Personal Financial Life Skills: Preparing for a financially secure future

• Discuss some of the issues that you will face as you begin your independent financial life.
• Continue the conversation discussing some more general intermediate and longer term issues.
• Provide tools for immediate and longer term use.
  • Enhance your understanding of your financial issues.
  • Relieve stress of managing your finances.
  • Take control of your financial future.

• Most people do not like dealing with finances and many hate it.
• Many people feel inadequately prepared, uninformed and fearful of making mistakes.
• Combined with a busy lifestyle, the result is that many neglect their finances or do not give them the time they deserve.

• Simplicity is a key – keeping your financial life simple can make decisions easier and reduce the anxiety you may feel about managing your finances.
• Doing the small things right on a consistent basis will result in financial discipline and good financial habits.
• Make effective use of the time you devote to your finances.
• Avoid big financial mistakes.
• Recognize that there will be conflict between short term gratification and long term benefits.
• Keep your emotions in check.
• Find someone to rely on to discuss your finances.
• Empower yourself to make good decisions by constantly learning about finances.
• Make a few sound important fundamental decisions and everything else gets easier.

• Employers withhold income tax, Social Security tax and Medicare tax from your wages.
  • For 2019, the Social Security withholding is 6.2% on your first $132,900 of wages.
  • The Medicare withholding is 1.45% of all your wages.
  • Your employer pays 6.2% on your wages up to $132,900 and matches your Medicare withholding.
  • There is also a new Medicare surtax of 0.9% on wages above $200,000 for singles and above $250,000 for those filing joint tax returns.  Employers do not match this surtax.
• The amount of income tax withheld depends on your wage level and the number of exemptions you claim on Form W-4.
  • The higher your wages, the more income tax that is withheld based on the IRS estimate of what your income tax will be for the year.
  • The IRS also recognizes that you will be able to reduce your taxable income based on the number of exemptions you claim on your tax return.  By claiming more exemptions, less income tax is withheld.  Generally speaking, claiming one exemption for each member of your family will probably be fine.  If you have significant other income, you may want to claim zero to have more withheld and if your have large itemized deductions, you may want to claim more than one.
• The goal is to have enough income tax withheld throughout the year so you do not owe tax when you file your return.  Having too much income tax withheld will result in a refund.  However, a large refund means that you gave the IRS more than you needed to.

Many companies, especially larger ones, offer 401(k) plans that are attractive ways to accumulate funds for retirement.

• You can defer part of your wages into the plan which reduces your taxable income.
• The funds within the account accumulate on a tax deferred basis.  You don’t pay tax on the earnings until you take money out of the plan.
• Most plans have several investment options for your funds.
• Many plans have some sort of a “matching” provision where the employer also contributes funds into your account.  The plan may have a “vesting” provision where to get the matching funds you have to remain employed for a number of years.  Usually, you will be fully vested on your employer’s contribution after three to five years.
• When you retire or change employers, your 401(k) plan balance is available to be transferred into your new employer’s plan or you can “roll it over” into an IRA.

There are some decisions you will have to make.

• Do you want to enroll in the 401(k) plan?
  • The answer should be yes.
  • Starting to save for retirement early makes sense, especially when your employer helps by making contributions on your behalf as well.
• How much of your wages do you want to contribute into the plan?
  • The IRS limits your contribution to 25% of your wages or $19,000.
  • Most plans provide for employees to contribute up to at least 10% of their wages.
  • One idea is to start off with a modest contribution percentage and then increase it by 1% each year.
  • If you can afford it, contribute an amount so that you can get the maximum employer “matching” contribution.  Some plans may provide a 100% match up to a certain percentage and others may match only a portion of what employees contribute.  You should fully understand your plan’s provisions to get as much as you can.
• How do you want to invest the funds within your 401(k) plan?
  • You should review the different investment options.  Often the investment options are mutual funds.
  • Be sure to consider your 401(k) investments as part of your total investment strategy.
  • Choose those that fit within your time horizon and risk tolerance.
  • Generally, the younger you are, the more you should choose equity investments.
  • Generally, the more comfortable you are with risk, the more you should choose equity investments.
  • One school of thought is that for your investment portfolio, you should consider having a fixed income percentage equal to your age.  In other words, if you are 25 years old, you should consider having 25% of your portfolio allocated to fixed income investments.

Most employers, especially larger ones, usually offer different insurance programs as part of their employee benefits.

• Health insurance is usually the most significant of the insurance programs that may be available.  If your employer’s plan has options for deductibles and types of coverage, consider them carefully.  You may be required to pay some portion of the cost of health insurance as well.  Unless you are permanently covered through another plan, such as your spouse’s, it is usually advisable to take advantage of this benefit.  The cost of this type of group plan is usually much less than the cost of buying health insurance individually.
• Short term or long term disability insurance may be available.  The costs, if any, are usually low and it makes sense to have coverage in case you become disabled and can not work.
• Your employer may also offer some type of group life insurance coverage.  Again, the cost of coverage is probably less than what you would pay to buy the insurance on your own.

