April 1, 2011
The ACA Blog Has Moved
Effective April 1, 2011 the ACA Blog is located on the ACA website. Please click on ACA Blog to access the newest postings.
March 27, 2011
Three Ways to Reduce Your 2010 Tax Bill
It’s that time of year again! Tax documents are arriving by mail and the race towards April 18th is on. While 2010 is over and gone, there are still things we can do to reduce our tax liability for last year. Here’s a list of a few things you can do now that might reduce your tax bill for 2010.
1. Take full advantage of available tax credits
The government offers taxpayers an array of credits for items and services purchased last year. Remember that credits are a dollar for dollar reduction in tax liability as compared to a tax deduction, which will reduce your taxable income. In short, tax credits are preferable to tax deductions. While some credits are phased out by income, such as the child tax credit, other credits are not phased out by income, such as the residential energy credit.
Below is a list of popular credits that often get overlooked:
Residential Energy Credit. Taxpayers can use this credit for improvements to a principle residence that creates an increase in energy efficiency: i.e. Installation of a tankless hot water heater.
Alternative Motor Vehicle Credit. The government may give you a tax credit if you purchased an alternative fuel vehicle, such as a hybrid automobile. Speak with your preparer about the applicable restrictions and rules.
First Time Homebuyers Credit. This credit certainly made the headlines last year. If you purchased a home in 2010, you may be eligible for a tax credit that could save you tax dollars.
American Education Opportunity Tax Credit. This credit extends the credit formerly known as the Hope credit. If you sent a child to college in 2010, this credit might be for you!
Dependent and Child Care Credit. This credit is available for working tax payers with dependents that require care during working hours. There are several requirements and regulations with this credit, but it is certainly worth the effort, if applicable.
The above list is only a portion of available credits. It is beyond the scope of this article to explore the entire list. It is important to discuss the applicability of tax credits with your tax professional for items applicable to your 2010 return. It could save you big bucks!
2. Maximize Retirement Contributions
Did you know that the government will subsidize your retirement? That’s right, through tax deductions the government effectively is subsidizing your retirement. Many personal retirement accounts allow contributions up until April 18th, and those contributions can apply to 2010.
Contributions into tax-deferred retirement accounts, such as IRAs, SEPs, and SIMPLE IRAs reduce current taxable income; therefore reducing tax liability. For example, a couple in the 25% tax bracket who can make an allowable Traditional IRA contribution of $10,000 could save $2500 or more. That’s a 25% return on investment before this money is even invested! Best of all, this contribution can be made as late as April 18th.
There are a multitude of rules and regulations regarding allowable retirement contributions and deadlines, so it’s imperative to speak with a tax professional before making a decision.
3. Review Itemized Deductions
Schedule A (Itemized Deductions) is a common area for mistakes and omissions. In my experience, I have seen mistakes and omissions on this form due to a lack of effort from the taxpayer. For example, many people leave tax dollars on the table when it comes to charitable deductions. Charitable deductions can help reduce taxable income and ultimately decrease your tax bill.
Here are a few other areas that are often overlooked.
Charitable Mileage. A deduction is allowable for qualifying charitable mileage. For example, if you drive to a local Goodwill to drop off items, the mileage to and from is deductible.
Sales Taxes. For your 2010 return, you may deduct sales taxes paid for automobile purchases. Depending on the state in which you live, this deduction can save you several hundred dollars or more. Let your tax preparer know if you purchased a vehicle in 2010.
Non-cash Charitable Contributions. Organizations such as Goodwill perform a great service to our communities. It’s important to properly substantiate non-cash contributions to maximize deductibility. Make sure to always get a receipt from the organization, create an itemized list of items being donated, and do not forget to properly value the items being donated to fully substantiate these types of donations. There are several documents available to assist taxpayers in determining the donated value of each item, including one on Goodwill’s website. It’s worth the additional effort.This is another area where a good tax preparer can come in handy. Don’t be afraid to ask for assistance from your preparer when it comes to properly valuing your donated items. Also, make sure to keep up with your mileage as well!
Utilize Miscellaneous Items Deductions. Miscellaneous itemized deductions are subject to a 2% floor of adjusted gross income. This means in order to get a deduction you must present allowable deductions greater than 2% of your adjusted gross income. The number of employees working from home has increased in the past few years. An office in the home of an employed taxpayer is a fine example of a miscellaneous itemized deduction. Tax preparation fees, financial planning, unreimbursed employee expenses, and investment expenses are a few more examples of miscellaneous itemized deductions.
Most Taxpayers don’t have the time and energy to fully understand all the available deductions, credits, and retirement contribution options available. The key to properly handling one of the largest recurring expenses (taxes) in anyone’s financial world is by implementing a proactive tax strategy. But, even with good tax planning, numbers can change and life can get in the way. When that occurs, the above options allow taxpayers another chance to reduce their tax liability.
I utilize integral tax planning for my clients. I feel this area is one of the most important (if not the most important) part of the financial planning puzzle. Taxes can touch and impact (both positively and negatively) many aspects of our financial world, so it’s important to manage our tax liability. It’s important that taxpayers work closely with tax preparers.
I am a firm believer in holistic financial planning, which includes proactive tax planning. If you are searching for a holistic financial planner in your area, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA advisors integrate taxes into financial planning, which is an enormous benefit to clients.
In full disclosure, Troy Von Haefen is a member of The Alliance of Cambridge Advisors.
Any of the above information is intended for informational purposes only and is not intended to be considered tax advice or implemented as such.
By Troy Von Haefen, CFP®
1. Take full advantage of available tax credits
The government offers taxpayers an array of credits for items and services purchased last year. Remember that credits are a dollar for dollar reduction in tax liability as compared to a tax deduction, which will reduce your taxable income. In short, tax credits are preferable to tax deductions. While some credits are phased out by income, such as the child tax credit, other credits are not phased out by income, such as the residential energy credit.
Below is a list of popular credits that often get overlooked:
Residential Energy Credit. Taxpayers can use this credit for improvements to a principle residence that creates an increase in energy efficiency: i.e. Installation of a tankless hot water heater.
Alternative Motor Vehicle Credit. The government may give you a tax credit if you purchased an alternative fuel vehicle, such as a hybrid automobile. Speak with your preparer about the applicable restrictions and rules.
First Time Homebuyers Credit. This credit certainly made the headlines last year. If you purchased a home in 2010, you may be eligible for a tax credit that could save you tax dollars.
American Education Opportunity Tax Credit. This credit extends the credit formerly known as the Hope credit. If you sent a child to college in 2010, this credit might be for you!
Dependent and Child Care Credit. This credit is available for working tax payers with dependents that require care during working hours. There are several requirements and regulations with this credit, but it is certainly worth the effort, if applicable.
The above list is only a portion of available credits. It is beyond the scope of this article to explore the entire list. It is important to discuss the applicability of tax credits with your tax professional for items applicable to your 2010 return. It could save you big bucks!
2. Maximize Retirement Contributions
Did you know that the government will subsidize your retirement? That’s right, through tax deductions the government effectively is subsidizing your retirement. Many personal retirement accounts allow contributions up until April 18th, and those contributions can apply to 2010.
Contributions into tax-deferred retirement accounts, such as IRAs, SEPs, and SIMPLE IRAs reduce current taxable income; therefore reducing tax liability. For example, a couple in the 25% tax bracket who can make an allowable Traditional IRA contribution of $10,000 could save $2500 or more. That’s a 25% return on investment before this money is even invested! Best of all, this contribution can be made as late as April 18th.
There are a multitude of rules and regulations regarding allowable retirement contributions and deadlines, so it’s imperative to speak with a tax professional before making a decision.
3. Review Itemized Deductions
Schedule A (Itemized Deductions) is a common area for mistakes and omissions. In my experience, I have seen mistakes and omissions on this form due to a lack of effort from the taxpayer. For example, many people leave tax dollars on the table when it comes to charitable deductions. Charitable deductions can help reduce taxable income and ultimately decrease your tax bill.
Here are a few other areas that are often overlooked.
Charitable Mileage. A deduction is allowable for qualifying charitable mileage. For example, if you drive to a local Goodwill to drop off items, the mileage to and from is deductible.
Sales Taxes. For your 2010 return, you may deduct sales taxes paid for automobile purchases. Depending on the state in which you live, this deduction can save you several hundred dollars or more. Let your tax preparer know if you purchased a vehicle in 2010.
Non-cash Charitable Contributions. Organizations such as Goodwill perform a great service to our communities. It’s important to properly substantiate non-cash contributions to maximize deductibility. Make sure to always get a receipt from the organization, create an itemized list of items being donated, and do not forget to properly value the items being donated to fully substantiate these types of donations. There are several documents available to assist taxpayers in determining the donated value of each item, including one on Goodwill’s website. It’s worth the additional effort.This is another area where a good tax preparer can come in handy. Don’t be afraid to ask for assistance from your preparer when it comes to properly valuing your donated items. Also, make sure to keep up with your mileage as well!
Utilize Miscellaneous Items Deductions. Miscellaneous itemized deductions are subject to a 2% floor of adjusted gross income. This means in order to get a deduction you must present allowable deductions greater than 2% of your adjusted gross income. The number of employees working from home has increased in the past few years. An office in the home of an employed taxpayer is a fine example of a miscellaneous itemized deduction. Tax preparation fees, financial planning, unreimbursed employee expenses, and investment expenses are a few more examples of miscellaneous itemized deductions.
