Saving: The First Step

January 14, 2010

We save money for three reasons:

• To meet emergencies. I recommend that people maintain liquid savings, which means that money is readily accessible in bank accounts or money market funds, to cover six months of basic living expenses
• To spend
• To invest

Saving is quite different from investing, although the two are often confused. We can save without investing, but we usually cannot invest without saving. Investing presumes that assets have a reasonable expectation of producing earnings or appreciating in value. I do not believe most passbook savings accounts or even many certificates of deposit that pay fixed interest meet this definition.

Your savings for emergencies and to invest should be, at a minimum, equal to 10 percent of your income — and it should be the first 10 percent of your income. Save first, spend later. Saving for other purposes, such as the new plasma TV or a vacation, should be in addition to the 10 percent for emergencies and investing. All money you take in should be subject to this 10 percent rule. If you get a gift or a windfall, such as an inheritance, at least 10 percent should go into long-term savings. If you get a raise, increase your savings to match.

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Financial Fundamentals

January 7, 2010

Your options for what to do with your money seem as boundless as the prairie sky I grew up under. But in truth your options are limited, because you can really do only five things with money:

  • Spend it
  • Save it
  • Invest it
  • Pay taxes with it
  • Give it away

Slice the pie however you’d like, but those are your options – five pieces. Only two slices are mandatory: spending and paying taxes – for most people. We all have basic needs that require spending. I don’t know anybody, and have never heard of anybody, who is completely self-sufficient, who produces everything they need to live or makes enough of anything that they can barter for everything else they need. Everyone spends something.

Despite the talk of zillionaires that pay no taxes, it is almost impossible not to pay some income tax. Your income will almost certainly be taxed. But taxes are not as ironclad as many think either. The U.S. tax code provides many opportunities to reduce the taxes you have to pay. It is neither illegal nor unethical to reduce your tax bill in ways provided by the tax code.

The other three categories – saving, investing, and giving – are completely voluntary. Many people have chosen, to their detriment, not to cut their pie into that many pieces no matter how big or small the pie.

Few of us have the resources to do everything we would like with our money, so we need to establish priorities. We have to understand our options and how they interact, clearly. A bigger slice for spending reduces the size of all other slices, except paying taxes. On the other hand, less spending may increase the size of the investing or giving slices, which may also decrease the size of the tax slice. The objective of financial planning is to increase our control of the size of each slice.


Investing and Saving

September 24, 2009

The goal of investing is quite different from saving. Saving makes money available to you in a secure place; investing seeks to make 13that money grow for some future use.

Two rules of thumb: Invest 10 percent of your income, and pay yourself first. Your deposit into your investment account should be the first check you write each time you get paid, not the last. If you pay yourself first, you’ll be able to manage on what remains. If you instead plan to invest what remains from your paycheck after you’ve met other needs (and wants), you’ll find that you have little or nothing left for investing most months.


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.


Keeping Your Emotions in Check…

September 3, 2009

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.