Many recent graduates are moving into the work force. Life transitions often involve a lot of decisions – housing? car? benefits? budget? This is also a good time to consider your financial goals. Different goals have different time horizons. Some are short term—such as establishing an emergency fund—and some are long term, like retirement. Tackling all your savings goals at once is unrealistic, so you should prioritize. The most immediate savings goal is your emergency fund. Experts recommend that you have an emergency fund sufficient to cover six months living expenses. Assets in the emergency fund should be very liquid such as cash in a savings account or in a money market fund. If you are new to the workforce, it may take time to build up an adequate reserve. The easiest way is to transfer a portion of your paycheck every pay period directly into an account. You may…
Why Investment Fees Matter
Understanding how much you are paying for investments and investment advice is essential. Fees reduce your return. Over time, high fees can hinder the growth of your assets. In the investment arena, fees are usually charged as a percentage of assets quoted in terms of basis points. A basis point is one one-hundredth of 1 percent, or 0.01 percent. In other words, 100 basis points equals 1.0 percent, and 50 basis points equals one-half of 1 percent, or 0.50 percent. There are many kinds of fees. Some fees are transaction-based: these compensate brokers for putting clients in an investment or for executing a trade. With a commission, the brokerage firm charges a fee for each transaction. In contrast to brokers, who charge commissions, fee-based advisers charge an annual fee based on a percentage of assets under management. The adviser is paid to manage your money and not to execute trades. If the…
Understanding Tax Efficiency
As an investor, you need to consider the impact of taxes. The taxes owed on investments depend on the type of investment account. For tax-deferred accounts, such as 401(k)s and 403(b)s, you contribute money from your paycheck before it is taxed, known as “pre-tax dollars.” In other words, you do not pay taxes on the portion of your salary that goes directly into your 401(k) or 403(b). Moreover, you do not pay taxes on the income or capital gains generated each year. Instead, you pay taxes when you withdraw money from the account. Roth IRAs and college savings plans, such as 529s, are examples of a tax-advantaged account. You fund these kinds of accounts with after-tax dollars, and you do not get a tax break upfront. After you fund a Roth IRA or 529, the income, appreciation, and withdrawals are tax-free. For taxable accounts, income and capital gains are not tax-exempt or tax-deferred, so you…
Organize Your Tax Files – You Will Be Glad That You Did
Preparing your taxes is not a fun task. It can be significantly less unpleasant if you are organized. Your taxes involve a lot of documents, and you must keep good records. In addition to your W-2 (or 1099-Misc forms, if you are a contractor), you will need supporting documentation related to your savings and investment accounts. A 1099 is a statement that details the dividends, interest, and capital gains earned during the year. Some investments are structured as partnerships and provide a year-end, or annual, K-1 instead of a 1099. A K-1 shows an investor’s share of partnership income for a given year. Transactions that you need to document at tax time occur throughout the year. Therefore, I strongly recommend that you keep a Current Year Taxes folder. As you receive tax-related documents in the mail or from a financial firm’s portal, store them in this paper folder or a…
Assessing your Financial Needs and Goals
What Are Your Savings Goals? The new year is the perfect time to reconsider your financial goals. If you have a partner, make this discussion a priority. It is the only way to determine if you are on the same page when planning for the future. To assess your financial needs, ask yourself the following questions: Do you need dividends or interest to support your present lifestyle? Are there any impending near-term changes in your life? When do you plan to retire? What about other long-term plans such as having children, changing jobs, traveling, or starting a business? Do you want to help your children with college expenses? Do you want to support specific charities? Are there unique factors to consider, such as health issues? Do other people rely on you for financial support? Do you have children or other family members with special needs? Are you interested in and…
Prioritize Financial Goals
Life transitions, such as college graduation, are a good time to think about financial goals. Different goals have different time horizons. Some are short term—such as establishing an emergency fund—and some are long term, like retirement. Tackling all your savings goals at once is unrealistic, so you should prioritize. The most immediate savings goal is your emergency fund. Experts recommend that you have an emergency fund sufficient to cover six months living expenses. Assets in the emergency fund should be very liquid such as cash in a savings account or in a money market fund. If you are new to the workforce, it may take time to build up an adequate reserve. The easiest way is to transfer a portion of your paycheck every pay period directly into an account. You may need a bigger emergency fund in some circumstances. You may face hurdles when looking for a new job,…
Pay Attention – Fraud is on the Rise
During turbulent times, people are often anxious, preoccupied, or distracted. COVID-19 is no exception. Not surprisingly, there is a positive correlation between turmoil and the incidence of cybercrime. During 2020, identity theft and financial frauds have been on the rise: hackers and scammer prey on people’s fear and vulnerability. Advances in technology and mobile communication have changed the way we manage our finances. These innovations save time and allow us to be more informed consumers. But the innovations have also introduced new risks and exposures. With time, your financial accounts will grow, and so will the potential losses from identity theft and fraud. Review your credit report regularly. You can download your free report and search for errors or indications of fraud at www.annualcreditreport.com. If you will not be in the market for a new loan soon, it is possible to freeze or lock your credit profile to reduce the…
Net Worth and Cash Flow
Establishing sound personal finance practices while you are young is essential, and thinking about cash flow and net worth is a part of that. For those who are new to personal financial management, you need to think of the long run. Discipline and having the right mindset will help you stay out of debt and achieve your financial goals. Cash Flow Cash flow depends not only on your income but also on changes in your savings and debts. If, at the end of the year, you have not saved, and your credit card balance has grown, there is only one explanation – you consumed more than you earned. If you were able to save money or your debts have declined, you consumed less than you earned. Net Savings In terms of your take-home pay, you either spend it, consume it, or save it. The difference between income and spending or…
Financial Fundamentals – How to Think About Risk
The financial fundamentals of risk evaluation are becoming more important than ever. This week, the S&P 500 reached a record level, surpassing the previous peak, which occurred on February 19th. After just a few months, the Index fully rebounded from a decline of 34%, which marks that fastest bear market recovery in history. The S&P 500 Index is market-cap-weighted, meaning that the companies with the largest market capitalization make up more of the Index and have a greater impact on the performance of the overall Index. The top five companies – Apple, Microsoft, Amazon, Facebook, and Alphabet (or Google) – make up more than 20% of the Index and significantly impact the performance. For 2020, the S&P 500 Index is up 4.9%, whereas the S&P 500 Index on an equal-weighted basis is down almost as much. Moreover, the Russell 2000 Index, which is the leading domestic small-cap index, is also…
Strategies to Stay Out of Debt
Establishing sound personal finance practices while you are young is essential. For those just starting out who are new to money management, you need to consider your financial future. Discipline and having the right mindset will help you stay out of debt and achieve your financial goals. Track and Analyze Your Spending The first step is to analyze your spending to see where your money is going. Limit yourself to one or two credit cards, using one for most day-to-day purchases. This makes it easier to track spending and your total credit card balances. Having multiple credit card accounts is a major reason that card debts grow. As credit card balances climb, it also hurts your credit score. Even if you can pay off your balance every month, using more than 30% of your credit line has a negative impact on your credit score. Peer-to-peer (P2P) networks offer convenience and…