Most Taxpayers don’t have the time and energy to fully understand all the available deductions, credits, and retirement contribution options available. The key to properly handling one of the largest recurring expenses (taxes) in anyone’s financial world is by implementing a proactive tax strategy. But, even with good tax planning, numbers can change and life can get in the way. When that occurs, the above options allow taxpayers another chance to reduce their tax liability.
I utilize integral tax planning for my clients. I feel this area is one of the most important (if not the most important) part of the financial planning puzzle. Taxes can touch and impact (both positively and negatively) many aspects of our financial world, so it’s important to manage our tax liability. It’s important that taxpayers work closely with tax preparers.
I am a firm believer in holistic financial planning, which includes proactive tax planning. If you are searching for a holistic financial planner in your area, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA advisors integrate taxes into financial planning, which is an enormous benefit to clients.
In full disclosure, Troy Von Haefen is a member of The Alliance of Cambridge Advisors.
Any of the above information is intended for informational purposes only and is not intended to be considered tax advice or implemented as such.
By Troy Von Haefen, CFP®
March 23, 2011
Claiming Homebuyer’s Credit on your 2010 Tax Return
Question: I was wondering what documentation you are suggesting your clients submit to claim the $6,500 home-buyer’s tax credit.
Answer: Here is what I would do for a client:
- Paper file return
- Properly complete Form 5405
- Copy of HUD Settlement Statement showing signature of buyer and seller
- Copy of mortgage statements from the last 5 years you lived in your previous home
By Kevin Jacobs, CFP®
March 19, 2011
Rising Oil Prices and Falling Dictators
The headlines and talk shows scream at us about the rising oil prices and Mideastern dictators falling like dominos. The stock market is scared and so the S&P500 has fallen 5% in the past week. Here we go again, you might say. Are we sliding back into another recession? These are very legitimate concerns but let’s look at the facts:
• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.
• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.
• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.
• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!
By Judy Stewart, CFP®, MBA, EA
• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.
• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.
• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.
• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!
By Judy Stewart, CFP®, MBA, EA
March 15, 2011
Three Steps to a Solid Financial Decision
I recently had a client call and ask my opinion about an extended warranty offer for his car. This was an interesting conversation which I thought may be helpful to share with others. Not so much in the sense of the viability of extended warranties for cars, but more so from the standpoint of learning how to make a well informed decision.
When it comes to decisions, I generally follow three steps to assist and guide clients. While some decisions may require more, these three steps are great starting points in the search for clarity.
1. Information
Information is golden when it comes to making a decision. The more information you can ascertain the easier the decision. The detail and fine print usually contain key points that often get over-looked but can be big factors in the decisions making process. Ex. Does the extended warranty require a deductible, and, if so, how much?
The point of gathering information is to ascertain black and white data and remove as much emotion as possible. While the salesman pushing the car warranty delivers the hard sell by emoting fear based on the possible financial liability of expensive repairs, the car owner needs to understand the true cost of the warranty. Sure, auto repairs can be expensive, but does the warranty truly cover those expensive repairs and for how much?
2. The Financial Bottom Line
This is the subjective area of the decision process. Where do you draw the line when it comes to cost? How much is too much to pay?
Let’s go back to the warranty example. The cost of the warranty was roughly $2000. The car was a Toyota with 30,000 miles. Using the information we gathered from the details of the proposed plan we learned this warranty would only be a viable option for the next 2-2 ½ years (due to mileage restrictions). I simply asked my client how many repairs $2000 would cover. He responded just as I thought, “quit a few!” After looking at what was actually covered and factoring the deductible and other limitations, the cost suddenly seemed pricey. My client drew the line and decided the cost was just too high.
3. Gut Check
We really need to listen to what our gut tells us when it comes to decisions. We also have to be careful not to rationalize a bad decision. This is why it’s important to follow steps 1 & 2, especially in regards to removing the emotion. If we can remove the emotion from the decision, the answer usually becomes clear.
While my client’s gut told him the warranty didn’t feel right (prompting his phone call to me), the salesman worked hard to play on emotions and cloud the decision making process. After removing the emotion my client’s gut proved to be right. The risk of possible repairs was a risk my client was willing to bear…and more importantly, one my client’s gut was willing to bear.
Most decisions get made without too much thought and deliberation, but the occasional difficult financial decision can be painful. Following the three steps above can help to clarify and remove some of the pain. While the simple example I used above may seem small to some, the three steps know no financial limit.
We have all made a few bad decisions along life’s journey, and, looking back on those decisions, we can usually agree that something was missing in the process. Take a look back at those decisions and see if one of the three points above was removed during your time of deliberation.
Have you experienced a difficult financial decision recently? How did you resolve the issue? What methods do you use to help you conquer a difficult decision?
By Troy Von Haefen, CFP®
When it comes to decisions, I generally follow three steps to assist and guide clients. While some decisions may require more, these three steps are great starting points in the search for clarity.
1. Information
Information is golden when it comes to making a decision. The more information you can ascertain the easier the decision. The detail and fine print usually contain key points that often get over-looked but can be big factors in the decisions making process. Ex. Does the extended warranty require a deductible, and, if so, how much?
The point of gathering information is to ascertain black and white data and remove as much emotion as possible. While the salesman pushing the car warranty delivers the hard sell by emoting fear based on the possible financial liability of expensive repairs, the car owner needs to understand the true cost of the warranty. Sure, auto repairs can be expensive, but does the warranty truly cover those expensive repairs and for how much?
2. The Financial Bottom Line
This is the subjective area of the decision process. Where do you draw the line when it comes to cost? How much is too much to pay?
Let’s go back to the warranty example. The cost of the warranty was roughly $2000. The car was a Toyota with 30,000 miles. Using the information we gathered from the details of the proposed plan we learned this warranty would only be a viable option for the next 2-2 ½ years (due to mileage restrictions). I simply asked my client how many repairs $2000 would cover. He responded just as I thought, “quit a few!” After looking at what was actually covered and factoring the deductible and other limitations, the cost suddenly seemed pricey. My client drew the line and decided the cost was just too high.
3. Gut Check
We really need to listen to what our gut tells us when it comes to decisions. We also have to be careful not to rationalize a bad decision. This is why it’s important to follow steps 1 & 2, especially in regards to removing the emotion. If we can remove the emotion from the decision, the answer usually becomes clear.
While my client’s gut told him the warranty didn’t feel right (prompting his phone call to me), the salesman worked hard to play on emotions and cloud the decision making process. After removing the emotion my client’s gut proved to be right. The risk of possible repairs was a risk my client was willing to bear…and more importantly, one my client’s gut was willing to bear.
Most decisions get made without too much thought and deliberation, but the occasional difficult financial decision can be painful. Following the three steps above can help to clarify and remove some of the pain. While the simple example I used above may seem small to some, the three steps know no financial limit.
We have all made a few bad decisions along life’s journey, and, looking back on those decisions, we can usually agree that something was missing in the process. Take a look back at those decisions and see if one of the three points above was removed during your time of deliberation.
Have you experienced a difficult financial decision recently? How did you resolve the issue? What methods do you use to help you conquer a difficult decision?
By Troy Von Haefen, CFP®
March 11, 2011
Common “Do-It-Yourself” Tax Preparation Mistakes
I find three of the most common “do-it-yourself” tax preparation mistakes include capital gains, business asset depreciation and rental home cost basis.
Many people do not know the difference between short-term (1 year or less) and long-term (1 year and 1 day+) capital gains tax treatment. I have met individuals who had to pay more in tax then necessary because they sold their asset within a day or two of it becoming a long-term asset. Knowing the difference between short-term and long-term capital gains can save you up to 20% or more on your federal return. If you receive an inherited asset, it is deemed to be a long-term capital gain and it receives a step-up in basis. This means your basis is what it was worth on the day the grantor died. If you have capital gains on your return and/ or your received an inherited asset, I strongly encourage you to seek out a professional and competent tax professional.
Moreover, another area worth significant tax savings on your return is calculating and planning your business asset deprecation correctly. I have had to amend many returns to correct their depreciation schedules. It is important you keep your purchase documentation for business assets and allow your tax professional to determine the best course of action in preparing your depreciation schedules. Many times, if I have a start-up business, it is more advantageous to depreciate business assets rather than taking a Section 179 expense deduction. If your business is showing a loss even before you have calculated depreciation, it is probably not in your best interest to expense the asset.
Finally, cost basis tracking on rental properties is another area where I see common mistakes. This is especially evident with converted personal to rental property. If you convert your home from a personal residence to a rental, your basis for depreciation is either the FMV (Fair Market Value) or adjusted basis at the time the property was converted. The adjusted basis is the original purchase price of the home in addition to many improvements and purchasing expenses. The basis for your rental property is the lower of these numbers (current FMV or adjusted cost basis).
Unless you have a very simple tax return, I strongly encourage you to seek out the advice of a competent professional. Tax preparation work is very tricky and can cost you in the long run if it is not done correctly. If you have capital gains, business depreciation or rental property on your return, I would consult with either a CPA or Enrolled Agent before filing your own return. The value of a good professional should far outweigh any fee they may charge.