• You will definitely want a checking account and probably a savings account.  If you have valuables that you want to store safely, like expensive jewelry, you may even want a safe deposit box.
• Most institutions offer direct deposit, so that should not be a concern.
• You want an institution that has convenient ATM’s so you do not have to pay fees for using an ATM outside their network.
• Learn about any fees that may be associated with your accounts.  Excessive fees cost money and are very annoying.
• And use an institution that offers good online banking services.  You will be busy and handling your finances online will save you time and money.

• When you receive mail, at least look at it immediately, especially bills.
• If you see something on a bill, such as a credit card statement, that looks unusual, follow up immediately.
• Then sort your mail into four general categories – bills that need to be paid, reading material, records that need to be kept and everything else that can be tossed.
• For electronic mail that relates to your finances, create folders that match.

• The key here is to make sure everything gets paid on a timely basis to eliminate any fees or charges for late payment.
• Most people pay their bills in one of two ways.
• You can pay the bills immediately when they arrive.
• Or, choose a couple of dates, such as the 15^th and 30^th of the month and pay them on those dates.
• Either way, you will be timely.

The general rule is that the IRS has three years from the due date of your tax return to start an audit.  This is often referred to as the three year statute of limitations.

• Therefore, you need to keep records that support anything in your tax return for those three years.
• This includes tax forms you may receive like W-2’s, 1099 forms and receipts for expenses you claim as itemized deductions.
• Security transactions deserve special attention.  When you sell stock, you report both the sales proceeds and cost basis on your tax return.  That means you need to be able to document what you paid for stock, regardless of how long you may have owned it.  You can keep trade confirmations or you may find it easier to keep the monthly statements you receive from your brokerage firm.  Some firms include summary information as part of their yearend reporting that can make this easier.
• Once the three year statute of limitation passes for a year’s return, you can dispose of the information that supported the information on that return.  But remember the rule for securities.
• While there is no need to keep copies of your actual tax returns beyond that three year period, as a practical matter, most people end up keeping copies of their tax returns forever.

Each month you will receive bills, statements and other financial information that you will need to handle.  There is a great temptation to keep everything, but that is really not needed.

·      Recurring monthly bills – Once you have paid your insurance, rent, mortgage and utility bills, there is no need to keep them.  You will have a cancelled check to document payment and unless there is something special about the bill, you can dispose of them.

·      Credit card statements – Even though there is no requirement to keep these statements, you may want to save them for some period (a year) in case there is a dispute, you want to return an item or if you want to be able to analyze your spending.

There are some papers that deserve special attention.  Documents to keep forever include: wills, powers of attorney, birth certificates, marriage documents, divorce or child care orders, trust documents, business agreements, military records and other such permanent records.

There are other documents that should be kept as long as they may be needed:

·      Insurance policies – as long as they are in effect or until a claim could no longer be filed.

·      Loan documents – until they are paid off.

·      Deeds and real estate papers – as long as you own the property plus any period for tax purposes.

·      Employee benefits information – as long as you are employed or until the benefit no longer exists.

·      Investment records – as long as you own the investment plus the three year tax reporting period.

Most people end up using filing folders in a drawer to keep their financial records.  If you do not have a drawer to use, buy a plastic storage bin.  Buy a box of folders and label them for each type of expense you normally have and for other types of records you plan to keep – rent, utilities, auto, insurance, home ownership, family, employment, bank or credit union statements, retirement, medical and any other categories you consider useful.  File folders are inexpensive so you may want to buy a box of them and create new folders when you like.

Once you have the files set up, you just put your receipts, statements and other information into them.  There is a good chance that some of the folders will get quite bulky over time.  When that happens, you can start a new one or better yet, toss out what you do not need.

For information you receive in an electronic format, just create folders on your computer and be sure to back them up on a regular basis.

Then comes the process of applying for the lease.  You will probably have to fill out an application that asks for several types of information.  Be sure to understand all the details, fill out the application completely (and honestly) and ask questions about anything you do not understand.

Remember, the landlord is running a business and you are the customer.  The difference between this type of transaction and just buying something at a store is that it is for a longer time.  Your relationship with the landlord will continue as long as you live in the apartment.  Starting the relationship on a good note and living up to your responsibilities as a renter can make the relationship more pleasant.

Here are some of the things you may encounter when applying for the lease:

• You will probably need to provide some personal information on your prior places of residence, your employment, contact information in case of an emergency, information on your car and whether you have pets.  You may even be asked about any legal record you may have.

• You will probably have to pay an application fee which may be non-refundable.  This covers the cost of the landlord processing your application.  Ask if your application fee can be applied to your rent.  You may not get it, but there is no harm in asking.

