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However much you make or save now doesn’t promise you a bright financial future. Life is unpredictable.
Follow these 10 tips to help prevent you and your family from money troubles.
See a lawyer and make a will.
If you have a will, make sure it is current and valid in your home state. You and your spouse should review each other’s will – ensuring that both of your wishes can be carried out. If you are divorced and remarried, update your beneficiary designations. Provide for guardianship of minor children, and establish education and maintenance trusts.
Pay off your credit cards.
Almost 40% of Americans carry credit card debt. This is not good for your financial future. Create a systematic plan to pay down your balances. Don’t fall into the “0% balance transfer game” - moving debt from a higher-interest credit card to a lower-interest one. It hurts your credit score, making it harder to get loans and insurance at a good rate. You can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
Buy term life insurance equal to six to eight times your annual income.
Also consider purchasing disability insurance think of it as “paycheck insurance.” This is primarily true for younger folks who have financial obligations to cover with future income. Stay-at-home spouses need life insurance, too. Most people don’t need a permanent policy, such as whole life or universal life, but each family’s needs are different. You should review your situation carefully with an insurance professional (preferably two or more) before making decisions.
Build a 3-to-6-month emergency fund.
This keeps you from having to charge up your credit cards when life’s emergencies strike. In the interim, before you build up your fund, you can establish a home equity line of credit, which allows you to borrow money against your house – this can take the place of part of your emergency fund.
Since projections show that Social Security is only able to pay 77% of promised benefits after 2033, you should adjust what you expect to receive, especially if you are younger than 50. Make up for this by funding your individual retirement account every year. If you don’t fund these accounts annually, you lose the opportunity to increase your tax-deferred savings. Fund an after-tax Roth IRA over a traditional IRA if you qualify.
If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan.
Just the same as with your IRA, these are opportunities you should take advantage of to defer funds. In addition, if you don’t participate, you lose the chance to receive any matching funds from your employer.
Use your company’s flexible spending plan to leverage tax advantages.
A flexible spending account allows you to pay for health-care and dependent care expenses with tax-free dollars. You lose the tax advantages for that year if you don’t use your flex plan annually.
Buy a home if you can afford it and maintain it properly.
With every mortgage payment, the equity in your property grows. You’ll have much more to show for your money spent than a box full of rental receipts. The benefits are more than financial – studies show that home ownership adds to peace of mind and improves quality of life.
Use broad market stock index funds to reduce risk and minimize costs.
Indexes are a simple way to diversify. Most importantly, they’re cheap. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of investments by getting a low-cost index.
Don’t be over-weight in any one security, especially your employer’s stock.
As a rule of thumb, keep exposure to any single stock to less than 5% of your overall portfolio. If you over-expose to a single stock and that company goes bankrupt, you lose a significant portion of your portfolio. It can happen easily. History is littered with good companies that went bad.
As tax season comes to a close, you realize exactly how much you paid in taxes and naturally will ask the question, “what can I do to reduce my taxes next year?”
The very short and simple answer to this question is to consider a portfolio of low-fee, thoughtfully constructed, index mutual funds or exchange-traded funds. Yet not all of them do the job for you. Here’s how to find the right ones.
An index mutual fund is a passively managed fund that tracks the performance of a certain index, such as the Dow Jones Industrial Average, or a broad bond or commodity index.
An ETF is similar to an index mutual fund, but is traded on the stock exchanges, just like a stock. Rather than buying all of the stocks in the Dow Jones Industrial Average or Standard & Poor’s 500, you can simply own an ETF that tracks that index.
Because index mutual funds and ETFs are not actively managed, their fees are generally low – or lower than actively managed mutual funds. Also, their low turnover – how frequently stocks are bought and sold within a portfolio – can provide additional tax benefits as excess trading activity creates the potential for more taxable events.
Consider these three aspects before buying an index fund or ETF:
Decide what you want to own. This is obvious, but not simple. Choosing from the broad number of stock index providers can be overwhelming (the Dow, S&P 500, Russell 2000, MSCI, FTSE, etc.). Therefore, it’s important to understand what markets, countries, regions, industries, sectors and stocks the index fund you buy contains.