By Kevin Jacobs, CFP®
Many people do not know the difference between short-term (1 year or less) and long-term (1 year and 1 day+) capital gains tax treatment. I have met individuals who had to pay more in tax then necessary because they sold their asset within a day or two of it becoming a long-term asset. Knowing the difference between short-term and long-term capital gains can save you up to 20% or more on your federal return. If you receive an inherited asset, it is deemed to be a long-term capital gain and it receives a step-up in basis. This means your basis is what it was worth on the day the grantor died. If you have capital gains on your return and/ or your received an inherited asset, I strongly encourage you to seek out a professional and competent tax professional.
Moreover, another area worth significant tax savings on your return is calculating and planning your business asset deprecation correctly. I have had to amend many returns to correct their depreciation schedules. It is important you keep your purchase documentation for business assets and allow your tax professional to determine the best course of action in preparing your depreciation schedules. Many times, if I have a start-up business, it is more advantageous to depreciate business assets rather than taking a Section 179 expense deduction. If your business is showing a loss even before you have calculated depreciation, it is probably not in your best interest to expense the asset.
Finally, cost basis tracking on rental properties is another area where I see common mistakes. This is especially evident with converted personal to rental property. If you convert your home from a personal residence to a rental, your basis for depreciation is either the FMV (Fair Market Value) or adjusted basis at the time the property was converted. The adjusted basis is the original purchase price of the home in addition to many improvements and purchasing expenses. The basis for your rental property is the lower of these numbers (current FMV or adjusted cost basis).
Unless you have a very simple tax return, I strongly encourage you to seek out the advice of a competent professional. Tax preparation work is very tricky and can cost you in the long run if it is not done correctly. If you have capital gains, business depreciation or rental property on your return, I would consult with either a CPA or Enrolled Agent before filing your own return. The value of a good professional should far outweigh any fee they may charge.
By Kevin Jacobs, CFP®
March 7, 2011
Top Ten Things To Do During Tax Season (Apologies to David Letterman)
10. Get your things organized and to your preparer as soon possible to avoid needing to file an extension.
9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.
8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.
7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.
6. Start your file now for 2011 tax data.
5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.
4. Start a mileage log with a section for charitable miles, medical miles, and business miles.
3. Keep track of all your out-of-pocket business expenses.
2. Keep organized on your other financial issues, not just taxes.
1. Reward your tax preparer with chocolate – especially if it’s me!
By Linda Leitz, CFP®, EA
9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.
8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.
7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.
6. Start your file now for 2011 tax data.
5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.
4. Start a mileage log with a section for charitable miles, medical miles, and business miles.
3. Keep track of all your out-of-pocket business expenses.
2. Keep organized on your other financial issues, not just taxes.
1. Reward your tax preparer with chocolate – especially if it’s me!
By Linda Leitz, CFP®, EA
March 3, 2011
You Get What You Pay For
Several years ago, after the completion my CFP® coursework, I was searching for practical guidance in tax preparation. I enrolled in the H&R Block tax course. I was seeking a pencil to paper type experience after the high level learning in taxation from the CFP® tax course.
I breezed through the Block course and did walk away with the experience I desired. I was able to get comfortable with some of the more complex tax forms and put my CFP® knowledge to the test. Of course, after completion of the Block course, their recruiters tried to sink their claws into me, but I politely declined. I knew I didn’t want to participate in a “drive through” tax preparation system.
There are many choices in tax preparers, and choosing the right preparer is important. Making a poor choice can be an expensive decision. The preparer/client relationship is essential, and I certainly see evidence of disconnected relationships by the number of tax return mistakes I find on prospective client’s returns.
Most mistakes I find are due to a lack of communication. How does the client know what information the preparer needs if the preparer doesn’t ask for it? And, how does the preparer know what info is needed if he/she doesn’t know the client?
Building a good client/preparer relationship takes time, and, unfortunately, the “drive through” tax prep services seen in many forms across the country doesn’t allow for time. If you want a relationship, you will have to pay for it, but the price you pay will be worth the cost. A preparer who knows you and your situation is golden when it comes to seeking out additional deductions.
If your return is very simple, say just a w-2, one the many national chain type preparers would be fine to utilize. But, if your return has any hint of complexity, it’s worth the additional expense to find a preparer who will take the needed time to complete the return thoroughly.
If you are searching for a tax pro this season, ask questions and explore the potential relationship. How thoroughly will your return be prepared? Will you have the ability to ask questions and receive acceptable answers? Will you have the ability to build a relationship that will position you to save tax dollars now and in the future? Remember, the preparer you are looking for and need may not be the least expensive option.
By Troy Von Haefen, CFP®
I breezed through the Block course and did walk away with the experience I desired. I was able to get comfortable with some of the more complex tax forms and put my CFP® knowledge to the test. Of course, after completion of the Block course, their recruiters tried to sink their claws into me, but I politely declined. I knew I didn’t want to participate in a “drive through” tax preparation system.
There are many choices in tax preparers, and choosing the right preparer is important. Making a poor choice can be an expensive decision. The preparer/client relationship is essential, and I certainly see evidence of disconnected relationships by the number of tax return mistakes I find on prospective client’s returns.
Most mistakes I find are due to a lack of communication. How does the client know what information the preparer needs if the preparer doesn’t ask for it? And, how does the preparer know what info is needed if he/she doesn’t know the client?
Building a good client/preparer relationship takes time, and, unfortunately, the “drive through” tax prep services seen in many forms across the country doesn’t allow for time. If you want a relationship, you will have to pay for it, but the price you pay will be worth the cost. A preparer who knows you and your situation is golden when it comes to seeking out additional deductions.
If your return is very simple, say just a w-2, one the many national chain type preparers would be fine to utilize. But, if your return has any hint of complexity, it’s worth the additional expense to find a preparer who will take the needed time to complete the return thoroughly.
If you are searching for a tax pro this season, ask questions and explore the potential relationship. How thoroughly will your return be prepared? Will you have the ability to ask questions and receive acceptable answers? Will you have the ability to build a relationship that will position you to save tax dollars now and in the future? Remember, the preparer you are looking for and need may not be the least expensive option.
By Troy Von Haefen, CFP®
February 27, 2011
Almost Whole
I am continually surprised by questions from financial reporters who are still asking how my clients are faring after losing half of their retirement savings or by individual investors who are still fretting over losing half of their nest egg. If you followed our advice, as about 95% of our clients did, to stay the course and avoid selling during the drop in the market you would be close to break even now. If your risk tolerance precluded you from staying in the market, you may have realized a greater loss. This is a good reminder that we need to avoid acting on emotional reactions to the stock market. The stock market is cyclical and you can’t recover from a loss if you aren’t in the market. The stock market is counter intuitive – generally, the best time to buy is when you feel like selling and the best time to sell is when you feel like buying.
Here are some figures that will illustrate the actual change in the market over the last three or four years. The S&P 500 hit an all time high of around 1561 in October of 2007 and dropped about 56% to around 683 by March of 2009. Since March of 2009 the market increased by about 88% to 1286 on January 31, 2011. While it hasn’t reached the peak of 1561 it has returned to the 1200-1300 level where the market hovered throughout the summer of 2008 – before the significant drop in September 2008. The NASDAQ hit an all time high of around 2810 in October of 2007 and dropped about 54% to around 1293 by March of 2009. Since March of 2009 the NASDAQ has increased by about 109% to 2706 on January 31, 2011.
By Jane Young, CFP®, EA
Here are some figures that will illustrate the actual change in the market over the last three or four years. The S&P 500 hit an all time high of around 1561 in October of 2007 and dropped about 56% to around 683 by March of 2009. Since March of 2009 the market increased by about 88% to 1286 on January 31, 2011. While it hasn’t reached the peak of 1561 it has returned to the 1200-1300 level where the market hovered throughout the summer of 2008 – before the significant drop in September 2008. The NASDAQ hit an all time high of around 2810 in October of 2007 and dropped about 54% to around 1293 by March of 2009. Since March of 2009 the NASDAQ has increased by about 109% to 2706 on January 31, 2011.
By Jane Young, CFP®, EA
February 23, 2011
The New Normal
A number of clients have expressed alarm at the recent clamor of commentators who have been predicting a cataclysmic economic change worldwide. These pundits claim that we are facing an economic “New Normal” and express concern that the ‘old’ economic rules on which we rely no longer operate.
Their conclusions? Drastic changes are needed in our lives and investments to accommodate the “New Normal!”
Usually they question the viability of the U.S. dollar and offer the possibility that China, or perhaps a block of other nations, are somehow positioned to ‘take over’ the U.S. because they hold so many U.S. bonds. Another variation of this calamity centers on the recent collapse of the real estate market, the precipitous drop in the stock market, and extraordinarily low interest rates. Taken together, these developments presage the end of American prosperity for our children and ourselves.
Of course these apocalyptic pronouncements are more effective if they are tied to some political viewpoint, the more extreme the better. More often than not, far right political viewpoints proclaim that doomsday is the certain result of left-wing politics. Leftist views generally emphasize the inevitable revolution that suppression of the masses will cause.
(Note to “Investment Advice” file: Never let your politics drive your investments!)
It’s time to confront these ridiculous assertions. Yes, it is true that the investment and economic travails of the past decade have been severe and have impacted many people worldwide. Some of these changes have not occurred before during many of our lifetimes. It is enticing to point the finger of blame and shame at our financial, economic, investment and political leadership. But that is not the whole story.