• Once your application is accepted, the landlord will probably want a deposit that could be equate to couple months rent.  The landlord holds this as security in case there are damages when you move out.  Be sure to inspect the apartment before you move in to find any existing damages.  If you find some, discuss them with the landlord and make sure you are not charged for them when you move out.

• The landlord will probably get a credit report on you before they approve your application.  This is normal and is one of the ways the landlord gets some comfort that you will pay the rent.

• Depending on your situation, the landlord may require that someone else guarantees your lease.  Remember the landlord is in business to make a profit and he wants to make sure that the rent gets paid and that the apartment is well taken care of.  If you are just starting out or if this is your first apartment, this may happen.  Do not be alarmed or frustrated.  Your parent or guardian is the most likely person to ask.

• Whether you decide to buy a new or a used car, be sure to do your homework.
• Along with considering the creature comforts of the car and whether you like it, you should also investigate the reliability of the car and the costs to drive it.
• Be sure to take every car you are considering for a test drive.
• You can learn about the costs of operating the car and reliability by examining the gas mileage information on the sticker and visiting websites that review cars.  Use the Internet to search for sites that provide this type of information.
• Also, speak with an insurance agent to learn what your insurance premiums will be.
• When you take everything into account – car payments, maintenance, parking, gas and insurance – you may want to try to limit the total auto expense to 10% to 15% of your monthly income.

• This is usually a matter of your preference and what you can afford.
• New cars are nice and usually come with a warranty that covers unforeseen expenses, but they are more expensive.
• If you are considering a used car, be sure to do some extra homework on the particular car you are considering.  Have a qualified mechanic inspect the car and you may want to get a Vehicle History Report (websites like www.Carfax.com offer these reports) to learn if the car was ever stolen, salvaged or recalled.  The report will also provide information on the number of previous owners, whether it ever failed an inspection or if someone tried to modify the odometer.

• This is most stressful part.  You will be spending a considerable amount of money and car sales people are notorious for their aggressive sales techniques.  Always remember that you are the customer and that there are many car dealerships that would love to have your business.
• Do your homework and be prepared before you walk into an auto showroom.  If you are just looking and not prepared to buy a car when you walk in, emphasize that to the sales person.
• When you are ready to buy, you should come with facts, and there is no better place to get those facts than the Internet.  Several websites, including Autobytel, TrueCar, and CarsDirect, will let you get price quotes beforehand.  Do not be afraid to take printed copies of competitive pricing and show them to the sales person.
• Stay focused on the purchase price of the car you want.  Keep discussions about any trade-in separate and any discussion on financing out of the negotiation.
• Be careful to not be talked into dealer add-ons like rust-proofing, extended warranties or other options unless you really want them.  These add-ons are very profitable for the dealer and can be very expensive to you.
• Do not hesitate to walk out and go to another dealer if you cannot get the price you want or if you are not treated with respect.

• You can pay cash.  While most people do not pay cash, you may want to do this if you have excess funds available.  It is simple and you will avoid any interest expenses.
• You can make a down payment and finance the rest.  This is most common.  There are many places to get an auto loan, including banks, credit unions and the dealer.  Terms usually vary from 24 to 72 months with most people choosing loans from 48 months to 60 months.  Many websites include calculators that can help you determine what your monthly payments would be at different size loans and different interest rates.
• Unless you are planning to use financing from the dealer, secure financing before you walk into the showroom.  That will be one less thing to distract you and will help you stay within your budget.
• Another popular way people pay for cars is by leasing them.  This avoids the need for a large down payment and at the end of the lease, you just return the car.  But, you never own the car.  Leasing may be attractive if you plan to only keep the car for three to four years or if you plan to drive a great deal and can get a lease without a mileage limit.
• Whether you are getting a loan or using a lease, be sure to fully understand all the details before you sign any documents.

Choose your credit card based on its fees, interest rates and benefits.

Ideally, the credit card you choose should have the lowest fees, the lowest interest rate and provide the most benefits when you use it.  Unfortunately, there is probably no card that has the best of all three.  Choosing the card that is best for you involves weighing these factors and considering how you will use it.

• Annual fees can vary from zero to $75 per year. Ideally, you would want to choose a card with no annual fee. There are also fees that companies charge for late payments. Be sure to check the terms of the credit card agreement, especially if you are occasionally late with a monthly payment.
• Interest rates can also vary greatly and can exceed 20%. You should also be very careful of low "teaser" rates, or special rates for a limited time if you transfer balances from another card. Another way issuing companies increase the amount you pay is by how they calculate the interest. Be sure to read the details of the agreement.
• Many cards offer benefits for using the card.  Using a credit card can bring the rewards of airline mileage, discounts on travel, electronic gifts, discounts on cars and other benefits. A rule of thumb is that the benefits are usually worth about 1% of the charges. If a card with these types of benefits is important, make sure the benefits are those you will use and that the other aspects of the card do not offset the benefits.