Is your goal to own large stocks, small stocks or both? Do you want U.S. stocks, international, emerging market or all of the above?
Just as important, the fund you choose should closely adhere to its benchmark index. The more closely the investment matches that of the desired exposure, the better.
Like actively managed mutual funds, every index fund and ETF has management fees. These fees range from more than 1% to as low as 0.00% per year.
That is not a typo – there are index funds that have zero management fees. And of course, the lower your investment fees, the more of the returns you keep.
Another factor affecting cost is liquidity, or put simply, how easy it is to buy and sell the investment. With mutual funds, this is not an issue because they are bought or sold at the end of each day. For ETFs, which are traded like stocks, their liquidity is a more important issue. If an ETF is thinly traded, to buy or sell, it may be more costly.
This measures how much the taxes you pay on distributions reduce a fund’s return. The lower this number, the better. Morningstar, an industry leader in tracking investments, offers this information for free.
Here is a great explanation taken directly from Morningstar:
“Like an expense ratio, the tax cost ratio is a measure of how one factor can negatively impact performance. Also like an expense ratio, it is usually concentrated in the range of 0-5%. 0% indicates that the fund had no taxable distributions and 5% indicates that the fund was less tax efficient.
For example, if a fund had a 2% tax cost ratio for the three-year time period, it means that on average each year, investors in that fund lost 2% of their assets to taxes.
If the fund had a three-year annualized pre-tax return of 10%, an investor in the fund took home about 8% on an after-tax basis. (Because the returns are compounded, the after-tax return is actually 7.8%.).”
Now that you know what you should keep in mind before investing in index mutual funds or ETFs, here is the tricky part:
And when you add the number of mutual funds to the number of U.S.-based ETFs, that number is over 10,000.
Talk to your financial advisor to find the right ones, along with the right combination, to fit your desired asset allocation and financial plan.
In today’s business climate, it may be more important than ever for companies to operate at maximum efficiency and with a keen awareness of the potential impact of changes in their industry and the economy. Using a SWOT analysis to take a closer look at your company’s internal operations, as well as its position in the marketplace, may help you avoid costly mistakes, improve your management practices, and refine your long-term strategic goals.
The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a strategic planning tool designed to assist an organization in identifying the internal and external factors likely to affect its ability to achieve its objectives. It can also be used to help management formulate ways to enhance processes and prepare for potential challenges. While some businesses regularly conduct these assessments, a SWOT analysis can be especially helpful prior to making a major strategic decision.
To conduct a SWOT analysis, start by evaluating where your company currently stands in each of the four categories. Under the heading “strengths,” list the areas where your business currently performs exceptionally well or possesses certain competitive advantages. Your company may, for example, have experienced and committed employees, a long history in the community, or products and services that have been shown to be effective. Under the heading “weaknesses,” make a list of areas where your company could show improvement. These weaknesses may include, for example, cash flow problems, high levels of debt, a key employee who is about to retire, or inefficient and aging IT systems.
If you have trouble developing an objective assessment of your strengths and weaknesses, imagine that you are viewing your business from a variety of perspectives, such as that of a client, a vendor, a staff member, or an investor. The comments you have received from others about your business can help you to determine more accurately the areas in which your group excels, as well as those in which improvement is needed.
Next, take stock of the external environment by evaluating potential opportunities and threats. When compiling a list of “opportunities,” think about the possibilities, both large and small, for expanding your offerings or creating new funding streams. These may include, for example, partnering with another business, adding new products, or intensifying marketing efforts in a new target demographic. Under the heading “threats,” list all of the outside influences that could prove detrimental, such as downturns in the economy, shifts in client demand, changes in the legal or political landscape, or natural disasters.
After compiling your own SWOT list, convene a meeting of members of your management team, professional advisors, and a representative group of employees. When discussing strengths and weaknesses, focus especially on where your company stands in each of these areas relative to competitors, the company’s capacity to grow and to take on new challenges, and how your company’s strengths and weaknesses make it more vulnerable—or more resilient—in the face of outside threats.