The power of momentum in democratic economies is easily underestimated. Although dramatic from time to time, the impact of severe financial shifts must be kept in proportion and viewed within a broader historical perspective. We need to recognize that most extreme economic shifts are self-correcting.
Even with unemployment at over 9%, over 90% of our citizens are employed. Real estate crashes, weather-related disasters, stock market crashes, low interest rates, etc. have all happened before. Indeed the damage done by seismic economic shifts during the Great Depression, the severe stagflation in the 1970’s, and the collapse of S. & L.’s in the 1980’s were all worse than we have seen today…and all of these are relatively minor when compared to the disruption of the financial markets in the 19th century. And whatever happened to the “New Economy” theory that gave rise to the ‘dot-com’ frenzy of the 1990’s?
It is folly to fret about how much of our debt is owned by the China (interestingly, Japan owns nearly as much U.S. debt as China, even though that fact is not usually noted). What can the Chinese do with our debt? They can’t dump it on the White House lawn and demand to be paid off with gold. They can’t go on the world markets and exchange dollars for Euros or Yen, or even buy gold. Any of these moves would be self-defeating because dumping huge amounts of money in any market would decrease the value of their remaining dollars. Actually, their only realistic option is to spend it in the U.S.!
There is a concern that the U.S. dollar is at a “tipping point” and will soon lose its status as the world’s reserve currency. But no other currency is in a position to take its place. The Euro’s stability is much too questionable. The Yuan doesn’t have a long enough history to be relied upon, especially when a dictatorial government can arbitrarily determine its value. Neither these nor other ‘respectable’ currencies such as the Yen, the British Pound, the Swiss Franc, etc. have enough depth to support a global economy.
Those who espouse extreme economic outcomes are invariably selling something. Usually it is their newsletter or book, or some strategy to beat the market, or gold itself. The most eminent economists in the world have never been able to predict any economic cycle with a meaningful consensus. Why should you believe the extreme voices of charlatans who use their advanced marketing techniques to dupe the fearful?
What can you do? I suggest that you sit back and follow sensible advice. The Functional Asset Allocation model, which is used by nearly 200 fee-only members of ACA (Alliance of Cambridge Advisors), focuses on the basics.
Consider this…there are only three possible economic scenarios: we can have inflation, deflation, or prosperity. It is a waste of time to try to determine which is coming next. The prudent approach is to be prepared for all three possibilities. As the ancient wisdom of the Torah exhorts: “Invest a third in land, a third in business, and a third in reserves!”
Today, that translates into a balanced portfolio of real estate, equities (i.e. stocks in companies), and cash and bond reserves. Trying to market-time and pick the next ‘hot investment’ is foolhardy. If you allow the vagaries of global economics, i.e. exogenous factors, to be the focus of your attention, you risk making decisions based on emotion rather than rational thought. In truth, it is the ‘endogenous factors’ in your life that determine your financial future.
As Pogo once said, “We have met the enemy, and he is us!” Instead of dithering about what will happen in the Mideast, or where interest rates are headed, or when will real estate level off, look at the things in your life that make a difference. Are you saving at least 10% of your gross income? Are you living within your means? Do you have enough liquidity to ride out a financial setback? Do you have a long-term fixed rate mortgage to protect you from inflation? Do you have government bonds to weather another bout of deflation.
Obsessing about the various complexities and possible outcomes in today’s global economy inevitably leads to rash and unwise leaps. Keep an eye on the issues within your reach! It is the key to a confident journey and a serene financial future.
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
By Bert Whitehead, MBA, JD
Their conclusions? Drastic changes are needed in our lives and investments to accommodate the “New Normal!”
Usually they question the viability of the U.S. dollar and offer the possibility that China, or perhaps a block of other nations, are somehow positioned to ‘take over’ the U.S. because they hold so many U.S. bonds. Another variation of this calamity centers on the recent collapse of the real estate market, the precipitous drop in the stock market, and extraordinarily low interest rates. Taken together, these developments presage the end of American prosperity for our children and ourselves.
Of course these apocalyptic pronouncements are more effective if they are tied to some political viewpoint, the more extreme the better. More often than not, far right political viewpoints proclaim that doomsday is the certain result of left-wing politics. Leftist views generally emphasize the inevitable revolution that suppression of the masses will cause.
(Note to “Investment Advice” file: Never let your politics drive your investments!)
It’s time to confront these ridiculous assertions. Yes, it is true that the investment and economic travails of the past decade have been severe and have impacted many people worldwide. Some of these changes have not occurred before during many of our lifetimes. It is enticing to point the finger of blame and shame at our financial, economic, investment and political leadership. But that is not the whole story.
The power of momentum in democratic economies is easily underestimated. Although dramatic from time to time, the impact of severe financial shifts must be kept in proportion and viewed within a broader historical perspective. We need to recognize that most extreme economic shifts are self-correcting.
Even with unemployment at over 9%, over 90% of our citizens are employed. Real estate crashes, weather-related disasters, stock market crashes, low interest rates, etc. have all happened before. Indeed the damage done by seismic economic shifts during the Great Depression, the severe stagflation in the 1970’s, and the collapse of S. & L.’s in the 1980’s were all worse than we have seen today…and all of these are relatively minor when compared to the disruption of the financial markets in the 19th century. And whatever happened to the “New Economy” theory that gave rise to the ‘dot-com’ frenzy of the 1990’s?
It is folly to fret about how much of our debt is owned by the China (interestingly, Japan owns nearly as much U.S. debt as China, even though that fact is not usually noted). What can the Chinese do with our debt? They can’t dump it on the White House lawn and demand to be paid off with gold. They can’t go on the world markets and exchange dollars for Euros or Yen, or even buy gold. Any of these moves would be self-defeating because dumping huge amounts of money in any market would decrease the value of their remaining dollars. Actually, their only realistic option is to spend it in the U.S.!
There is a concern that the U.S. dollar is at a “tipping point” and will soon lose its status as the world’s reserve currency. But no other currency is in a position to take its place. The Euro’s stability is much too questionable. The Yuan doesn’t have a long enough history to be relied upon, especially when a dictatorial government can arbitrarily determine its value. Neither these nor other ‘respectable’ currencies such as the Yen, the British Pound, the Swiss Franc, etc. have enough depth to support a global economy.
Those who espouse extreme economic outcomes are invariably selling something. Usually it is their newsletter or book, or some strategy to beat the market, or gold itself. The most eminent economists in the world have never been able to predict any economic cycle with a meaningful consensus. Why should you believe the extreme voices of charlatans who use their advanced marketing techniques to dupe the fearful?
What can you do? I suggest that you sit back and follow sensible advice. The Functional Asset Allocation model, which is used by nearly 200 fee-only members of ACA (Alliance of Cambridge Advisors), focuses on the basics.
Consider this…there are only three possible economic scenarios: we can have inflation, deflation, or prosperity. It is a waste of time to try to determine which is coming next. The prudent approach is to be prepared for all three possibilities. As the ancient wisdom of the Torah exhorts: “Invest a third in land, a third in business, and a third in reserves!”
Today, that translates into a balanced portfolio of real estate, equities (i.e. stocks in companies), and cash and bond reserves. Trying to market-time and pick the next ‘hot investment’ is foolhardy. If you allow the vagaries of global economics, i.e. exogenous factors, to be the focus of your attention, you risk making decisions based on emotion rather than rational thought. In truth, it is the ‘endogenous factors’ in your life that determine your financial future.
As Pogo once said, “We have met the enemy, and he is us!” Instead of dithering about what will happen in the Mideast, or where interest rates are headed, or when will real estate level off, look at the things in your life that make a difference. Are you saving at least 10% of your gross income? Are you living within your means? Do you have enough liquidity to ride out a financial setback? Do you have a long-term fixed rate mortgage to protect you from inflation? Do you have government bonds to weather another bout of deflation.
Obsessing about the various complexities and possible outcomes in today’s global economy inevitably leads to rash and unwise leaps. Keep an eye on the issues within your reach! It is the key to a confident journey and a serene financial future.
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
By Bert Whitehead, MBA, JD
February 19, 2011
How to Bullet-Proof Your Portfolio
I read an interesting article this weekend in the Wall Street Journal that really got me thinking. The basis of the article was how to profit from the impending inflation that the media is telling us is right around the corner. While I don’t necessarily discount that fact that inflation may be headed our way, I do disagree with the idea of trying to time economic cycles.
If you’re a reader of my blog, you understand that as a holistic, big-picture, fee-only financial advisor I find market timing or economic timing to be a poor choice. If now is the time to sell long bonds due to the threat of inflation, when is the right time to buy? If now is the time to buy small cap stocks, when is the right time to sell? This is the market timer’s dilemma.
I find the best response to the threat of inflation, deflation, or economic prosperity (the only three economic cycles we can face) is to develop a portfolio to handle all three. The difference between my theory and the article is that my theory is designed to be permanently implemented into the portfolio….not a moving target that requires guess work and timing to accomplish the task. Here’s how to handle the three economic cycles.
Inflation – To ward off the effects of inflation there are a couple things investors can do. First, holding cash is a good inflationary hedge. While interest rates rise, the rate paid to you in your interest bearing type accounts will increase.