• A credit card is serious business.  The issuing company is lending you money and you have responsibilities to pay it back.
• One card is probably enough.  Avoid temptation by only having one card.
• Keep the credit limit low.  Depending on how you are going to use it, $500 or $1000 is high enough for most first-time credit card users.
• Pay off the entire balance each month.  Avoid charges and build a good credit record.
• Make the payments on time.  This helps build a good record and avoids late payment charges.
• Use the card for emergencies.  Start off slowly with this new convenience.  Keep using cash and checks for most purchases, especially until you get comfortable with the card.
• Never let others use your card.  You are responsible for all charges on your card.  Do not let others borrow it or give out the number.
• Keep track of your use of the card and compare your records to what shows up on the monthly statement.
• Keep the card active.  Even if you are only using the card for emergencies, use it for small purchases every three or four months just to keep it active.  Then be sure to pay off the balance before any interest is due.
• Avoid using the card for cash advances.  The interest rate charged for advances is usually high and interest is charged immediately.
• Create a spending and budget plan.  Do not let your credit card payments exceed 20% of your monthly income.
• If having a credit card turns out to be a problem, get rid of it or stop using it for a while.

• If you plan to do much traveling, join the loyalty programs offered by the airlines, car rental agencies and hotels that you may use.
• The programs are usually free and there are benefits beyond accumulating points to redeem for free services.
• Members of hotel programs are often offered complementary upgrades on rooms.
• If you are a member of a car rental program, you can often bypass lines and get dropped off right beside your car.

• Borrowing costs money.  That is not necessarily bad.  It just means that when you pay it back, you have to pay more than you borrowed.
• Choose when to borrow and what to borrow for carefully.
• Find the best interest rate and terms, based on your needs and wants.
• Live up to your repayment responsibilities.
• Periodically review your debt.  Refinancing your mortgage or an auto loan may save you money.
• Having a good credit record is important.  A good credit record does more than just make future credit approval easier to get.  Most lenders use your credit record to determine credit limits and what rates to charge.  A good credit record will save you money.  Get a copy of your credit report annually using the website – annualcreditreport.com.  It is free and you will be able to see what potential lenders see.  And if you see something unusual, investigate it immediately.

• Never borrow what you cannot repay.
• Never borrow for a luxury if you cannot afford the necessities.
• Prioritize your borrowing.  Borrowing for education, getting a mortgage for a home and financing a car should take priority over borrowing for vacations or things that you do not need.
• Reserve some borrowing capacity for emergencies.
• Take action immediately if your borrowing is getting out of control. If credit cards are the problem, stop using them or even cut them up. Contact lenders to develop a workable repayment plan. A qualified credit counselor can help.

• Insuring your home and its contents is smart.  If disaster strikes, you want to be protected.  In addition, these policies usually provide a level of liability coverage that could cover the costs of someone being hurt in your home.
• If you rent, having renters insurance can cover the cost of replacing items that are stolen or destroyed, as well as providing liability coverage.
• If you own your home, choose a policy that will pay for the cost of rebuilding your home if it is totally destroyed.  Examine the amount regularly to take inflation into account.  Also make sure the “contents” part of your policy is adequate.  A policy that covers the cost of replacing items is better than one the just covers the “cash value” of an item.
• You should keep an-up-to-date inventory of your belongings with a copy in a safe place like your safe deposit box.

Auto policies are usually comprised of three parts:

• Collision coverage covers the cost of repairs to your car after an accident.  Choose an amount of collision coverage that reflects the value of your car.  If your car is old or has little value, you may even want to drop the collision part of your policy.
• Comprehensive coverage covers damage to your car from random acts like fire, theft, hail and vandalism.  This part of the policy is usually the cheapest and should be based on the value of the car.  Remember that insurance companies will not pay more than the car is worth.
• Auto liability coverage is absolutely essential.  This covers damages caused by your car.  If you cause an accident with your car and injure someone or damage their property, your auto liability insurance will pay the injured person’s medical and repair expenses.  This is usually the most expensive part of the policy and most states require it.

• Most homeowners and auto policies provide some level of coverage for damages caused to others and their property.  In an era of large jury awards and rising medical costs, you may want to consider an umbrella policy for additional protection.
• These policies are usually inexpensive (a few hundred dollars for over a million dollars coverage) and are available from most insurance companies.

• Be sure you have adequate health insurance.
• Most large employers provide it as part of their benefits program.  While you may be required to share in the cost, a company provided plan is usually cheaper and has fewer restrictions than a policy bought individually.
• Choose the level of coverage you need, but make sure you are covered for major medical expenses.

A few words about deductibles

• Choosing a homeowners, auto or health policy will usually involve deciding on a level of deductible.
• The deductible is what you pay before the insurance starts paying.
• The higher the deductible, the lower the premium.
• Before buying, ask for the premium levels at different levels of deductibles.  Then evaluate the level of “risk” you are willing to assume.
• You may find that your premium can be up to 25% less with higher deductibles.

