Before you take advice on your finances, ask this question

As I review posts for our sister website on financial literacy, this seemed to be a great post to repeat:

If you want financial advice, before listening to someone, ask yourself one simple question:

“If I’m not paying this adviser, who IS paying them?”

If you don’t know the answer, you may have a problem.

Think about it ….

“Simplify your finances? No; “Gain control, understand your finances?” Yes

After reading a recent article in Kiplinger’s Finance Magazine  on simplifying your finances, I wondered if your personal finances can really be made simple.  While many of us may hope so, I am not sure that “simple” is best.

However, gaining control of your finances and gaining a better understanding do make sense.

clutter-286975_1920 Okay, that does need to be simplified!

Here are some ways that help you gain control that may also “simplify” your life:

Cash management and Debt management

Set up automatic payments with vendors so they use your bank or credit card, or set up payments using your bank website.

  • If the payments are regular, and of similar amounts, you save time and can plan on the withdrawals.
  • However, if you change banks, sorting and resetting auto-pay at the new bank can be a major headache. Similarly, if you change credit cards, you need to update information with all vendors.

You can also automate tracking of your spending by using websites like Mint or Personalcapital.  Or, you can use Quicken or QuickBooks software from Intuit to track your bank and credit card accounts.  You can download from your bank and credit card websites into the program and then review to analyze your cash flow and spending.

Setting up direct deposit for payroll into your checking is great.  You can also split part so it goes to savings or even have some go to your investment accounts.  You will then need to follow up to invest the cash that accumulates, but having money set aside saves it from being spent, and adds to your investments

Investing

Kiplinger’s recommended consolidating retirement accounts to avoid low balance fees.  It also makes updating beneficiary designations easier.

While avoiding fees makes sense, am not sure that putting all investments into a single retirement account does.  You cannot do this if you have Roth and pre-tax accounts like a 401(k) plan, and you probably should not do it if you have contributory IRA and 401(k) accounts that are subject to different tax rules.

Kiplinger’s also recommended using one broker for your taxable accounts.  This makes more sense, in that you have a higher balance which should mean lower fees and more attention from the broker.  However, I prefer using exchange traded funds, or ETFs, and avoiding most broker fees, which means essentially no attention from a broker.

One article said that your investment plan should be to “sign up and forget it.”  While avoiding investment pitfalls like second-guessing yourself out of panic when a fund goes down is good, I do think you need to review and rebalance your investments once a year.

Another article recommended using an “all in one” fund for investing.  Now, this really troubles me.  If your sole goal is retirement, then an age-targeted fund could make sense.  But, if you are saving for goals with different time horizons, this is a bad idea.

If you use an age-targeted fund, do your homework on the funds.  For example, if the fund plans to suddenly shift to bonds when you retire, that will not serve you well because you are likely to have several decades for which you will need the growth from stocks.

Protecting your information

Having a master password for access to all your other passwords reminds me of the joke about the student who repeatedly distilled his notes down, first to an outline, then to note cards, and finally to one word.  How did he do on the day of the exam?  He forgot the word.

Nonetheless, having passwords is clearly important so having a way to manage them is as well.  Check out this recent review of apps for managing your passwords PC Magazine Best Password Managers for 2015.  You can manage the passwords yourself by creating a document that you save as a PDF and then encrypt.  But don’t forget the password you used for the PDF!

Store files in one place

We did a post on using cloud storage when you do not need originals.  Here is another site to check out:  Shoeboxed

Credit cards

In addition to downloading transactions as noted above, you can track your credit score and credit history by using sites like Credit Karma

Estate planning

For insurance purposes, and for your estate plan, having a record of possessions, you can list all your property using sites like Know your stuff home inventory.

Conclusion?

There are ways to gain better understanding of your finances that also make your finances simpler.  But setting simplification as your primary goal risks distorting your finances – too simple may be a bad result.

P.S. Our sister website, www.wokemoney.com, encourages you to gain a better understanding of your finances so you can handle your own planning.  Let me know what you think.

Holiday Tip and Gift Guidelines

As we recover from Thanksgiving, we turn to Black Friday and then Cyber Monday, so the holiday season is in full swing.

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Part of your gift giving may be tipping those around you upon whom you depend. While gift giving etiquette may be obvious in some instances, it can get less clear when considering gifts for people outside of your friends and family. So, to help you navigate the season, we have put together a guide of suggested amounts for gifts and tips, as well as final comment on notes and cards in lieu of cash.

We all have people in our lives that help us keep our families, homes and businesses on track and get through each day as we move forward throughout the year. In many cases, the services they provide ensure we can go to work, have clean homes and stay fit, including caregivers, delivery, home maintenance, and personal care services:

Caregivers (for kids, parents and pets, too!)

Caregivers for your children, parents and pets can be lifesavers. They provide care, education, exercise, and attention to those you care about most. This is the time of year to let them know how thankful you are for all that they do. The amount of service they provide and the arrangement you have with them can dictate the appropriate gift level:

  1. Nanny/au pair – a week’s salary and a small gift;
  2. Daycare teachers – a $25-$70 gift;
  3. Home healthcare worker – a week to a month’s salary;
  4. Teacher – a small gift and a handmade card from your child;
  5. Dog walker – depending on your walker’s schedule, you may want to gift a day’s pay or a full week’s pay; and
  6. Dog groomer – half the cost to the full amount for the service.

If you contract any of these services through an agency, you may want to contact the agency to find out if they have a gift-giving policy in effect. If the agency prohibits gifts, consider alternatives like making a donation to the agency or sending in homemade cookies to the office.