Secondly, a properly leveraged home (having the right size mortgage) will also provide a buffer against inflation. Imagine this….locking in a long term fixed rate mortgage will allow the owner to pay for tomorrow’s housing cost in today’s dollars. The mortgage payment will not increase while inflation pushes housing cost around you higher.
Economic Prosperity – We don’t want to hedge against economic prosperity; we want to participate. Therefore the best way to participate in an economic upswing is by holding equities. My choice is through low-cost mutual funds and ETFs. If everything is moving along swimmingly in the economic world, which unfortunately is not currently the case, then equities as a whole will rise.
Deflation- deflation is a portfolio killer. Deflation usually creeps up after a strong market cycle, so it often catches do-it-yourself investors holding a larger percentage of equities. The market then tumbles and the investor is devastated due to the large percentage of equity holdings.
The armor required to battle the effects of deflation can be found in two forms: US Treasury Strips and CDs. Both assets hedge against falling interest rates by carrying a locked in or guaranteed rate of return. While Treasury Strips are marketable and can be sold at market rates (meaning at a loss), the idea is to buy and hold until maturity, which guarantees the return. Certainly the same can be accomplished through corporate bond….but with one big disadvantage: security! Need I say more than Enron and Worldcom!
Holding a Treasury strip or CD to maturity may sound boring, but the theory is based on protecting the interest earning side of the portfolio and providing a basis of stability. Little or no risk should be taken on this side of the portfolio. Risk should be saved for the equity portion of the portfolio.
Some of the ideas presented above may lead to a bit of confusion or fog for the non- professional, but that’s okay. The most important fact to take away is to remember that the total portfolio, which includes the primary home, should be designed to participate in a thriving economy, while buffering against the effects of both inflation and deflation. The ideas discussed above are simple and can be effective, and the best part is they are not based on market timing. Timing the market or the economy is not a wise play.
I know it’s the boring approach. I know it won’t make you rich overnight, but it won’t make you broke overnight either! If you are not sure whether your portfolio is designed to handle the three economic environments, it would be wise to speak with an advisor. The Alliance of Cambridge Advisors is a great place to start your search.
By Troy Von Haefen, CFP
If you’re a reader of my blog, you understand that as a holistic, big-picture, fee-only financial advisor I find market timing or economic timing to be a poor choice. If now is the time to sell long bonds due to the threat of inflation, when is the right time to buy? If now is the time to buy small cap stocks, when is the right time to sell? This is the market timer’s dilemma.
I find the best response to the threat of inflation, deflation, or economic prosperity (the only three economic cycles we can face) is to develop a portfolio to handle all three. The difference between my theory and the article is that my theory is designed to be permanently implemented into the portfolio….not a moving target that requires guess work and timing to accomplish the task. Here’s how to handle the three economic cycles.
Inflation – To ward off the effects of inflation there are a couple things investors can do. First, holding cash is a good inflationary hedge. While interest rates rise, the rate paid to you in your interest bearing type accounts will increase.
Secondly, a properly leveraged home (having the right size mortgage) will also provide a buffer against inflation. Imagine this….locking in a long term fixed rate mortgage will allow the owner to pay for tomorrow’s housing cost in today’s dollars. The mortgage payment will not increase while inflation pushes housing cost around you higher.
Economic Prosperity – We don’t want to hedge against economic prosperity; we want to participate. Therefore the best way to participate in an economic upswing is by holding equities. My choice is through low-cost mutual funds and ETFs. If everything is moving along swimmingly in the economic world, which unfortunately is not currently the case, then equities as a whole will rise.
Deflation- deflation is a portfolio killer. Deflation usually creeps up after a strong market cycle, so it often catches do-it-yourself investors holding a larger percentage of equities. The market then tumbles and the investor is devastated due to the large percentage of equity holdings.
The armor required to battle the effects of deflation can be found in two forms: US Treasury Strips and CDs. Both assets hedge against falling interest rates by carrying a locked in or guaranteed rate of return. While Treasury Strips are marketable and can be sold at market rates (meaning at a loss), the idea is to buy and hold until maturity, which guarantees the return. Certainly the same can be accomplished through corporate bond….but with one big disadvantage: security! Need I say more than Enron and Worldcom!
Holding a Treasury strip or CD to maturity may sound boring, but the theory is based on protecting the interest earning side of the portfolio and providing a basis of stability. Little or no risk should be taken on this side of the portfolio. Risk should be saved for the equity portion of the portfolio.
Some of the ideas presented above may lead to a bit of confusion or fog for the non- professional, but that’s okay. The most important fact to take away is to remember that the total portfolio, which includes the primary home, should be designed to participate in a thriving economy, while buffering against the effects of both inflation and deflation. The ideas discussed above are simple and can be effective, and the best part is they are not based on market timing. Timing the market or the economy is not a wise play.
I know it’s the boring approach. I know it won’t make you rich overnight, but it won’t make you broke overnight either! If you are not sure whether your portfolio is designed to handle the three economic environments, it would be wise to speak with an advisor. The Alliance of Cambridge Advisors is a great place to start your search.
By Troy Von Haefen, CFP
February 15, 2011
Happy Financial New Year!
By Linda Leitz, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
The economy still isn’t out of the woods. Many people still feel the pressure of a sluggish financial landscape. As the year beings, it’s good to get some financial goals in place. Basics are a good starting point.
Spending – Spend less than you make. If you need to make adjustments in your spending, buckle down and do it. Also, you’ll want to include in your budget the next three items.
Debt – If you have credit card or other unsecured personal debt, work on paying it down. Pay the biggest amount possible on the debt with the highest rate. If you’re working on spending, the debt won’t increase.
Emergency savings – Put money away for emergencies. You want to have some money that you can use to cover unexpected financial needs. If you have no emergency funds, work toward 5% of your pre-tax income.
Retirement savings – Things will get better in the financial world, so save toward not having to work to cover expenses. If your employer matches part of what you contribute, get to that level as quickly as possible.
If you’ve got these under control, get with a fee-only financial planner to work on some bigger goals. The financial world will get better. The faster we all get away from the behaviors that brought on the meltdown, the faster the economy will get better.
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
The economy still isn’t out of the woods. Many people still feel the pressure of a sluggish financial landscape. As the year beings, it’s good to get some financial goals in place. Basics are a good starting point.
Spending – Spend less than you make. If you need to make adjustments in your spending, buckle down and do it. Also, you’ll want to include in your budget the next three items.
Debt – If you have credit card or other unsecured personal debt, work on paying it down. Pay the biggest amount possible on the debt with the highest rate. If you’re working on spending, the debt won’t increase.
Emergency savings – Put money away for emergencies. You want to have some money that you can use to cover unexpected financial needs. If you have no emergency funds, work toward 5% of your pre-tax income.
Retirement savings – Things will get better in the financial world, so save toward not having to work to cover expenses. If your employer matches part of what you contribute, get to that level as quickly as possible.
If you’ve got these under control, get with a fee-only financial planner to work on some bigger goals. The financial world will get better. The faster we all get away from the behaviors that brought on the meltdown, the faster the economy will get better.
February 11, 2011
Ever Been Caught in the Rain?
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
We’ve all been caught out in the rain, and as an avid golfer, I can honestly say I have played golf in weather bad enough to make passersby shoot me strange looks from inside their dry cars. While an all-weather suit is a plus, a good umbrella is a must to stay dry. Just as an umbrella is a necessity in any die-hard golfer’s bag, a financial umbrella policy is a wonderful tool to protect your family.
An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.
Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.
The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.
We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.
So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.
Nashville, TN
http://www.vhfinancialmanagement.com/
We’ve all been caught out in the rain, and as an avid golfer, I can honestly say I have played golf in weather bad enough to make passersby shoot me strange looks from inside their dry cars. While an all-weather suit is a plus, a good umbrella is a must to stay dry. Just as an umbrella is a necessity in any die-hard golfer’s bag, a financial umbrella policy is a wonderful tool to protect your family.
An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.
Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.
The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.
We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.
So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.
February 7, 2011
Ten Investment Resolutions for 2011
By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/
It's that time of year when many of us establish one or more New Year's resolutions. This often means committing to improving one's lifestyle by losing weight, exercising more, or drinking less. Many investors could benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year's investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.
Most of us are creatures of habit and discover that making permanent changes in our behavior is surprisingly difficult. To make matters worse, our commitment to change is sometimes tested by examples of those who ignore prudent behavior to their apparent advantage and those who follow it to their apparent detriment. Winston Churchill lived to age 90, fortified by an ample supply of champagne and cigars, while author and jogging enthusiast Jim Fixx died of a heart attack at age 52. These isolated examples may test our faith but should not encourage us to abandon a proven set of prescriptions; continuing to apply them will still improve our odds.
So, for those who find making such promises useful, here are ten investment-related resolutions that will stack the deck on your favor for better long-term wealth:
1. I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.
2. I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.
3. I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
4. I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
5. I will continue to invest new capital and work my plan because it is time in the market—and not timing the market—that matters.
6. I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) rather than "unbalance" (i.e., buying more of what's hot).
7. I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.
8. I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
9. I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
10. I will keep my cost of investing reasonable.
Most of us find it hard to follow a sensible diet or a sensible investment strategy 100% of the time. If you must stray when managing your wealth or well-being, moderation is the key. Chocolate cake is OK, as long as it's not for dinner every night. Speculating on a stock or two is all right as well, as long as you don't do it with your investment capital.