• Most employee benefit programs provide some form of disability coverage.  Check your program to make sure the amount is adequate for your needs.  Also, look at the details (definition of disability, waiting period and any total limits) to ensure your policy will provide all that you need.
• If you need more, talk to an insurance professional or consider policies offered by any professional organization you belong to.

• Some estimate that over one half of individuals will spend some time in a nursing home or other care facility before they die.
• The costs of this type of care can be very high and the federal Medicaid program will not cover all the expenses you may incur.
• Usually, age 50 is about when to consider a long-term care insurance policy.  Premiums will be higher for older buyers.
• Examine any policy before buying to fully understand what will be covered and for how long.

• For most people, life insurance is simply a way to ensure that a surviving spouse and children can continue to have a decent lifestyle.
• Many experts suggest that a primary breadwinner should have insurance equal to 6 to 10 times their annual income.  In most cases, this will provide enough money for the survivors to be at least reasonably comfortable.
• If you have young children or other special needs, additional amounts should be considered.

• Deciding whether to buy a term policy or a cash value whole life policy should be carefully considered and you may want to review your options with a qualified advisor.
• Term policies are usually much cheaper, but whole life policies provide for a “cash build up” for the duration of the policy.
• Luckily, life insurance is available from many sources.  Start with your employer.  Many employee benefit programs provide inexpensive coverage.
• Term and whole life policies are available from hundreds of companies.

• Be sure to investigate the company offering any policy you are considering.
• Quality customer service and financial stability are essential.  When you end up needing the insurance, the last thing you want to discover is that the company is hard to deal with or that their financial condition prevents them from providing the benefits you paid for.
• Check with the Better Business Bureau and examine the insurance rating reports found in many libraries and on the Internet.

• Owning a share of stock is owning a portion of the company.  If you buy 100 shares of General Electric stock, you actually own a portion of GE.
• You can profit by owning shares when the company pays a dividend or if the value of the shares increases while you own them.
• You can also lose money if the value of the shares goes down before you sell them.

• When you own a bond, you are lending money to the company or institution issuing the bond.
• You profit when you receive interest payments and if the value of the bond increases while you own it.
• You can lose money if interest payments are not made, if the principal of the bond is not repaid when it is due or if the value of the bond falls and you sell the bond.

• When you buy mutual funds, you are buying shares in a company that in turn owns stocks in other companies or owns bonds issued by other companies or institutions.
• By investing in mutual funds, you get the professional services of the mutual fund manager who decides where and when to invest.
• You profit when the mutual fund distributes dividends (and capital gains and interest) and if the value of your mutual fund shares increases because of the increases in the underlying values of the stocks and bonds it owns.

• Most people start out with individual accounts set up at brokerage firms or mutual fund companies, in their IRAs and through their company retirement plan.
• If you invest through an individual account, the income (dividends, interest and capital gain distributions) from the account is taxable.
• If the investments are within an IRA or a qualified plan, you will probably not owe any tax on the returns until you take funds out.

• When you make the decision to invest, you are leaving the world of insured and guaranteed returns found with savings accounts and CDs from a bank or credit union.
• The values of stocks rise and fall depending on the success of the company and the overall direction of the stock market.
• The value of bonds can rise and fall depending on changes in interest rates and the financial condition of the institution issuing the bonds.
• In return for taking these risks, you hope to earn returns greater than what you would have earned in a savings account or with a CD.

• The stock market can be volatile.  The year of 2008 was a bad one for stocks with the S&P 500 index falling 38% while rising every year since then.
• Over the 10-year period ending in 2019, the average total return for large company stocks (comparable to the S&P 500 index) was 5.613.6%.  The best year (2013) had a return of over 32% and the worst year was 2008 when the return was a negative 37%.
• While the bull market of 1995 to 1999 produced average returns of over 28% and the bear market of 2000 to 2002 (and 2008) saw the market fall by over one third, returns during those years were well outside the long-term average returns.

• The returns from investing will vary greatly from year to year.
• It is only by viewing your investments as long-term can you hope to earn returns to justify the risks.  For example, over the past 20 years, the average returns for large company stocks was 6.1%, but during that period the best year was 1995 when these stocks had total returns of over 37% and the worst year was 2008, when the return was a negative 37%.
• Trying to guess the near term direction of the market or an individual stock’s price is foolish.

• You should also consider how you divide your investments among the different types of investment.
• How you divide your investments among stocks, bonds and cash investments is called asset allocation. It can serve as a logical starting point for your investment strategy.  Individuals should base their asset allocation on their time horizon and risk tolerance.
• Over long periods of time, stocks have performed better than bonds which have performed better than short term cash investments.
• The younger you are, the more you should consider having greater portions of your total portfolio invested in stocks.
• One way to start addressing the asset allocation question is to use a rule of thumb that the total of your bond and cash portions should total your age.  If you are 25 years old, allocate 25% to bonds and cash and the remainder to stocks.