Once you and your team have compiled a thorough SWOT list, this information can be used by the company to streamline practices and formulate new strategies. A SWOT analysis can help your company build upon its current strengths, make plans to improve areas of weakness, and prepare to avert or cope with potential problems. Besides helping you hone your strategy and strengthen your position in the marketplace, a SWOT analysis can be useful when approaching investors and in improving your relations with board members, employees, and other stakeholders. A thoughtfully prepared inventory of your assets and liabilities, coupled with a strategic plan to act on those findings, can serve as tangible evidence of your management skills and willingness to take the action necessary to ensure that your business continues to meet or exceed its goals.
May 29th marks the nationwide celebration of 529 Day, an opportunity to highlight the many benefits of 529 college savings plans.
As higher education costs continue to soar, many parents find themselves faced with the nagging question, “Will I have enough money to pay for my child’s college education?” One often overlooked savings option is a state-sponsored 529 plan.
These plans offer great tax benefits, while allowing you to contribute substantially higher sums than other savings alternatives.
529 plans generally come in two forms. The first form – prepaid tuition programs – allows participants to lock in tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. In some states, a portion of the contract value may also be applied to private or out-of-state schools.
The second form – college savings programs – allows contributions to vary. The full value of the account can be applied at any accredited institution of higher education nationwide. Since 529 plans operate under individual state laws, costs and details vary by state.
Some states allow you to set aside over $500,000 per beneficiary (with no income limitations or age restrictions), compared to $2,000 annually per beneficiary for a Coverdell Education Savings Account (formerly known as an education IRA).
Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and are not taxed when the money is taken out to pay for college. Often times, the 529 account must be open for at least 12 months before any money can be withdrawn, so read the fine print. Further, various states may also offer their own tax breaks.
One unique feature of 529 plans is that they allow you to move up to $15,000 out of your estate ($30,000 per couple) annually.
Another unique feature of 529 Plans is that you can make a lump-sum contribution to a 529 plan of up to five times the annual gift tax exclusion ($75,000 in 2020), elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.
The donor generally retains control of the account and may be assessed a penalty for “nonqualified” withdrawals.
Professional Management. 529 plans offer a “hands-off” savings approach: Funds invested in the plan are professionally managed.
Penalty for Refunds. You will be subject to a federal 10% penalty on the earnings portion of a nonqualified withdrawal. In addition, the earnings on nonqualified withdrawals are taxed at your tax rate and not the student’s. However, you may be able to avoid a nonqualified withdrawal by rolling over the account to a new beneficiary.
Effect on Financial Aid. Any investment may affect a student’s eligibility for financial aid. Earnings withdrawn from a 529 plan are treated as income to the child and will show up on the following year’s financial aid application. Thus, you may want to reserve 529 funds for use in a student’s later years.
Keep in mind, there is no guarantee that any investment portfolio will achieve its investment goals. The value of your 529 account will fluctuate as the value of the mutual fund shares in which it invests fluctuates, so that your investment, when it is withdrawn, may be worth more or less than its original cost. Also, be aware that out-of-state plans may have in-state income tax ramifications.
For more complete information on 529 plans, contact your financial advisor.
An attorney friend recently asked me out of the blue about nonfungible tokens, or NFTs. What prompted his interest was the sale of a collage composed of 5,000 digital pieces, auctioned by Christie’s on March 11, 2021, for a remarkable US$69 million. Mike Winkelmann, an artist known as Beeple, created this piece of digital art, made an NFT of it and offered it for sale. The bidding started at $100, and the rest of the auctioning process transformed it into a historical event.
Similarly, it was hard to miss the news about the iconic GIF Nyan Cat being sold as a piece of art, Twitter’s founder transforming the first tweet into an NFT and putting it up for sale, or an NFT of a New York Times column earning half a million dollars for charity.
My friend’s questions were an attempt to understand where the underlying value of an NFT comes from. The issue is that perceptions of what the buyer is paying for are not easily framed in legal terms. NFT marketplaces do not always accurately describe the value proposition of the goods they are selling. The truth is that the value of any NFT is speculative. Its value is determined by what someone else is willing to pay for it and nothing else.