Finally, just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can benefit from having a "financial coach" to remind them about their New Year's resolutions and keep them on track toward a more prosperous future.
Here's to good health and good wealth in 2011.
Middleton, WI
http://www.trinfin.com/
It's that time of year when many of us establish one or more New Year's resolutions. This often means committing to improving one's lifestyle by losing weight, exercising more, or drinking less. Many investors could benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year's investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.
Most of us are creatures of habit and discover that making permanent changes in our behavior is surprisingly difficult. To make matters worse, our commitment to change is sometimes tested by examples of those who ignore prudent behavior to their apparent advantage and those who follow it to their apparent detriment. Winston Churchill lived to age 90, fortified by an ample supply of champagne and cigars, while author and jogging enthusiast Jim Fixx died of a heart attack at age 52. These isolated examples may test our faith but should not encourage us to abandon a proven set of prescriptions; continuing to apply them will still improve our odds.
So, for those who find making such promises useful, here are ten investment-related resolutions that will stack the deck on your favor for better long-term wealth:
1. I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.
2. I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.
3. I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
4. I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
5. I will continue to invest new capital and work my plan because it is time in the market—and not timing the market—that matters.
6. I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) rather than "unbalance" (i.e., buying more of what's hot).
7. I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.
8. I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
9. I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
10. I will keep my cost of investing reasonable.
Most of us find it hard to follow a sensible diet or a sensible investment strategy 100% of the time. If you must stray when managing your wealth or well-being, moderation is the key. Chocolate cake is OK, as long as it's not for dinner every night. Speculating on a stock or two is all right as well, as long as you don't do it with your investment capital.
Finally, just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can benefit from having a "financial coach" to remind them about their New Year's resolutions and keep them on track toward a more prosperous future.
Here's to good health and good wealth in 2011.
February 3, 2011
Cut Your Losses!
By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/
When should you sell an investment if the value drops?
Investors agonize over this and often let themselves be guided by the old adage: “Buy low, sell high.” Based on this logic, they decide they will hold any investment they buy until they can at least break even. Once a client adopts this mantra, it is difficult to convince them to sell their holding at a loss, even when it keeps dropping in price.
There is a strategy of ‘averaging down’ when an investment drops in price. For example, suppose that you buy a mutual fund or stock when it is $20 a share and then it drops to $15 a share. If you had decided it was a good buy at $20 then, logically, you should buy more because it is even a better buy at $15. And if it drops to $10, then buy even more.
This is an aggressive strategy, and requires undaunting confidence in the investment. It can work out, but it often doesn’t. When it doesn’t, the results can be catastrophic. Employees who buy their company stock are particularly prone to make this mistake. I have seen situations where clients have stubbornly held on to Pan Am, GM, Chrysler, Enron, etc. and continued adding to their holdings only to end up losing it all. On the other hand, Ford shareholders have done well using this strategy over the past few years.
A more sound investment approach is to decide that, when you buy an investment, you will reevaluate it if it drops. You evaluate the losing investment with other investments, and then make a “keep or sell” decision. For example, let’s go back to your $20 per share stock. Rather than wait until it drops to $15 you could have decided that, if it drops 10% or 15% (i.e. to $18 or $17), you will reconsider the investment. If there are other investment options with better upside potential, sell your loser and reinvest in something with better prospects. This prevents you from blindly holding on to the shares hoping they will go back to $20.
For many people, selling a loser means they made a mistake, and they are adamant about not losing money on their investments. The blatant truth is that holding on to the stock means you still have a loss, you just haven’t ‘realized’ it yet.
One technique I have used with some success is to explain to clients that by selling the stock, they are ‘harvesting’ their losses for tax purposes. The tax loss will save them tax dollars by offsetting other gains, thereby reducing the capital gains tax. It often gives them an additional $3,000 deduction against other ordinary income, which can save them about $1,000 in taxes at the 33% tax bracket.
The beauty of this is that the client can buy the stock back after 31 days. If bought back sooner, the ‘wash sale rule’ precludes them from taking the tax loss. It’s interesting to note that, no matter how resistant the client was to selling the stock at a loss initially, once they sell it they never buy it back!
Of course we do not recommend ‘market timing.’ When managing clients’ portfolios we take into consideration other factors such as the overall balance of the portfolio, the amount of the single investment relative to the total portfolio, as well as tax issues and clients’ long term goals.
For example, we don’t sell stripped Treasuries in a client’s ladder just because the market value drops. The function of this investment is to assure that the maturity value provides the cash flow necessary for spending goals (usually in retirement), without fail. We know and expect that the market value will fluctuate in the meantime, but the ending value is government guaranteed.
On the other hand we don’t hesitate to sell a mutual fund that has underperformed its peers significantly for two or more quarters in a row. We also take losses in the Cambridge Index Portfolio when we can capture them as short-term, which are the most tax advantaged.
Cutting losses isn’t limited to securities like stocks, bonds, and mutual funds. A huge concern of many clients today is whether they should ‘dump’ their real estate in this depressed market or wait until they can ‘get their money back out.’ This issue is more complex, but here are some guidelines I consider.
If the home is your personal residence, and you like it and can afford the payments, keep the house unless you have to move (e.g. new job, changing neighborhood). If it is a vacant house or vacant property, it is generally better to sell (even at a loss) because the carrying costs of keeping vacant property and running the risk that the value will continue to drop generally makes this type of real estate a bad investment at this time. You may want to review my previous blog of April 29, 2010 titled “What To Do When Your House Is Underwater.”
The issue of when to “cut your losses” is also perplexing when applied to employment and other relationships, but my expertise in these areas is limited (though I have done a lot of research…). The best approach usually is to get a therapist!
In any situation, cutting your losses sooner rather than later is usually the better course of action. Not only does it minimize financial losses, but it also reduces stress. Continually dealing with these kinds of decisions is emotionally toxic.
So make a New Year’s resolution to cut your losses in three areas that have been plaguing you. Get the monkeys off your back, and get on with a rich fulfilling new year!
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
Franklin, MI
http://www.bertwhitehead.com/
When should you sell an investment if the value drops?
Investors agonize over this and often let themselves be guided by the old adage: “Buy low, sell high.” Based on this logic, they decide they will hold any investment they buy until they can at least break even. Once a client adopts this mantra, it is difficult to convince them to sell their holding at a loss, even when it keeps dropping in price.
There is a strategy of ‘averaging down’ when an investment drops in price. For example, suppose that you buy a mutual fund or stock when it is $20 a share and then it drops to $15 a share. If you had decided it was a good buy at $20 then, logically, you should buy more because it is even a better buy at $15. And if it drops to $10, then buy even more.
This is an aggressive strategy, and requires undaunting confidence in the investment. It can work out, but it often doesn’t. When it doesn’t, the results can be catastrophic. Employees who buy their company stock are particularly prone to make this mistake. I have seen situations where clients have stubbornly held on to Pan Am, GM, Chrysler, Enron, etc. and continued adding to their holdings only to end up losing it all. On the other hand, Ford shareholders have done well using this strategy over the past few years.
A more sound investment approach is to decide that, when you buy an investment, you will reevaluate it if it drops. You evaluate the losing investment with other investments, and then make a “keep or sell” decision. For example, let’s go back to your $20 per share stock. Rather than wait until it drops to $15 you could have decided that, if it drops 10% or 15% (i.e. to $18 or $17), you will reconsider the investment. If there are other investment options with better upside potential, sell your loser and reinvest in something with better prospects. This prevents you from blindly holding on to the shares hoping they will go back to $20.
For many people, selling a loser means they made a mistake, and they are adamant about not losing money on their investments. The blatant truth is that holding on to the stock means you still have a loss, you just haven’t ‘realized’ it yet.
One technique I have used with some success is to explain to clients that by selling the stock, they are ‘harvesting’ their losses for tax purposes. The tax loss will save them tax dollars by offsetting other gains, thereby reducing the capital gains tax. It often gives them an additional $3,000 deduction against other ordinary income, which can save them about $1,000 in taxes at the 33% tax bracket.
The beauty of this is that the client can buy the stock back after 31 days. If bought back sooner, the ‘wash sale rule’ precludes them from taking the tax loss. It’s interesting to note that, no matter how resistant the client was to selling the stock at a loss initially, once they sell it they never buy it back!
Of course we do not recommend ‘market timing.’ When managing clients’ portfolios we take into consideration other factors such as the overall balance of the portfolio, the amount of the single investment relative to the total portfolio, as well as tax issues and clients’ long term goals.
For example, we don’t sell stripped Treasuries in a client’s ladder just because the market value drops. The function of this investment is to assure that the maturity value provides the cash flow necessary for spending goals (usually in retirement), without fail. We know and expect that the market value will fluctuate in the meantime, but the ending value is government guaranteed.
On the other hand we don’t hesitate to sell a mutual fund that has underperformed its peers significantly for two or more quarters in a row. We also take losses in the Cambridge Index Portfolio when we can capture them as short-term, which are the most tax advantaged.
Cutting losses isn’t limited to securities like stocks, bonds, and mutual funds. A huge concern of many clients today is whether they should ‘dump’ their real estate in this depressed market or wait until they can ‘get their money back out.’ This issue is more complex, but here are some guidelines I consider.
