Thursday, April 24, 2014

Are you a Saver or a Spender?

Ideally, it would be beneficial to be a balance of each.

Savers love to see their money grow. It gives them great pleasure to open bank and brokerage statements and see the values increase. It can be physically painful when account values drop, even a small amount. Hence, savers avoid risk for fear of losing money. They may even deprive themselves of creature comforts and the joy of giving.
Spontaneity is out.

Spenders take bigger risks feeling somehow the money will appear. Negative consequences don't even enter their minds. They are big spenders, big tippers and very generous with friends and family. They get tremendous joy from making others feel good.

Serious issues arise when a spender marries a saver. Then the sparks fly!

Ideally, you want both aspects. Once you recognize your strengths and weaknesses you develop strategies to managing your money and spending habits.

A simple spending plan will give a saver permission to spend and set limits for the spender. Going back to "know your numbers" - knowing how much you have budgeted for clothing or entertainment puts you in control and gives you the power to make good money decisions.

Knowing you have alotted $1000 for clothing (or sports) for the year lets you buy that special dress (or golf club) without guilt. Keeping tab mentally lets you keep track and leads to a better spending decision.

You will be giving yourself a gift of confidence by striking a balance between enjoying today and enjoying tomorrow. You will truly Be $ Smart!

What is a Step-Up in Basis?

Often I speak with clients who wish to "gift" their home to their children or clients whose parents want to "transfer" stock, bonds or a home to them. Sometimes this can be a good idea, many times it isn't. Thorough reseach and advice from an attorney or accountant can help determine how beneificial the move will be.

When you buy a house or investments there is always a "cost". That number - the cost - is the basis upon which you will pay taxes down the road when you decide to sell. It is also the number that determines if you have made or lost money. If you have been fortunate to see the value of your investment grow, you will have a profit when you sell it, which adds to your wealth.

Of course, Uncle Sam then steps in for his share of your winnings - capital gains tax. How much tax you pay will be determined by your tax bracket. (Depending on taxable income capital gains tax runs from 10% to 39.6%)

A step-up in basis occurs when you inherit investments or real estate. The cost basis will be the value of the investment on the "date of death" of the owner or nine months later.

Say you or your parents bought a house in 1980 for $250,000. In the present market it's worth $750,000. You die and leave the house to your only child. Your child has the house appraised and sells it for $750,000. How much capital gains tax must your child pay? Zero! The cost basis of the house was "stepped up" to the value on date of death.

If, instead, you decide to "transfer" the house to your child. He is now the owner and then you die. What would the tax consequences be? Assuming he is in the 25% tax bracket, he would owe 15% capital gains tax on $500,000. He would owe $75,000. He received no "step-up in basis" because with a transfer, he assumed your original cost basis of $250,000.

The same thing happens when stocks, bonds and other investments are transferred; there is no step up in cost basis. So if today you inherit 500 shares of IBM grandpa bought in 1950 at $.25 per share ($125) and you sell those shares today you would receive $95,000 free and clear. If grandpa had transferred those shares to you instead of bequeathing them, you would owe taxes on $94,875 ($95,000 - $125) X 15% =$14,231.

Be sure to consult an accountant or an attorney before transferring investments or real estate. You don't want to share with Uncle Sam more than necessary.

Be $ smart!

Financial Jargon Translated

Most professions have their own terminology or lingo. Unfamiliar financial terms can be very intimidating or confusing. Knowing the language can give you a great advantage. Here are a few translations you may find useful:

Equities - stocks.

Fixed Income - bonds, CD's.

Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)

Standard deviation -defines risk. It graphically maps historical returns.

ROI - return on investment - how much your money has grown.

Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give you access to multiple stocks (or bonds) at one time

Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. It is one method to avoid putting all your eggs in one basket.

Cap (as in capitalization) – designates size.
Mid-cap or large-cap stock - are terms that classify the size of a company.
It is a way to measure the size of a company by multiplying the number of outstanding shares by its share price.

Alternative investments – are those other than stocks, bonds or cash.
May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).

Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD – a certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT - electronic funds transfer - a means of moving money from one account to another.

Protect yourself. Learn the language or ask for a translation. Be $ smart.