“Neither snow nor rain…”

Despite the weather, terrain or traffic, your mail carrier delivers your mail every day and your online purchases arrive on time and in good condition. Let those who make those deliveries know you’re grateful. In deciding what and how much to give, consider the particular company’s gift giving restrictions:

  1. Mail carriers – are not prohibited from receiving cash gifts and gifts more than $20;
  2. FedEx – employees may accept gifts under $75, though no cash or gift cards;
  3. UPS – workers are allowed to accept tips, but UPS discourages the practice; and
  4. Newspaper delivery – $10-$30 is standard.

Home Maintenance:

Whether you live in a single-family home or a large apartment building, it’s likely there is someone who services your home or property in some way.

  1. Trash and recycling collectors – $10-$30, which you may want to mail directly to the collection company if you’re not home to hand deliver it;
  2. Doorman – $25-$100;
  3. Regular cleaning person – the cost of one visit;
  4. Landscapers/gardeners – $20-$50 per person or if you have just one person doing the work, the cost of one visit;
  5. Parking garage attendant – $10-$50; and
  6. Building’s handyman, superintendent and custodian – $20-$100.

If you have someone who always goes the extra mile, such as a handyman who’s prompt and efficient or a doorman who is quick to carry heavy packages for you, then a larger tip may be warranted.

Personal Services:

It’s hard work keeping you fit, perfectly coiffed and beautiful, but recognizing the efforts of those who do is easy and may also buy you scheduling flexibility when you really need it. In deciding whether to tip and how much, consider this:

  1. Hairdresser/manicurist – if you’re a frequent visitor, tip the cost of one visit. If you’re a less frequent customer, then $20. However, if you tip generously through the year, you do not need to give an extra tip at the end of the year;
  2. Personal trainer – up to the cost of one cost;
  3. Massage therapist – also cost of one visit; and
  4. Golf or Tennis instructor – a thoughtful gift.

If you’re unable to tip or give a gift, a thoughtful thank you note will acknowledge the good work these people do for you throughout the year. Another effective gesture of gratitude is to send a thank you note to the supervisors of the people who provide you with great service throughout the year, letting them know how impressed you are with the service you receive. Good feedback is appreciated by both the supervisor and the people who are helping you out.
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What is the AMT?

 Not, it is not a dyslexic version of ATM!

 Back when people could shelter almost 100% of their high income, Congress decided to make that more difficult by creating the alternative minimum tax (“AMT”), a minimum tax that all must pay with a rate of 28%. This along with sweeping changes made in 1986 made it difficult for the top taxpayers, people with income over $1 million, to get much below an average tax of 20%.

On the other hand, an AMT rate as high as 28% is still great if your marginal rate is 39%.

Why do you care? Despite the title, you do not get to pick

You must pay the higher amount determined by the regular and AMT tax calculations. If you have to pay the AMT, you are paying almost a flat rate of 26% to 28%, not a graduate rate, and you are losing the value of many itemized deductions, including state income taxes paid, most mortgage interest and miscellaneous deductions. To make sure you pay taxes, certain “preference” amounts are added to your AMT income, including incentive stock options and alternate depreciation schedules.

Data on 2012 income tax indicates that nearly every married taxpayer with income between $100,000 and $500,000 owed some AMT. Thus, the AMT is no longer just for the ultra rich!

So what do you do? Plan carefully

Make sure that efforts to reduce regular taxes do not push you into paying the AMT. Here is one example: If you have a year with high ordinary income, be sure to pay all of the state income taxes due during that calendar year, since you are less likely to be in the AMT doing so but are like to be in the AMT next year if you wait until April to pay those state taxes. The lower ordinary income of next means that you will certainly be in the AMT.

Note: some states also impose an AMT, making planning quite … er, taxing!

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Oh, that looks complicated!

Good planning pays off, as in the example above, where preserving the deduction can be a very substantial savings on your federal income taxes.

Okay then, what is a financial plan?

You may hear some argue that robo-planners will not replace individual, human planners. I call them the “There’s no app for that” group.

We do believe that “There is an app for that.”
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Well, that is not what I had in mind.

But exactly what is “a financial plan”? Finding a good, workable definition is a challenge.

Wikipedia says:

Textbooks used in colleges offering financial planning-related courses also generally do not define the term “financial plan.” For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[8] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards’ definition of ‘financial planning’.

Can’t we define “financial plan”?

Yes. Investopedia offers this broad definition:

While there is no specific template for a financial plan, most licensed professionals will include knowledge and considerations of the client’s future life goals, future wealth transfer plans and future expense levels. Extrapolated asset values will determine whether the client has sufficient funds to meet future needs.

And Wikipedia gives more detail:

In general usage, a financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual’s finances and sometimes includes a series of steps or specific goals for spending and saving in the future.

So you need to project where your assets can take you to be sure you meet your future in good shape. Makes sense

And what is my definition?

A to do list or “action plan” that tells you what you need to change now so you optimize the use of all your resources to achieve your major, long term goals in the future.         

So what does a financial plan look like?

If you paid to have a financial plan prepared, and have a complicated situation, you may get a glossy, bound book filled with projections, charts and graphs, plus text. While much of it may be boilerplate, it will tell you where you are going from now until you die, how your money will follow if you invest according to the plan, and what you need to change on taxes, insurance, and your estate plan.

At the other extreme, you can glean the essential steps and write them all on a PostIt note, which you then place in a spot you see often enough to remind you what to do:

  • Maximize my 401(k) contributions,
  • Set up and contribute to a Roth IRA,
  • Review my investment allocation, use ETFs,
  • Steer clear of any major credit card debt,
  • Review my beneficiary designations,
  • Sign an medical directive, and
  • Save enough for a fun (not too expensive) vacation next summer!

In the end, it doesn’t matter how many pages or what the plan looks like; what matters is that you learn from reviewing your finances and change how you manage your resources so that improve your finances.

So, yes, a simple to do list could be enough, if you follow it!