• If you are investing in stocks, you should try to have investments in at least 3 or 4 stocks in at least 4 or 5 industries.
• A portfolio of 15 technology stocks is not diversified. A portfolio of one stock in each of 15 different industries probably also is not a good example of diversification.
• A portfolio of more than 25 or 30 stocks can make it difficult to stay aware of what each company is doing.
• Spreading ownership over different stocks in different industries reduces the risk that the particular stock you choose in a good industry turns out to be the wrong one. It also reduces the risk that you invested in the wrong industry.

• Another way to reduce your risk is to make your investments over a period of time. That way, you assure yourself that you are not investing all your money at the top of a bull market cycle.
• You may miss some appreciation if the market continually goes up, but that seldom happens.
• Remember, no one can predict short-term movements in the stock market with any degree of accuracy.
• By spreading your investments over 4 to 6 months, you will eliminate the risk of making all your purchases when stocks are at their highest points. There are two types of risk that this strategy reduces.
  • First, it reduces the risk of losing a significant part of your money quickly. Many people dread making an investment and then seeing the value go down dramatically. By spreading out your buying, this will not happen.
  • The other risk you can reduce by spreading out your investments is price volatility. By taking this approach, the average price for the stocks you buy will probably reflect the average market values for that period.

• When you buy mutual fund shares, you are buying into a broad portfolio of stocks that the portfolio manager has selected.
• In addition, most mutual funds offer a system of purchasing called “dollar cost averaging.”  With this, you buy an equal dollar amount of shares on a periodic basis.

• Our federal income tax system was implemented in 1913 simply as a way for the government to collect revenue.
• Since then, the laws have been expanded and revised dozens, if not hundreds of times.
• If history is any guide, you can expect the tax laws to continue to change and probably get even more complex.
• While you probably do not want to spend the time and effort to become an income tax expert, by understanding some of the basics you can make better financial decisions and remove some of the anxiety surrounding this financial fact of life.
• Everyone’s tax situation can be different we will only cover some of the basics.
• If your situation is complicated or if you feel that you need an expert to help with your taxes, do not hesitate to use the services of a professional.

• You add up your income.  Most types of income (wages, interest, dividends, and capital gains) are included.
• Perhaps, you then make certain adjustments.  These adjustments are usually for certain IRA contributions and business expenses.
• You then subtract either a standard deduction (set by the government) or the total of your itemized deductions (state and local taxes which are limited, charitable contributions, mortgage interest).
• This leaves you with your taxable income.
• You then apply a series of tax rates to certain levels of taxable income.  Higher income gets taxed at higher rates.
• You then compare your calculated tax with the taxes that have been withheld from your paychecks (and additional estimated tax payments you may have made).
• The difference is what you owe when you file your return on April 15^th or what you will receive as a refund.

• Most of the income you receive by working or by investing is taxable.
• Along with the items mentioned above, distributions from retirement plans (unless rolled into an IRA), lottery winnings, rental income, alimony and business income are taxable.
• However, interest from municipal bonds is usually not taxable.  Dividends and long term capital gains (from investments held for more than a year) are taxed at a lower rate than other income.

• If you are not eligible to participate in a company sponsored retirement plan or if your adjusted gross income is below a certain level, contributions to a regular IRA are deductible.
• The current limit on IRA contributions is $6,000 for those under age 50 and $7,000 for those ages 50 and above.
• You may also be eligible to make adjustments for certain educational and business expenses.

• You are allowed to reduce your income subject to tax for certain types of expenses, including state and local income taxes, charitable contributions, mortgage interest and medical expenses in some cases.
• If you do not have these expenses or if your level of these expenses is low, the law provides a standard deduction.
• For 2020, the standard deduction is $12,400 for individuals and $24,800 for married couples filing joint returns.

• Our tax system has progressive marginal tax rates.
• That means that income at lower levels is taxed at lower rates and income at higher levels is taxed at higher rates.
• There are also different rates for those that file individual returns and those married couples filing joint returns.
• For 2020, tax rates start at 10% and rise to 37%.
• Qualifying dividends and long term capital gain are currently taxed at lower rates with a minimum of 0% and a maximum of 20% depending on taxable income.

• There are some rules that enable you to get an extension of time, but most people file by the due date.  Getting an extension does not allow you to delay paying any taxes you may owe.
• For most people, the taxes that are withheld from their paychecks cover what they owe or come very close.
• If you have a relatively large amount of investment or other income, you may want to consider making estimated payments throughout the year to avoid owing any penalties or interest.

• No one wants to pay any more tax than what they are legally required to pay.
• But be sure to not let the idea of saving taxes cause you to make financial mistakes.

• Being able to afford a financially secure retirement is expensive.
• Understanding some of the basics now and taking a few steps can make that retirement you dream of a reality and maybe even let it start a few years sooner than what you think.
• Any discussion on retirement planning ultimately comes down to a few basic issues:
  • What will it cost?
  • How much do I need to save?
  • What should I be doing now?