If the home is your personal residence, and you like it and can afford the payments, keep the house unless you have to move (e.g. new job, changing neighborhood). If it is a vacant house or vacant property, it is generally better to sell (even at a loss) because the carrying costs of keeping vacant property and running the risk that the value will continue to drop generally makes this type of real estate a bad investment at this time. You may want to review my previous blog of April 29, 2010 titled “What To Do When Your House Is Underwater.”
The issue of when to “cut your losses” is also perplexing when applied to employment and other relationships, but my expertise in these areas is limited (though I have done a lot of research…). The best approach usually is to get a therapist!
In any situation, cutting your losses sooner rather than later is usually the better course of action. Not only does it minimize financial losses, but it also reduces stress. Continually dealing with these kinds of decisions is emotionally toxic.
So make a New Year’s resolution to cut your losses in three areas that have been plaguing you. Get the monkeys off your back, and get on with a rich fulfilling new year!
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
January 30, 2011
Auto Gap Insurance: Why you may need it!
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
It seems that almost every other TV commercial during the holidays has a gesticulating car salesman telling why you need a new car. Of course, these dealers are trying to move stock by year end. “Hurry before the best deals of the year end,” is an often stated selling point. If you find yourself driving a new car, you may need to think about an auto gap policy for your new car. Gap policies are a useful policy addition that may save you money.
What is a Gap Policy?
A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.
Why does this matter?
If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.
Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.
Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.
Nashville, TN
http://www.vhfinancialmanagement.com/
It seems that almost every other TV commercial during the holidays has a gesticulating car salesman telling why you need a new car. Of course, these dealers are trying to move stock by year end. “Hurry before the best deals of the year end,” is an often stated selling point. If you find yourself driving a new car, you may need to think about an auto gap policy for your new car. Gap policies are a useful policy addition that may save you money.
What is a Gap Policy?
A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.
Why does this matter?
If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.
Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.
Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.
January 26, 2011
What is a Diminished Value Claim?
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
Recently, my wife was involved in a little fender bender in a parking lot. She was hit by a young driver who just wasn’t paying attention. The damage was not dramatic and no one was hurt. After gathering all the vital information and contacting our insurance company on the spot, both parties went on with their day.
With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?
In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.
A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.
The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.
If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.
Nashville, TN
http://www.vhfinancialmanagement.com/
Recently, my wife was involved in a little fender bender in a parking lot. She was hit by a young driver who just wasn’t paying attention. The damage was not dramatic and no one was hurt. After gathering all the vital information and contacting our insurance company on the spot, both parties went on with their day.
With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?
In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.
A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.
The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.
If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.
January 22, 2011
Long Term Care Insurance - expect premium increases
By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/
I've long been skeptical of long term care insurance (LTCI) being priced properly. A recent article in the New York Times noting MetLife's decision to stop issuing LTCI policies business gives a good example of my cause for concern.
The article states that, in addition to MetLife's LTCI problems
"The two leading players in the industry are trying to raise prices, too. Genworth Financial is seeking an 18 percent increase on older policies held by about 25 percent of its customers. And John Hancock has filed for permission to raise premiums for about 80 percent of its customers by an average of 40 percent. It has also temporarily stopped offering new long-term care insurance plans through employers while it tries to figure out what to charge."
The article goes on to say that 11 companies that were in the top 10 in market share at some point over the past decade have bailed out of the LTCI marketplace.
It hardly instills confidence that the two leading LTCI companies can't figure out what to charge for their insurance, and is no doubt unsettling for people who bought insurance from a company because of its high standing in the LTCI world to think that their premiums which are already not cheap might increase 20-40%.
Middleton, WI
http://www.trinfin.com/
I've long been skeptical of long term care insurance (LTCI) being priced properly. A recent article in the New York Times noting MetLife's decision to stop issuing LTCI policies business gives a good example of my cause for concern.
The article states that, in addition to MetLife's LTCI problems
"The two leading players in the industry are trying to raise prices, too. Genworth Financial is seeking an 18 percent increase on older policies held by about 25 percent of its customers. And John Hancock has filed for permission to raise premiums for about 80 percent of its customers by an average of 40 percent. It has also temporarily stopped offering new long-term care insurance plans through employers while it tries to figure out what to charge."
The article goes on to say that 11 companies that were in the top 10 in market share at some point over the past decade have bailed out of the LTCI marketplace.
It hardly instills confidence that the two leading LTCI companies can't figure out what to charge for their insurance, and is no doubt unsettling for people who bought insurance from a company because of its high standing in the LTCI world to think that their premiums which are already not cheap might increase 20-40%.
January 18, 2011
The Theory and Reality of Emergency Funds
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.
I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.
My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.
In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.
The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.
The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.
Nashville, TN
http://www.vhfinancialmanagement.com/
Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.
I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.
My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.
In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.
The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.
The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.
January 14, 2011
Payroll Tax Relief and What it Means to YOU
By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/
If you haven’t heard, President Obama signed a new tax bill last week. One of the items that will affect all employees is the 2% point reduction in an employee’s share of Social Security portion of the FICA Tax, from 6.2% to 4.2%. What exactly does that mean for you?
The table below illustrates the change and savings. FICA limits are currently adjusted for inflation and are currently set at $106,800. The tax savings is currently only available for 2011.
Pay 2010 Tax (6.2%) 2011 Tax (4.2%) Savings
$30,000 $1,860 $1,260 $600
$50,000 $3,100 $2,100 $1,000
$80,000 $4,960 $3,360 $1,600
$100,000 $6,200 $4,200 $2,000
$106,800 $6,621 $4,485 $2,136
This is a huge opportunity for every employed person to increase their 401k contributions or contribute to an IRA or a Roth IRA in 2011. This is FREE money, folks. Using it for retirement is a very wise move.
Carlsbad, CA
http://www.stewart-financial.com/
If you haven’t heard, President Obama signed a new tax bill last week. One of the items that will affect all employees is the 2% point reduction in an employee’s share of Social Security portion of the FICA Tax, from 6.2% to 4.2%. What exactly does that mean for you?
The table below illustrates the change and savings. FICA limits are currently adjusted for inflation and are currently set at $106,800. The tax savings is currently only available for 2011.
Pay 2010 Tax (6.2%) 2011 Tax (4.2%) Savings
$30,000 $1,860 $1,260 $600
$50,000 $3,100 $2,100 $1,000
$80,000 $4,960 $3,360 $1,600
$100,000 $6,200 $4,200 $2,000
$106,800 $6,621 $4,485 $2,136
This is a huge opportunity for every employed person to increase their 401k contributions or contribute to an IRA or a Roth IRA in 2011. This is FREE money, folks. Using it for retirement is a very wise move.
January 10, 2011
Proactive Tax Planning Strategies
By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Many people fail to plan when it comes to taxes. You can save significant amounts of money regarding your tax liability if you are willing to be plan. Below you will find some proactive tax planning strategies:
1. Learn the range for the marginal tax brackets. You can find these at http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm. With some planning, you may be able to reduce your taxable income so as to be taxed at a lower marginal rate.
2. Evaluate your investments and make sure you not only have them allocated appropriately, but also determine if they are in the most tax-efficient vehicle. See previous blog entry regarding asset location at http://stepbystepfinancialplanning.com/blog/2009/06/14/asset-location-an-often-overlooked-aspect-of-investing/
3. Fund your available retirement plans as much as possible. Don’t just contribute what the company gives you as a match!
4. Document the non-cash charitable contributions you make to organizations, such as Goodwill and Salvation Army. You give more than you realize.
5. Keep track of miles for business, unreimbursed employee expenses, charity and medical.
6. Use your investment losses in your non-retirement accounts to offset gains.
7. Be mindful of potential state tax deductions for contributions to 529 college savings plans.
8. Consider Donor Advised Funds for charitable purposes.
There are many other potential tax planning strategies so I encourage you to speak to your tax professional for ideas and suggestions. Tax preparation is nothing other than “documenting history.” Tax planning is where the real money is saved. I encourage you to take some time before the end of the year to see how you can proactively plan to reduce your 2010 tax liability.
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Many people fail to plan when it comes to taxes. You can save significant amounts of money regarding your tax liability if you are willing to be plan. Below you will find some proactive tax planning strategies:
1. Learn the range for the marginal tax brackets. You can find these at http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm. With some planning, you may be able to reduce your taxable income so as to be taxed at a lower marginal rate.
2. Evaluate your investments and make sure you not only have them allocated appropriately, but also determine if they are in the most tax-efficient vehicle. See previous blog entry regarding asset location at http://stepbystepfinancialplanning.com/blog/2009/06/14/asset-location-an-often-overlooked-aspect-of-investing/
3. Fund your available retirement plans as much as possible. Don’t just contribute what the company gives you as a match!
4. Document the non-cash charitable contributions you make to organizations, such as Goodwill and Salvation Army. You give more than you realize.
5. Keep track of miles for business, unreimbursed employee expenses, charity and medical.
6. Use your investment losses in your non-retirement accounts to offset gains.
7. Be mindful of potential state tax deductions for contributions to 529 college savings plans.
8. Consider Donor Advised Funds for charitable purposes.
There are many other potential tax planning strategies so I encourage you to speak to your tax professional for ideas and suggestions. Tax preparation is nothing other than “documenting history.” Tax planning is where the real money is saved. I encourage you to take some time before the end of the year to see how you can proactively plan to reduce your 2010 tax liability.
