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.


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

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.

Spring Cleaning

April 23, 2010

As the snow melts away and the grass begins to green, many of us start our “spring cleaning” projects around the house. It is also a great time to clean up, organize, and review your financial affairs. Consider these six suggestions:

Review account beneficiary forms to confirm that you have a named primary and a contingent beneficiary that reflect your wishes.
Discuss with your attorney and review your estate planning documents, such as your will, trusts, health care directives, and durable powers of attorney to confirm that the documents you have in place take full advantage of current estate tax laws. If you have not yet prepared these documents, consider meeting with an attorney to discuss whether they are appropriate for your situation. Be sure to advise your heirs and executor where your estate planning and account documentation can be found in case of your death or incapacitation.
Review your current property/casualty, life, disability, and long-term care insurance coverage with your wealth manager and other insurance advisor(s) to determine if you are properly insured.
Review contributions to employer retirement plans. The maximum contribution in 2010 to a 401(k), 403(b) or 457 plan is $16,500, and taxpayers age 50 and older may make “catch-up” contributions of $5,500. The maximum contribution to a SIMPLE Plan in 2010 is $11,500 with a “catch-up” contribution of $2,500 for taxpayers age 50 and older.
Review contributions to traditional and Roth IRAs. The maximum contribution, if you qualify, is $5,000 in 2010 and taxpayers age 50 and older may make “catch-up” contributions of $1,000.
Review your overall investment allocation and consider rebalancing as necessary. Contact a Wealth Enhancement Group advisor to discuss these and other opportunities that may exist.

Vacation Properties and Income – Part 2

September 14, 2009

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

September 10, 2009

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Simple Truths

September 8, 2009

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.