• Many financial advisors suggest that your living expense after retirement will be about 70% to 80% of what they were before you retired.
• For a couple retiring today with a household income of $80,000, that means they will probably spend $55,000 to $65,000 annually after they retire.

• Let's assume you are currently earning $50,000 per year, that you are 35 years old and that you want to retire at age 65.
• You expect your income to go up 5% a year from now until you retire. That equates to an annual income before you retire of over $216,000.
• If you spend 70% of that amount after you retire, that means you will be spending almost $151,000 per year.
• That sounds like a huge number, but that is what 5% raises can mean and remember that inflation will make everything more expensive.

• The answer to this question gets more complex.
• You have to make assumptions about Social Security.
• You must decide whether you want to deplete your savings during retirement or leave assets to heirs.
• And you have to guess how long you are going to live.
• All of those are difficult assumptions.

• Assume you earn $50,000 per year, are 35 years old and want to retire at age 65.
• Assume that Social Security benefits (about $2,111 per month for an average couple) will increase 3% annually, you earn 3% on your savings and that your expense level after retirement increases 3% annually.
• If you live 30 years after you retire and you are willing to deplete your savings over the 30 years of retirement, you would have needed to accumulate about $2,700,000 by the time you retire.

The numbers in our example seem very large.

• But, do not let their sheer size make you think that a financially secure retirement is beyond your reach.
• In fact, a young age works very much in your benefit.
• You have many years to put money aside for your retirement, the benefits of tax deferred compounding work in your favor and the income tax laws provide help.

• While there has been a great deal of political debate over the future of Social Security, no one is seriously talking of eliminating it.
• You pay into the program through deductions from each paycheck and you will probably receive benefits from the program when you retire.
• However, Social Security benefits alone will probably not enable you to afford the retirement lifestyle you want.
• Currently, the average monthly benefit for a retired couple is about $2,340.
• Realistically, there is very little you can do to affect the size of Social Security benefits you will receive when you retire.

• Most companies, especially larger ones, have recognized that providing qualified plans to accumulate funds for employees’ retirement makes sense.
• 401(k) plans have become very popular because both the company and the employee can contribute funds to the plan.
• The government has also recognized this and has increased the amounts that companies and employees can contribute to plans.  For 2020, employees can contribute up to $19,500 into a 401(k) plan.  In addition, the company can put additional funds into the plan up to a total (employee and employer) of $57,000.
• There are three things you can do to increase your 401(k) plan balance:
  • Participate in the plan.  You usually sign up for the plan when you are hired.
  • Contribute as much as you can out of your wages into your account.  The amount you contribute is not subject to income tax and the more you contribute the more you will accumulate.
  • Most 401(k) plans have some form of employer matching contribution formula.  Each plan is different, but try to contribute enough to get the full employer match.

• IRAs have become a primary tool to accumulate funds for retirement.
• There are rules about IRA eligibility and deductibility, and there are regular IRAs and Roth IRAs.
• For 2020, the annual contribution limit is $6,000, and over time those contributions can add up dramatically.
• In addition, earnings on funds within IRAs are not taxed so your money grows faster.
• By contributing $6,000 each year for 30 years and earning 6% on the funds can add almost $475,000 to your retirement nest-egg.
• If you are contributing as much as you can to your company retirement plan and still have some extra funds available, contribute to an IRA.

• The final source of retirement income will be your other savings.
• You have control over how much you save.
• Accumulations in savings accounts and investment accounts, while not enjoying the tax preferences of 401(k) plans and IRAs, are still a major component of most individuals’ retirement income.
• Saving more and earning more on these funds can add greatly to your retirement lifestyle.
• Consider taking advantage of automatic savings plans with monthly transfers to a savings account or investment account.
• Also, be sure that your investment strategy is sound with consideration given to your goals, your time horizons and your risk tolerance.

• Your cost of living after retiring is going to be high, perhaps even scary.
• To have enough money to retire with a lifestyle you want means that you must accumulate a great deal of money before you retire.
• The future of Social Security is uncertain and you should not count on Social Security providing enough to make your retirement comfortable.  It may just help some.
• Company retirement plans and IRAs provide additional tax benefits that make accumulating funds easier.  Contribute as much as you can to these plans and save additional funds in personal accounts.
• Time is on your side.  Starting to take actions now can provide peace of mind that you are doing the right thing and will provide the funds for the retirement you want decades in the future.

• As you probably know, college is expensive.
• As you may not know, college costs are rising faster than inflation and almost no one is predicting that college costs are going to go down.
• As a result, you may want to start thinking about funding your children’s college costs now.  The sooner you start thinking (and hopefully saving) the easier it will be.

• According to the College Board, the annual cost (tuition, room, board, books, supplies, transportation, and other) of attending college for 2017 - 2018 was:
• Four year private college - $50,900
• Four year public college for an in-state resident - $25,300
• Four year public college for an out-of-state resident - $40,900
• While many students qualify for scholarships and other forms of financial aid to bring these numbers down, you may also want to consider some of the other costs (travel, entertainment) that may add to these numbers.