January 6, 2011
Five Awful Investments to Avoid in 2011*
By Bert Whitehead, M.B.A., J.D.
Franklin, MI
http://www.bertwhitehead.com/
1. Timeshares. This preposterous “investment” is based on the doubtful proposition that a $117,000 condo is really worth $585,000 because 50 chumps can be convinced to rent it one week a year for the rest of their natural lives, and pay most of the rent (totaling $11,700) in advance and the rest annually disguised as maintenance fees. These are always sold by very friendly people, usually named Joe, who cannot begin a sentence without grasping your forearms and saying, “Let me be honest with you.” In addition to a very fuzzy explanation of the investment potential, you will find out how you could get AIDS from hotel sheets (presumably not a danger at Vacation Ownership Resorts because they don’t have maid service).
a. A hint: If after reading this, you still can’t help yourself and simply must buy a timeshare, buy it on a the secondary market (i.e., look in the classified ads and buy one from some dummy who spent his kid’s college money for it last year and now is trying to dump it at half price). This is still twice what it is worth.
b. A better hint: Put your $11,700 in a well-balanced investment portfolio. Each year use the accrued earnings to rent a timeshare anywhere in the world. Then go job hunting while you’re there and write it off!
2. Lottery Tickets. Lotteries were designed by scheming Republicans as a patriotic way to entice poor people into voluntarily returning their welfare checks to the state coffers. They sort of work like variations of the old 50/50 church raffle except the church doesn’t tax your 50 percent and then pay you over 20 years. Assuming a tax bracket of 33 percent, and an annual present value of money at 8 percent instead of a return of 50 cents for every dollar bet, you actually “win” slightly less than 17 cents. This is not attractive, even compared to roulette tables in Las Vegas where they pay 95 cents for each dollar bet. Plus you get free drinks.
a. Hint: If you could borrow $7.7 million at 8 percent over 20 years and buy every single number on the Michigan lottery, you would be a sure winner if the jackpot was $22 million or more. (If you don’t have to split the pot with some bloke on the dole.)
3. Life Insurance Investments. These quaint arrangements were popular and considered by some to be relatively competitive in the Fabulous ‘50s. Then your only alternatives were U.S. Savings Bonds (which your elders still called “war bonds”), paying 4 percent, and savings accounts which aggressively paid 4.5 percent. Pseudo-tycoons had Christmas Club accounts, a scam whereby you gave money to the bank every week and then they gave it back to you at the end of the year. No interest, but no service charge either. Now, bank savings accounts pay virtually no interest which is dwarfed by service charges if you don’t have very much money and just let it sit there. The service charge compensates the tellers who take your money out for a walk every month until it all evaporates. But we digress: back to life investments. They are variously called whole life, variable life, universal life, permanent life, etc. They sport many supposed advantages none of which are exclusive to this investment vehicle. Despite reams of projections and lengthy enthusiastic explanations, these investments are bereft of S.E.C. scrutiny, and the investor thus usually is at the mercy of inscrutable policy language as explained by a hyperkinetic salesperson with a snappy patter but no prospectus to evaluate risk or disclose the sales commission. Moreover, these are inevitably touted as “Long-term Investments”. Long Term Investments in financial lingo refers to generally inferior investments that are impossible to fully understand on which salespeople earn very large commissions.
a. Hint: Continue to ask your insurance person A) exactly how much commission is paid for selling this to you and B) exactly how much of your money you get back if you bail out after two years. If you can get a straight answer, you will be amazed that the amount of money you will lose under B is uncannily close to the amount disclosed under A. If still in doubt, we will demonstrate how much better you will be buying term insurance and investing the difference in the S&P 500 Index mutual fund. NOTE: This does not mean you should cancel or cash-in existing policies.
4. Any Investment Sold Over the Phone. Legitimate investments are never sold over the phone. Period. If their investment was as good as they say it is, and then they wouldn’t be spending their time talking to strangers like you on the telephone. Actually we encourage clients to never buy anything over the phone because of the increased exposure to fraud. And also because it only encourages even more unsolicited telephone intrusions.
5. Any Investment Someone Comes to your House to Sell You. If you think it through: anytime someone comes out to see you , at your convenience, in the comfort of your own home, and you are under no obligation, you are going to get a very high pressure sales pitch for something you probably never before considered buying, at an outrageous price. The sales commission on these arrangements is usually 25-50 percent of your investment. This makes shopping at home very expensive.
* This article was originally written 20 years ago. Interest rates have changed, but the scams remain the same…
Franklin, MI
http://www.bertwhitehead.com/
1. Timeshares. This preposterous “investment” is based on the doubtful proposition that a $117,000 condo is really worth $585,000 because 50 chumps can be convinced to rent it one week a year for the rest of their natural lives, and pay most of the rent (totaling $11,700) in advance and the rest annually disguised as maintenance fees. These are always sold by very friendly people, usually named Joe, who cannot begin a sentence without grasping your forearms and saying, “Let me be honest with you.” In addition to a very fuzzy explanation of the investment potential, you will find out how you could get AIDS from hotel sheets (presumably not a danger at Vacation Ownership Resorts because they don’t have maid service).
a. A hint: If after reading this, you still can’t help yourself and simply must buy a timeshare, buy it on a the secondary market (i.e., look in the classified ads and buy one from some dummy who spent his kid’s college money for it last year and now is trying to dump it at half price). This is still twice what it is worth.
b. A better hint: Put your $11,700 in a well-balanced investment portfolio. Each year use the accrued earnings to rent a timeshare anywhere in the world. Then go job hunting while you’re there and write it off!
2. Lottery Tickets. Lotteries were designed by scheming Republicans as a patriotic way to entice poor people into voluntarily returning their welfare checks to the state coffers. They sort of work like variations of the old 50/50 church raffle except the church doesn’t tax your 50 percent and then pay you over 20 years. Assuming a tax bracket of 33 percent, and an annual present value of money at 8 percent instead of a return of 50 cents for every dollar bet, you actually “win” slightly less than 17 cents. This is not attractive, even compared to roulette tables in Las Vegas where they pay 95 cents for each dollar bet. Plus you get free drinks.
a. Hint: If you could borrow $7.7 million at 8 percent over 20 years and buy every single number on the Michigan lottery, you would be a sure winner if the jackpot was $22 million or more. (If you don’t have to split the pot with some bloke on the dole.)
3. Life Insurance Investments. These quaint arrangements were popular and considered by some to be relatively competitive in the Fabulous ‘50s. Then your only alternatives were U.S. Savings Bonds (which your elders still called “war bonds”), paying 4 percent, and savings accounts which aggressively paid 4.5 percent. Pseudo-tycoons had Christmas Club accounts, a scam whereby you gave money to the bank every week and then they gave it back to you at the end of the year. No interest, but no service charge either. Now, bank savings accounts pay virtually no interest which is dwarfed by service charges if you don’t have very much money and just let it sit there. The service charge compensates the tellers who take your money out for a walk every month until it all evaporates. But we digress: back to life investments. They are variously called whole life, variable life, universal life, permanent life, etc. They sport many supposed advantages none of which are exclusive to this investment vehicle. Despite reams of projections and lengthy enthusiastic explanations, these investments are bereft of S.E.C. scrutiny, and the investor thus usually is at the mercy of inscrutable policy language as explained by a hyperkinetic salesperson with a snappy patter but no prospectus to evaluate risk or disclose the sales commission. Moreover, these are inevitably touted as “Long-term Investments”. Long Term Investments in financial lingo refers to generally inferior investments that are impossible to fully understand on which salespeople earn very large commissions.
a. Hint: Continue to ask your insurance person A) exactly how much commission is paid for selling this to you and B) exactly how much of your money you get back if you bail out after two years. If you can get a straight answer, you will be amazed that the amount of money you will lose under B is uncannily close to the amount disclosed under A. If still in doubt, we will demonstrate how much better you will be buying term insurance and investing the difference in the S&P 500 Index mutual fund. NOTE: This does not mean you should cancel or cash-in existing policies.
4. Any Investment Sold Over the Phone. Legitimate investments are never sold over the phone. Period. If their investment was as good as they say it is, and then they wouldn’t be spending their time talking to strangers like you on the telephone. Actually we encourage clients to never buy anything over the phone because of the increased exposure to fraud. And also because it only encourages even more unsolicited telephone intrusions.
5. Any Investment Someone Comes to your House to Sell You. If you think it through: anytime someone comes out to see you , at your convenience, in the comfort of your own home, and you are under no obligation, you are going to get a very high pressure sales pitch for something you probably never before considered buying, at an outrageous price. The sales commission on these arrangements is usually 25-50 percent of your investment. This makes shopping at home very expensive.
* This article was originally written 20 years ago. Interest rates have changed, but the scams remain the same…
January 2, 2011
When Buying or Refinancing a Home You Should…
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
Make sure you understand the fine print!
It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.
The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!
You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.
Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.
Nashville, TN
http://www.vhfinancialmanagement.com/
Make sure you understand the fine print!
It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.
The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!
You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.
Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.
Subscribe to:
Posts (Atom)
Posts