Turning something as ephemeral as a tweet into an item that can be sold requires two things: making it unique and proving ownership. The process is the same for cryptocurrencies, which turn strings of bits into virtual coins that have real-world value. It boils down to cryptography.
Cryptography is the technique used to protect privacy of a message by transforming it into a form that can be understood only by the intended recipients. Everyone else will see it as only an unintelligible sequence of random characters. This message manipulation is enabled by a pair of keys, public and private keys: You share your public key with your friend, who uses it to transform his message to you into an unintelligible sequence of random characters. You then use your private key to put it back into its original form.
The special mathematical properties of these two crypto keys are widely used to provide secrecy and integrity. Two crypto keys play the role of digital signatures and are commonly used in blockchain to enable both authentication and anonymity for transactions.
Blockchain is a crucial technology for creating NFTs. It uses cryptography to chain blocks into a growing list of records. Each block is locked by a cryptographic hash, or string of characters that uniquely identifies a set of data, to the previous block. The transaction records of a chain of blocks are stored in a data structure called a Merkle tree. This allows for fast retrieval of past records.
To be a party in blockchain-based transactions, each user needs to create a pair of keys: a public key and a private key. This design makes it very difficult to alter transaction data stored in blockchain.
Although blockchain was initially devised to support fungible assets like Bitcoin and other cryptocurrencies, it has evolved to enable users to create a special kind of crypto asset, one that is nonfungible, meaning provably unique. Ethereum blockchain is the basis for most of the currently offered NFTs because it supports the ERC-721 token standard, enabling NFT creators to capture information of relevance to their digital artifacts and store it as tokens on the blockchain.
When you pay for an NFT, what you get is the right to transfer the token to your digital wallet. The token proves that your copy of a digital file is the original, like owning an original painting. And just as masterpiece paintings can be copied and distributed as inexpensive posters, anyone can have a digital copy of your NFT.
Your private crypto key is proof of ownership of the original. The content creator’s public crypto key serves as a certificate of authenticity for that particular digital artifact. This pair of the creator’s public key and the owner’s private key is primarily what determines the value of any NFT token.
NFTs came to prominence in 2017 with a game called CryptoKitties, which enables players to buy and “breed” limited-edition virtual cats. From there, game developers adopted NFTs in a big way to allow gamers to win in-game items such as digital shields, swords or similar prizes, and other game collectibles. Tokenization of game assets is a real game-changer, since it enables transferring tokens between different games or to another player via NFT specialized blockchain marketplaces.
Besides gaming, NFTs are frequently used to sell a wide range of virtual collectibles, including NBA virtual trading cards, music, digital images, video clips and even virtual real estate in Decentraland, a virtual world.
NonFungible.com, a website that tracks NFT projects and marketplaces, puts the value of the total NFT market at $250 million, a negligible fraction of the total crypto coin market but still highly attractive to content creators. The contract behind the token, based on the ERC-721 standard for creating NFTs, can be set to let content creators continue to earn a percentage from all subsequent sales.
The NFT market is likely to grow further because any piece of digital information can easily be “minted” into an NFT, a highly efficient way of managing and securing digital assets.
For all the excitement, there are also concerns that NFTs are not eco-friendly because they are built on the same blockchain technology used by some energy-hungry cryptocurrencies. For example, each NFT transaction on the Ethereum network consumes the equivalent of daily energy used by two American households.
Security for most of today’s blockchain networks is based on special computers called “miners” competing to solve complex math puzzles. This is the proof-of-work principle, which keeps people from gaming the system and provides the incentive for building and maintaining it. The miner who solves the math problem first gets awarded with a prize paid in virtual coins. The mining requires a lot of computational power, which drives electricity consumption.
Ethereum blockchain technology is evolving and moving toward a less computationally intensive design. There are also emerging blockchain technologies like Cardano, which was designed from the outset to have a small carbon footprint and has recently launched its own fast-growing NFT platform called Cardano Kidz.
The speed of transformation of blockchain technology into a newer, more eco-friendly variant might well decide the future of the NFT market in the short term. Some artists who feel strongly about global warming trends are opposed to NFTs because of perceived ecological impact.
