The Propensity to Consume

August 31, 2010

Most People and most societies consume what they can. Americans are notoriously short-sighted, as demonstrated by a low personal savings rate by international standards. There could be many explanations, from a standard of affluence that has distanced us from the struggle for mere survival, to our propensity to invent and create that places a premium on spending whatever money we have in order to create more. We are the consumer society. Just look at the ads in magazines or newspapers and calculate the percentage of them that sell what for most people are luxuries.
You may be surprised to find that you are guilty of a habit that dooms you to never having money. Some people who constantly feel money pressure buy themselves little treats or rewards, in part because they never have the money to buy themselves what they really want. But it’s precisely that accumulation of “little” expenses that prevents them from getting ahead. Many don’t even realize they do this. The only way to find out is to keep track of what you spend. Do it for a week or a month. Try to remember each expenditure, no matter how small. Record everything in a little notebook each day. Add them up in different categories at the end of your test period: food and drink, entertainment, utilities, gifts and so forth. Pay particular attention to the small expenditures on unnecessary items and see how they accumulate over time.

Sharing Your Wealth

August 24, 2010

The tax laws of the United States encourage gifts by granting tax deductions for them in many cases. If individual citizens voluntarily help meet our country’s needs, their contributions reduce the responsibility of the government. Many would also argue that private support of charitable activities is more efficient than public support.
Due to the tax treatment of charitable contributions, individuals may realize not only immediate tax benefits but also advantages in terms of after-tax cash flow and the size of the estate they may pass on to their heirs. Gifts to charity during one’s lifetime or at death, if structured properly, will reduce the estate tax liability. An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limitations.

Keeping Your Emotions in Check…

August 23, 2010

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.

Don’t Sell Yourself Short

August 19, 2010

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher—and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.

A Debt like No Other

August 17, 2010

If you have incurred inefficient debt, one method of eliminating it is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise. It provides low interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

Trusts and You

August 12, 2010

Trusts are vehicles that can help shelter your assets from taxation and manage the property that you leave to your heirs. Simply put, you transfer property in the name of a trustee who manages it for the benefit of a third party, the beneficiary. One of the great advantages of trusts in their flexibility. They can be adapted to fit a wide variety of situations. In fact, as our attorneys at Wealth Enhancement Group say, “Trust is not the key word. Trust doesn’t tell you that much.”

What precedes the word trust tells you everything. The most important aspect of trusts is that they allow property to be managed according to the donor’s specific wishes, far into the future. Living trusts allow you to control trust assets; irrevocable trusts take away control but offer many attractive estate tax implications and more. Your advisers can help you determine which type of trust best suits your situation

Planning Together…

August 5, 2010

The first step in planning for retirement with your spouse is to reach an agreement on your primary objectives. Without that, a strategy is impossible, or at least a lot more complicated and expensive.

I have been amazed at how often I’ve interviewed new clients, couples creating a financial plan, who have fundamental disagreements on what they want from retirement. Sometimes they don’t even realize their differences until I ask them both to write down their ideal retirement. I get back one piece of paper from Mars and one from Venus.

As in all other things with your spouse, communicate clearly and never assume. Lay out precisely what each of you wants and decide how you can make those desires work together. Be specific. I advised one couple that was confident they shared a similar vision of retirement, a home on the beach. Only after I probed further did we all learn that he wanted to live in Florida and she wanted to live in Martha’s Vineyard. Both were shocked, and neither would budge. They had always talked about a beach home, but had never gotten around to specifying which beach.

As part of your review of your financial plan you might also want to confirm that your partner’s plans or wants have not changed. You wouldn’t want to find out years from now that your spouse decided long ago that his view of an ideal retirement had changed, but he had forgotten to tell you.

Necessities or Luxuries

August 3, 2010

Most spending falls into two simple categories: necessities and luxuries. Almost every dollar you spend could be divided in that way. The challenge of dividing our spending in such a way, however, is made more difficult because of the simple fact that most of us are not now and never have been in dire need.

Still, a “necessities versus luxuries” spending breakdown is useful for anyone trying to organize their finances and use their money efficiently. Most people spend most of their money, as opposed to saving, investing, or giving it away. Therefore, whether you are buying necessities or luxuries, spending has to be the starting point for any financial planning. A dollar spent is not a dollar that could be used in another way; a dollar not spent has the same future value as a dollar earned. You can increase the size of your financial pie only three ways: spending less, earning more, or, in some cases, paying less tax.