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!
Thursday, April 24, 2014
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!
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.
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.
Wednesday, March 12, 2014
Buying or Leasing a Car
I am ever so grateful I only buy a car once every few years. I dread negotiating with a car dealer. Most folks have similar feelings, though I have met a few individuals who truly enjoy the challenge.
It is best to plan the purchase as opposed to being forced to buy because your car has died. You want as little pressure as possible. You must be able to walk away if the deal does not suit you.
The best times to buy/lease:
1. at year end,
2. at month or quarter end,
3. during bad weather when most folks are inclined to stay home,
4. at the end of the day,
5. late summer, early fall when the new models are introduced.
All these times force dealers to give discounts to meet sales targets.
Next steps:
1. Determine what make, model and options you want.
2. Pick four or five dealers. Use the internet to shop dealers and compare prices before ever stepping into a showroom. Talk with the dealer's internet person, give them the details of what you're seeking and ask for their best price. Make sure you get the name of each person with whom you speak.
3. Go to the next dealer and ask if they can beat that price. Do the same with the next dealer. Try to get the deal done on the phone before heading to the dealership.
4. After a week of conversations, you then state "I am very serious about this purchase!"
You may even ask a friend to get a price quote from a "buyers' club" where they hold a membership to verify "a good deal".
Be prepared to walk away until they meet your terms.
If you are trading in your present car clean it inside and out beforehand. Having the service record could be a plus.
If you do your homework and time it right you could save up to $2000 or more.
Be $ smart!
It is best to plan the purchase as opposed to being forced to buy because your car has died. You want as little pressure as possible. You must be able to walk away if the deal does not suit you.
The best times to buy/lease:
1. at year end,
2. at month or quarter end,
3. during bad weather when most folks are inclined to stay home,
4. at the end of the day,
5. late summer, early fall when the new models are introduced.
All these times force dealers to give discounts to meet sales targets.
Next steps:
1. Determine what make, model and options you want.
2. Pick four or five dealers. Use the internet to shop dealers and compare prices before ever stepping into a showroom. Talk with the dealer's internet person, give them the details of what you're seeking and ask for their best price. Make sure you get the name of each person with whom you speak.
3. Go to the next dealer and ask if they can beat that price. Do the same with the next dealer. Try to get the deal done on the phone before heading to the dealership.
4. After a week of conversations, you then state "I am very serious about this purchase!"
You may even ask a friend to get a price quote from a "buyers' club" where they hold a membership to verify "a good deal".
Be prepared to walk away until they meet your terms.
If you are trading in your present car clean it inside and out beforehand. Having the service record could be a plus.
If you do your homework and time it right you could save up to $2000 or more.
Be $ smart!
Thursday, February 27, 2014
Do it yourself or hire an expert.
Have you saved enough money to invest?
Do you have the time to research stocks, bonds, etc?
Do you enjoy following the stock market and discussing opportunities with friends? Not everyone does.
I do not repair my own car nor do I repair the plumbing in my home. I hire an expert. You may consider hiring an expert to manage your money if you have neither the time nor the inclination to figure out investing.
A stock broker (aka financial advisor, wealth management advisor) works for an investment firm and will build a portfolio for you, buy and sell investments and charge you commissions on your trades. Stock brokers do not work under a fiduciary agreement where they are required to put the clients' interests before their own. There may be a "conflict of interest" because what they sell you affects how they get paid.
Remember a previous $ Tip: ask "What's this going to cost me? How do you get paid?
A "fee only" advisor will charge a fee for services like preparing a financial plan or making financial recommendations. Fees might be hourly or per service provided. Since they do not sell the investments they recommend there is no conflict of interest.
A money manager or investment advisor will charge a percentage of the money they manage for you. They do not charge a commission for each "buy" or "sell". You pay an annual rate, usually paid monthly and deducted from your account. That rate may range from 1% to 3% (or more). If you give a money manager $50,000 and they charge 1.2% you would pay $600 for the year or $50 per month. It is in the interest of the money manager to make your money grow as he/she would receive more in fees over time as your money grows - e.g. 1.2% of $75,000 = $900. 1.2% of $100,000 = $1,200 . Money managers usually operate under a fiduciary rule to put their clients' interests first.
No matter which route you take, ask questions, research the individual online (SEC website) and if it sounds too good to be true - RUN!
Be $ smart.
Wednesday, February 19, 2014
Do yourself a favor - keep your old 401k (or 403b)
The temptation is great - you left your job, cash is tight, you have money invested in your 401k - makes sense to cash out the account - right?
NO! Here are four good reasons to leave the money where it is:
1. You will need the money some day in retirement. Money invested while you are young has many more years of compounding growth than if you double up on savings in your 50's.