Whether or not the current NFT craze can keep its momentum going, NFTs have already accelerated a larger trend of digital economic innovation. NFTs have confirmed that the public is feeling increasingly favorable toward a crypto-economy and is embracing short-term risks in return for creating new business possibilities.
NFTs have already made significant inroads into the luxury and gaming industries, and have plenty of room to grow beyond these initial applications. The art sector will continue to be an important segment of the overall NFT market and is likely to gradually reach maturity over the next couple of years, although it is likely to be surpassed by other digital certificate applications like trademarks and patents, training and upskilling certificates.
Money is always an emotional subject, but often when our emotions get involved with our investments we will make wrong decisions. And that can be a costly mistake.
Keeping emotions and investing separate seems almost impossible for many investors. When reacting too quickly and letting emotions cloud judgment, even the most experienced investors do not make the best decisions. However, keeping emotions away from investment decisions can give you a better chance for success.
Here are four tips on how to keep emotions and investing separate:
It sounds so simple, but setting financial goals really is the first step to investing, and financial goals can keep emotions out of the picture if done correctly. Having goals will help you keep an eye on the big picture.
For example, if you are saving for retirement in 30 years, you know that you have more time to make up for any losses than if you plan to retire in 5 years. These goals can also keep you focused on what you need to do today to get there.
Do you check up on your investments every day, sometimes spending hours figuring out how you’re doing and what you could have done better if you had just moved your investments around? If so, you are just going to drive yourself crazy because all you’ll really see will be market gyrations and mistakes you think you could have avoided.
Checking too often will not benefit your portfolio in any way, but it will cause anxiety. This is even more true if you own individual stocks as checking stock prices too often can cause you to panic, and you might make a snap judgment to trade. Instead, keep your checks to monthly or quarterly, and concentrate on sticking to your overall plan and goals.
Again, it sounds so simple, but knowing what you are buying is crucial to help you avoid emotional setbacks in investing. Always do your own research before purchasing anything, even if you have outside assistance.
Understand what the investment is, how it will help you achieve your goals, what the risks are, and when and how to exit. Without your own research, you will not take full responsibility for your trades, introducing negative emotions.
You can create some distance between yourself and your investments by putting a financial advisor in the middle of the two.
By entrusting a neutral third party who can help you examine your situation objectively and encourage you to stay on track, you can hold yourself more accountable for the things that you can actually control.
You just finished your taxes, but it's not too early to make plans for next year.
It's important that as you build your plan, you think about some strategies to reduce or defer your taxes now or in the future. Here are some strategies to consider helping your financial plan become more tax-efficient:
1. Tax harvesting
Usually, this strategy is implemented near the end of the calendar year, but it can be done at any time. With tax-loss harvesting, you sell off holdings that have a loss position to offset the gains you've experienced from other sales.
The asset you sold is then replaced with a similar investment to maintain the portfolio's asset allocation and expected risk and return levels. It won't restore your losses, but it can ease the pain.
2. Using long-term gains and the 0% tax rate
For those who fall within the 15% tax bracket, your long-term gains are tax-free. Make it a habit to project your taxes and to look for tax opportunities every year as part of your plan.
3. Making IRA contributions
You have until the upcoming April’s Tax Day to make a Roth or traditional IRA contribution for that tax year, but why put it off? In fact, you could even use your income tax refund to fund it. Remember, a Roth creates tax-free income in the future, which is worth its weight in gold.
4. Using the "backdoor" Roth
Some people make too much money to contribute to a Roth IRA or to take a deduction on a traditional IRA. But you still can make a contribution to a traditional IRA without the deduction and later convert it to a Roth.
There's no tax due, except on growth in the account that you earn between the time of the contribution and the conversion. If you hold money in a traditional IRA for a short time only, the growth – and the resulting tax – should be small.
5. Exploring financial vehicles that can defer taxes on dividends, interest and capital gains
Tax deferral allows you to employ the triple compounding effect: It pays interest on the principle, interest on the interest and interest on the taxes that you would have paid if you were in an investment that was taxed annually.
This year – or any year for that matter – don't wait until the end of the year to think about the moves that could save you on your tax return.
Get together with your financial adviser or tax professional now to discuss a plan that will help you succeed in your goals.
