is a hard one for people who visualize themselves as being healthy but unfortunately it is not all about being healthy today.  It is about not knowing what tomorrow holds and ensuring your ability to pay for your medical bills should something unexpected happen.  It is about not being faced with a huge hospital bill that can cause financial ruin.  Currently there is a lot of talk about the Affordable Health/Obama Care.  Since there is a lot of information concerning this I will trying discuss this in a separate post. Nothing political but only the maneuvering around the options of the exchanges and comparison with what your employers might be offering or not offering.

2.  Home owner’s insurance is mandatory for those that have a mortgage. And the requirement is pushed by the lenders.  Since this protects your most prized possession it is important even after you have paid off your mortgage to ensure you keep your asset protected (yes it is possible and many people do actually get to pay off their mortgages - you just have to commit and strategize accordingly to achieve this.  I covered buying what you need vs. what you want in an earlier blog and plays well into buying the house you can afford).

For those that rent it is also important to protect your property and sometimes these items can be quite costly to replace.  As such renter's insurance will go a long way towards the peace of mind that you can recover in case of thief or unforeseen disaster.

3.  Automobile Insurance is mandatory and usually at a basic level depending in our state requirements.  It always blows my mind how many people out there still go without auto insurance and the risks they consciously put on their financial well-being.  Most of us buy a car more out of necessity than pleasure.  We use it for transportation to and from work.  If you are involved in an accident and your car needs work to get it back on the road, you need to know that expense is catered for.  As well as you getting a rental while yours is in the shop.  Some types of auto insurance cover medical bills related to accidents as well legal costs should any arise.

4.  Life insurance has many uses.  For those that are married and have young children life insurance can be used to provide financial protection for your family should you die prematurely.  It can also meet funeral costs and cover some medical bills should there be need.  Term life is ideal for the early stages of family life and it is of course cheaper than permanent life insurance.  Permanent life insurance needs and uses can be spread throughout the cycles of life from income for your family to estate planning.  A thorough review of your needs and affordable premiums is of course extremely important.

The Ramifications of Voters' Short-Attention-Span

Latest polls have cockroaches more popular than Congress. My only problem with this is that the same people who voted them in are the same ones preferring cockroaches.

People are complaining of working without pay or not working at all.  

Isn't there a greater good in what Congress is trying to achieve?  Or do some feel that Congress has lost the plot altogether?

Or are we as individuals not willing to make necessary sacrifices?

Doesn't a good economy go on hand in hand with that higher standard of living we are all seeking?

What are your thoughts?  

So do we blame Congress or the short attention span of the voters? In a few weeks the polls will reflect them thinking something else is worse than cockroaches.

If in the end how we vote has such as such unfavorable ramifications on our daily lives and; our ability to feed and shelter our families why then do we approach elections as though its just another day and we do not invest more in elections.

Paying taxes - do's and don'ts on withholding

With the year coming to a close it is time to start reviewing one's finances.  Most middle income people will quickly say "that is something the wealthy people do, it is not for me".  Quite the contrary financial planning is necessary at all levels of income/wealth.  Whether you are looking at it from a wealth preservation point of view or from a wealth building point of view, planning is a necessity. 

If you are an employee and only have your Form W2 to report at tax time then the review of your Form W4 on record with your employer is necessary.  For those having more than one job it goes without saying it needs to be an across-the-board review.  Form W4 - Employee's Withholding Allowance Certificate is used to instruct our employers on how to handle our tax withholding on wages earned.

We all do not like paying taxes, as they say there is no avoiding death and taxes.  Some say "I do not want to pay Uncle Sam until I really have to", and then proceed to pay as little as possible during the year.  Needless to say most of these people end up paying interest and penalties for late payment of taxes due.  Ensuring how you that use your money efficiently toward fulfilling your financial goals is of paramount importance.  Paying avoidable interest and penalties is inefficient use of your hard earned money.

Below is a link to a calculator found Internal Revenue Service (IRS) website.  This will help you figure out how many exemptions you can claim.  If you are single then zero exemptions would be more advisable.  Just because the form does not limit your exemptions it does not mean you should pick as many as possible.  Whatever exemptions you select on W4 you need to remember you will need to match these same exemptions on your Individual Income Tax return at the time of filing.

http://www.irs.gov/Individuals/IRS-Withholding-Calculator

Form W4

Reviewing your expenses

Deciding what is a necessity on your list of expenses and what is  luxury requires one to be very honest with oneself.  There are the "needs" and then there are mere "wants".  Our needs are very basic: shelter, food and clothing.

