When you are making an investment decision, it is important to remember these five factors and the how they effect your decision-making process. These variables include:
1. Time Horizon
2. Risk Capacity
3. Expected Return
4. Asset Class Preference
5. Tax Status
Below is a blog entry I wrote on May 6th, 2010. If you do not remember, this was the day of the infamous “flash crash.” As I was thinking about what to send out this evening in preparation for what could be a very volatile (prices go up and prices go down) period in the market, I found this article said it all. I encourage you to not panic and to make decisions based off of emotions. If you have a long-term plan in place, there is the high likelihood you do not need to do anything different than what you are doing now. If you do not have a long-term in place, you may want to consult with a professional to help put a thought-out and objective plan together. As you read the article below, please remember how you reach financial security. You do not reach it overnight but rather by taking “one step at a time!”
By: Kevin F Jacobs
Written: May 6th, 2010
Today was an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
I am not telling you to be oblivious to what is going on in the world but that you need to work on the things you can do something about and let everything else take care of itself. It is important you do not overreact to short-term market events. During times like these it is important to remember the basics regarding your financial life:
1.Live on less then you make
2.Have $0 consumer debt
3.Don’t buy more house then you can afford
4.Pay as little in taxes as you are allowed
5.Have proper cash and emergency reserves
6.Save for the short-term and invest for the long-term
7.Spend time with your family and those you love instead of watching the latest stock market charts.
As for the rest of it, take a deep breath and remember to control the things you can and let go of those things that are outside of your power.
Many people fail to plan when it comes to taxes. You can save significant amounts of money regarding your tax liability if you are willing to be plan. Below you will find some proactive tax planning strategies:
1. Learn the range for the marginal tax brackets. You can find these at http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm. With some planning, you may be able to reduce your taxable income so as to be taxed at a lower marginal rate.
2. Evaluate your investments and make sure you not only have them allocated appropriately, but also determine if they are in the most tax-efficient vehicle. See previous blog entry regarding asset location at http://stepbystepfinancial.org/blog/2009/06/14/asset-location-an-often-overlooked-aspect-of-investing/
3. Fund your available retirement plans as much as possible. Don’t just contribute what the company gives you as a match!
4. Document the non-cash charitable contributions you make to organizations, such as Goodwill and Salvation Army. You give more than you realize.
5. Keep track of miles for business, unreimbursed employee expenses, charity and medical.
6. Use your investment losses in your non-retirement accounts to offset gains.
7. Be mindful of potential state tax deductions for contributions to 529 college savings plans.
8. Consider Donor Advised Funds for charitable purposes.
There are many other potential tax planning strategies so I encourage you to speak to your tax professional for ideas and suggestions. Tax preparation is nothing other than “documenting history.” Tax planning is where the real money is saved. I encourage you to take some time before the end of the year to see how you can proactively plan to reduce your 2010 tax liability.
Below you will find a blog entry from Bert Whitehead, a mentor of mine, with the Alliance of Cambridge Advisors. This is important information to read and to do something about sooner then later. I use this information with permission from the author.
Starting in 2010, the Tax Code opens up vast opportunities to increase Roth IRA participation for many taxpayers. As I will explain, you will need to consider at least 11 issues or possible strategies to make the most of this and determine the final formula that will reduce your long-term income tax bill and address other financial goals. But I caution you from the outset…Roth conversions are a hot topic with brokers and investment advisors who want to use this as an asset gathering gimmick or earn commissions from transactions. It is a complicated opportunity, and demonstrates how a comprehensive Financial Advisor who handles your taxes, investments, and estate planning is able to add value.
Here’s a review of some Roth IRA basics.
You probably know that if you work and your overall income is low enough, you can contribute to a Roth IRA as one of your annual IRA contribution choices. Your contribution is taxable (that is, you cannot deduct it on your tax return) when it is made. Age 70 ½ distributions are not required and, if taken, withdrawals in later years are totally free from income tax. Depending on your circumstances, this can be a huge advantage. A Roth IRA contribution of $5,000 can grow to $80,000 if invested at 7% over your working career, and you would save taxes on $75,000!