2. Your 401k is protected from creditors and bankruptcy.
It makes no sense to cash out and then lose the money in bankruptcy or to your creditors. Keep it for yourself.
3. Taxes, taxes and penalty eat away the proceeds.
The money you receive will be taxed as ordinary income (whatever tax bracket you are in) by both your state and the federal government. If you are under 59 1/2 you will pay a 10% penalty.
e.g. $5000 in your plan.
Federal tax 28% + state tax 6% + 10% penalty = 44% X $5000 = $2200.
$5000-$2200 = $2800.
Your $5000 shrinks to $2800. If you leave it to grow $5000 could build to over $8000 in 10 years, $10,000 in 15 years earning a mere 5%.
4. 401k plans usually have better investment choices.
Your company has negotiated for good, diversified funds not always available to the individual investor.
Give it some thought - keeping your 401k will bring rewards later in life.
Be $ smart!
NO! Here are four good reasons to leave the money where it is:
1. You will need the money some day in retirement. Money invested while you are young has many more years of compounding growth than if you double up on savings in your 50's.
2. Your 401k is protected from creditors and bankruptcy.
It makes no sense to cash out and then lose the money in bankruptcy or to your creditors. Keep it for yourself.
3. Taxes, taxes and penalty eat away the proceeds.
The money you receive will be taxed as ordinary income (whatever tax bracket you are in) by both your state and the federal government. If you are under 59 1/2 you will pay a 10% penalty.
e.g. $5000 in your plan.
Federal tax 28% + state tax 6% + 10% penalty = 44% X $5000 = $2200.
$5000-$2200 = $2800.
Your $5000 shrinks to $2800. If you leave it to grow $5000 could build to over $8000 in 10 years, $10,000 in 15 years earning a mere 5%.
4. 401k plans usually have better investment choices.
Your company has negotiated for good, diversified funds not always available to the individual investor.
Give it some thought - keeping your 401k will bring rewards later in life.
Be $ smart!
Thursday, February 6, 2014
Putting your money to work...
Once I finished school and started working it did not take me long to realize I had to start saving some money to "thrive", not just survive.
I recognized there were only so many hours in each week that I could work. I had to work smarter. I had to put my money to work!
I could not ignore the dollars starting to build in my savings account. The bank was paying low interest so I knew my money could not grow very fast.
Taking some risk, I learned to invest.
I started small by opening a mutual fund account at Vanguard Funds. I chose a fund that invested in the top 500 companies in the U.S. That meant I owned a little bit of 500 different companies. It's called diversification. If something negative happened to one company, the other 499 could do well and compensate for the losing one.
I did not buy just one stock which is like putting all my eggs in one basket.
Vanguard had a minimum initial purchase of $3000 which is the amount I invested. (Some companies charge less, some charge more.) I then set-up automatic withdrawal from my savings account for $100 a month.
Over time, I watched the account grow - with the normal ups and downs of the stock market. When the account reached $10,000 I bought another mutual fund and switched my $100 per month to the new fund. This fund held international companies - all outside the U.S. When the international fund reached $6000 I purchased yet another fund - a total bond fund. And again, changed the $100 to build the new fund.
Stocks and bonds sometimes move in sync and sometimes not.
We never know year to year which part of the market will do best so we buy a little of each.
This might sound very basic but many people have no idea how to start investing. It does not require a great deal of money. It does require determination and patience.
I have had great satisfaction watching my money grow. I am willing to help anyone get started. Call or email with your questions.
I recognized there were only so many hours in each week that I could work. I had to work smarter. I had to put my money to work!
I could not ignore the dollars starting to build in my savings account. The bank was paying low interest so I knew my money could not grow very fast.
Taking some risk, I learned to invest.
I started small by opening a mutual fund account at Vanguard Funds. I chose a fund that invested in the top 500 companies in the U.S. That meant I owned a little bit of 500 different companies. It's called diversification. If something negative happened to one company, the other 499 could do well and compensate for the losing one.
I did not buy just one stock which is like putting all my eggs in one basket.
Vanguard had a minimum initial purchase of $3000 which is the amount I invested. (Some companies charge less, some charge more.) I then set-up automatic withdrawal from my savings account for $100 a month.
Over time, I watched the account grow - with the normal ups and downs of the stock market. When the account reached $10,000 I bought another mutual fund and switched my $100 per month to the new fund. This fund held international companies - all outside the U.S. When the international fund reached $6000 I purchased yet another fund - a total bond fund. And again, changed the $100 to build the new fund.
Stocks and bonds sometimes move in sync and sometimes not.
We never know year to year which part of the market will do best so we buy a little of each.
This might sound very basic but many people have no idea how to start investing. It does not require a great deal of money. It does require determination and patience.
I have had great satisfaction watching my money grow. I am willing to help anyone get started. Call or email with your questions.
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