Shelter

The size of the shelter can quickly move from being a "need" to being a "want".  How much house do you really need?  What will suffice to meet your basic shelter needs? Before the "Great Recession" many people bought more house than they could afford.  Some were able to refinance; others were able to take advantage of government programs to avoid foreclosure; and others could not avoid losing the homes.  It is always advisable to review mortgage or rent at every life changing event. For those renting always remember your rent should never be more 25% of your gross income.  Buying a home is a huge step - while beneficial it must be done after careful consideration and preparation.  The rate you qualify for your mortgage is equally as important as knowing if your home will meet you and your family's needs over a long period of time. 

http://www.bankrate.com/apps/mortgage-app/

Clothing

Same concept applies to clothing - yes you do not need to compete with Carrie Bradshaw of "Sex and the City" for Manolos.  Or for those of us who are little older - completing with Imelda Marcos.  There are ways to dress well without breaking the bank. One can definitely do with less clothing than what the average person has in their wardrobe. You do not need to take advantage of every sale or offer of a discount that is out there.  Do not go "window shopping" or if you do it as a past-time then do not have purse/wallet with you. Try and limited you spending on clothes to 4-8% of your income.  Again planning is important to curb excessive spending.

Food

Aim to spend between 15 - 25% on groceries.  Having a grocery list before you leave home will help to buy only what you need.  Try planning your meals ahead of time so that your grocery list contains things that you really need.  Another thing that I always find works for me is to shop for food on a full stomach.  

Since meat is expensive increasing fruits and vegetables is helpful in reducing the amount of money you spend on food monthly.  Using vacuum packaging before freezing or refrigeration will go a long way toward reducing spoilage thereby saving you money in the long run.  

Many of us like to eat out but most do not have a budget for this.  If you use your credit cards to pay, then try looking back three months to see how much you are spending.  Alternatively you can begin now and for the next two months monitor your spending on what you spend when you eat out.  

Budgeting - 101

To live within your means it is important that you create a realistic budget. A serious look at what your earnings are, as well as a review of your expenses.  You will need to initially categorize expenses into groups.

The expense group can be broken down into:

i) essentials (mortgage/rent, utilities, food, transportation/car note)

ii) non-essentials (entertainment)

Once you have done this it will be easier to see how flexible you can be.  It will allow  you to view more clearly which items you have the flexibility reduce.  The benefits of this reduction you can then use fund an emergency fund; increase your savings or make plans for a new financial goal.  

Sometimes it is not possible to cut expenses and in such cases a look at increase the income might be necessary.  Make sure you do not put yourself in a situation where your life becomes miserable.

It is always beneficial to have an idea of what your debt-to-income ratio is as it affects your credit score.

A debt ration of 36% of your monthly income is ideal.  You should consider a debt-to-income ration of 40% as being too high.

It is of utmost importance that you commit to debit repayments that you can comfortably pay without stressing you out.  Only count income that you are actually receiving on a regular basis - if you are still interviewing for a job that income should not be included.

Below is a link to a calculator found on Bankrate.com

http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

Edited 10/13/2013

How do you view your retirement assets and rainy day fund?

Many of us live for the moment - putting nothing away for retirement and worse still not having an emergency fund to help you weather the storm during those not so good days of the cycle of life.  

As a result of the "Great Recession" instead of adjusting one's standard of living to meet current level of income many of the "underemployed" and "unemployed" have been draining their 401(k) s and IRAs - all in an effort to maintain lifestyles at levels that are not sustainable.  Generally people find it difficult to face their predicament but denial is not a workable alternative either. 

For the "underemployed" it is understandable to either reduce the amount being deferred (put away) for retirement or alternatively you can freeze the contributions for a short while. The best way to avoid dipping into your retirement assets is to ensure you have an emergency fund to cover your expenses while you are not gainfully employed.

Ideally one needs between three and six months of living expenses set aside to fully fund your “emergency fund”.  That is not to say once you reach three or six months you stop - no it would be more conservative in today's world to work around six to nine months. Many have experienced longer and longer gaps between jobs and sometimes you might realize that you need to re-invent yourself to meet the requirements of the current job market.

Edited 10/11/2013