The only way to fund a Roth IRA other than an annual contribution based on earned income is to “convert” an existing IRA (or similar pre-tax retirement account) to a Roth IRA and pay tax on the current IRA distribution now rather than at age 70 ½. . In the past, your total adjusted gross income (AGI) had to be under $100,000 to avail yourself of this option. This is the big change this year.
Starting in 2010, you can convert any of your IRA’s to a Roth IRA no matter how high your income. While you do have to pay the income taxes now, remember that future withdrawals from your Roth IRA are tax-free! The reason why 2010 is a big year is two-fold; 1) there is special relief when paying the income taxes that result from any 2010 Roth conversion and 2) we are all facing the threat of rising income tax rates.
Here are some points to ponder and strategies to consider. Again, these can be complicated so you should expect to discuss whether these apply to you during the year when you do tax planning with your ACA advisor (i.e. a member of the Alliance of Cambridge Advisors).
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Visit msnbc.com for breaking news, world news, and news about the economy
Today was an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
I am not telling you to be oblivious to what is going on in the world but that you need to work on the things you can do something about and let everything else take care of itself. It is important you do not overreact to short-term market events. During times like these it is important to remember the basics regarding your financial life:
As for the rest of it, take a deep breath and remember with me to control the things we can and let go of those things that are outside of our power.
One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash. My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective. I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.” I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash. My job as a financial planner is to recommend to them what I believe is in their best interest.
I am not against investing and taking risk. However, I am against investing and taking risk before you are ready. I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.
In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors. First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account. I call this the “ready cash” account. If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.” Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund. However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead. I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.
*I can hear it already. You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA. Well, let’s just save the answer to that question for a later blog entry.
Throughout investing circles, you hear about the importance of asset allocation and diversification. Asset allocation means to have a proper percentage of your invested assets spread throughout multiple investment classes (i.e. large company, small company, mid-size company, international, etc.). Diversification is very simply the old adage your grandmother used to tell you: Don’t put all your “eggs” in one basket!
I want to briefly discuss an ofter-overlooked aspect of investing, which is asset location. This is simply the idea of “putting the right stuff in the right bucket.” The stuff in this analogy is the different asset classes where you have your money invested and the right bucket is either a designated retirement account or a non-retirement account. (A lot of investment professionals want to use the terms qualified account and a non-qualified account. Keep in mind I work with normal everyday working people so I try not to speak in financial jargon that often).
First, as much as possible you want your interest-earning assets (i.e. money market accounts, CDs, bonds and bond funds) inside of your tax-deferred investment vehicles. With most tax-deferred vehicles, you receive a tax deduction on the contribution you make. Here are some common tax-deferred vehicles you may have available to you: 401k (403b), Traditional IRA, Series E/EE Savings Bonds. (I did not include annuities in this explanation. If you are really interested in why please read my previous posts on annuities.) When you take money out of a tax-deferred investment vehicle, you have to pay ordinary income tax (the percentage of tax you pay on the last dollar of taxable income) on the distribution. This can be as high as 35% on your federal tax return. Depending on your state, this number could be significantly higher.
These two articles do a good job explaining the pros and cons of variable annuities in detail.
http://amateurassetallocator.com/2008/02/27/how-to-use-variable-annuities-the-right-way/
http://amateurassetallocator.com/2008/07/30/pros-and-cons-of-variable-annuities/
Virginia: Update: we got the pre-approval letter! The realtor took us out to v...
Chuck Rylant: These video blogs are very helpful. I think time horizon is what many ...
Chuck Rylant: This is very helpful information. Good basic foundation information an...
Business Financial Planning: This is certainly a thing I have to do more research into, many thanks...
Khalilah: This is certainly a thing I have to do more research into, many thanks...