For the past several years, college costs have been increasing at a rate faster than the overall inflation rate.  While it is impossible to know what will happen in the future, here are some numbers that demonstrates what happens at annual increases of 4%.

• The current $50,900 annual cost of attending a private college rises to over $64,900 in five years, over $75,300 in ten years and over $91,700 in fifteen years.
• The current $25,300 annual cost of attending an in-state public college rises to over $30,800 in five years, over $37,400 in ten years and over $45,600 in fifteen years.
• And do not forget, these are just the annual costs; also, if your child attends for four years, you must multiple by 4.
• As you can see, it will be expensive to send your child to college and even more expensive if you have more than one child.
• Fortunately, you have time to save and there are several ways that the income tax laws make saving easier.

Custodial Accounts

• Using a Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minor Act (UTMA) account is an easy and legal way to transfer the ownership of assets to a child.
• With a UGMA or UTMA account, the parent creates a custodial account on behalf of the minor child.
• Assets are transferred into the account and the custodian, usually a parent, manages the account until the child reaches legal age.
• At that point, the child can do whatever he or she wishes with the assets.
• Transfers to these accounts are irrevocable.

Coverdell Education Savings Accounts (Education IRAs)

• Coverdell Education Savings Accounts provide parents and others the opportunity to save for a child’s education expenses in a tax advantaged account.
• There is an annual limit of $2000 for contributions to these accounts.
• There are also income limits for those making the contributions.
• Earnings within the account are tax deferred and withdrawals are not subject to tax if they are used for qualified education expenses.
• The law expanded this definition to include expenses for elementary and high school expenses.  Withdrawals not used for qualified education expenses are subject to regular income tax and a 10% penalty.
• Withdrawals must also be completed before the child reaches age 30.
• Education IRA accounts function like IRA accounts and are available from most banks, credit unions, brokerage firms and mutual fund companies.
• Investment options vary depending on the firm.  Usually there is considerable flexibility with self-directed type accounts.

Qualified Tuition (Section 529) Plans

• These college savings plans are now offered by over 40 states and were also enhanced by the 2001 tax law.
• While the plans are offered by the state, there is no restriction on where the child attends college utilizing the funds.
• One potential drawback is that there are usually limited investment options.  It makes sense to look at several states’ programs to find one that offers the investment choices you desire.
• With a Section 529 Plan, there are no income limits on the donors and contributions of up to $15,000 per year can be made.
• In addition, there are special provisions to allow a “front-end loading” of up to five years of contributions to be made without gift taxes.
• Withdrawals used for qualified educational purposes are excluded from federal income taxation.

• It can be very easy to put off starting to save for college, especially if your children are young.
• Yet, by starting early, even if it is just a small amount, you can make a large dent in what you will need.
• Saving $50 each month will accumulate to over $3,400 in five years, almost $8,000 in ten years and over $13,000 in fifteen years.
• Saving $100 each month will accumulate to over $6,800 in five years, over $16,000 in ten years and almost $28,000 in fifteen years.
• Saving $200 each month will accumulate to over $13,000 in five years, over $31,000 in ten years and over $53,000 in fifteen years.

• Enabling your children to attend the college of their choice and get an education that will prepare them for a successful and productive life is one of the greatest gifts you can give.
• However, the costs of providing that college education can be very large.
• Starting earlier rather than later can make the process easier, especially with some of the tax benefits of Coverdell Education Savings Accounts and Section 529 Plans.
• Developing a college saving habit can provide your children with the funds they need and provide you with the satisfaction of knowing that you are doing the right thing.

Having schedules for recurring financial tasks and not putting off handling issues that arise will make your financial life easier.

• Pay your bills on time and avoid late payment penalties.
• Reconcile your checking account every month.
• Put your money to work as soon as you can and keep it working for you.
• Review your overall financial status at least annually.

Having a solid credit record will improve your chances of being approved for loans and qualify for lower rates.

• Pay your bills on time.
• Do not apply for too many credit cards or other loans.
• If you have a credit card balance, pay it down as quickly as you can.
• Order a copy of your credit report annually and contact the credit agency if there are errors.

Saving on a consistent basis will help you live on less than you earn and accumulate funds for important longer term objectives.

• Understand how you spend your money and you will probably find ways to reduce your expenses.
• Enroll in your employer’s retirement plan and contribute as much as you can.
• Use an automatic saving plan at work or with your financial institution to move money into a savings account every month.

Learning more about finances will reinforce what you are doing well and identify those things you should be doing.

• Stay abreast of the financial markets including the stock market and what is happening with interest rates.
• Watch or listen to financial reports on television or the radio.
• Read some of the financial stories in newspapers or online.
• Read financial “help” columns and you may see that others are facing the same issues.
• Read one of the financial newspapers, at least occasionally.
• Discuss finances with others that are well informed.