Monthly Archives: September 2017

Stop Making These Financial Blunders

Have you ever committed to a healthy night – gone to the gym, had a healthy dinner, skipped the wine, only to wind up with a late night trip to Ben and Jerry’s? Of course you have, at least in some sense… even though you knew that would wreck all of your hard work, you excused away your better judgement for the momentary gratification.

This article is not about ice cream, but how savvy people make financial mistakes they know they are making. These are the 5 most common I see.

No emergency fund. An emergency fund is vitally important for all households. The “book” says 3 – 6 months of living expenses is a good target depending on whether you are in a single income or duel income household. To be more precise, you should customize the amount based on your unique situation; such as; employment stability, industry variability, earnings volatility (salary vs. bonus vs commission) and expense composition.

Unqualified withdrawals from a 401k/IRA. There are times when it makes sense to partake in an unqualified withdrawal from a 401k/IRA. However, most of the time it does not. It is important to explore all possible options available before doing this, as it can’t be undone. Some alternatives that could make better sense are: spending down on one’s emergency fund, cut ongoing expenses, take a loan out of your 401K and even filing for bankruptcy.

Dismissing employers 401K match. If you have a 401k match available to you, take full advantage of it. This is a great opportunity to catapult your retirement savings. The caveat is, you are tying money up in a qualified retirement account, but you will likely thank yourself down the road. There are countless calculators online to show you the power of compounding in a retirement account. When you throw in an employer match, the downstream impact is enormous.

Carrying credit card debt and only paying the minimum balance due when one has cash available. Most of us know this is a bad habit, but many of us don’t know how bad or why. Many credit cards average an APR (Annual Percentage Rate) between 15% – 22%, which is much higher than any reasonable expectations for an investment return. A better strategy would be to take your savings, pay off your credit card in full and build your savings back up over the next several months. Carrying credit card debt and trying to improve your financial situation is like swimming with sandbags, it is going to weigh you down and wear you out.

Prepay Property Taxes Yet

As a financial advisor and CFP® Practioner I’ve had numerous discussions in the past few weeks about prepaying 2018 property taxes in 2017. Time is running out, this strategy is picking up steam and homeowners are practically sprinting to their city hall office. Not so fast. Below are three reasons to consider before pre-paying your 2018 property taxes.

1) AMT! There is an Alternative Minimum Tax, also known as AMT. To explain in a nutshell, when your tax liability is calculated, an additional alternative method to calculate your tax is computed and compared to your original tax liability. You end up paying the higher of the two taxes. AMT was put in place to ensure everyone pays a minimum tax. Your AMT calculation is similar to your regular calculation but several deductions are excluded. One of those deductions is property tax! This means that if you are going to pay AMT, additional property tax payments will not help. Unfortunately, it can be difficult to figure out if you will be subject to the AMT and it is best to reach out to your financial or tax advisor.

2) You may not hit the SALT (state and local taxes) cap next year. Starting in 2018, there will be a ceiling of $10,000 on the total of local taxes, state taxes and property taxes eligible for deduction. Many people in New York City and New Jersey will easily blow past this $10,000 cap. However, there will be some who pay property taxes but their SALT is under $10,000. This is more likely in no or low tax states like Texas, Florida and Nevada. Make sure you anticipate to be over the cap of $10K for your 2018 tax year before committing your 2018 property tax payment to 2017.

The Way to Save Big Money

You’re not alone if you’re under estimating just how much you’re spending on your car.

For the most part, we as a culture have come to understand the cost of a car in one of two ways:

The sticker price

The monthly payment

And while those numbers are certainly a big part of the equation, they both fail to tell the whole story.

The truth is that the ongoing costs of owning a car are so numerous and so significant that addressing just them, and nothing else in your budget, could be enough to put you on track for your biggest financial goals.

The Real Cost of Owning a Car

The amount it costs to buy your car is just the start. Because whether you buy it outright or take out a loan, you still have to factor in all of the ongoing costs:

Insurance

Gas

Maintenance

Registration fees

Taxes

Depreciation

Add all those up and you’re likely spending at least a few hundred dollars per month on your car, on top of any monthly payment you might have. Nerdwallet has a helpful tool for putting them all together, and you can also use the tools provided by KBB and Edmunds to get an estimate.

The fact of the matter is that even a relatively “practical” car will likely cost you thousands of dollars per year just to keep it running, and it could be much more depending on how new, big, and fancy the car is.

All of which means there’s an opportunity to save a meaningful amount of money by making a few smart decisions. Here’s how to do it.

3 Ways to Save Money on Transportation

1. Buy Used

You may have heard that a car loses value as soon as you drive it off the lot. That is, simply by buying the car and bringing it home, you have, often significantly, decreased its value.

That’s a tough pill to swallow if you’re buying new. But it also means you have a big opportunity to save some money if you’re willing to buy a car that’s even a little bit used.

Edmunds estimates that the average total cost of a new compact SUV is $33,682, while the average total cost for a 3-4 year old used compact SUV is $24,966. That’s a difference of $8,716, and it doesn’t even factor in the likelihood of cheaper insurance and lower taxes!

The bottom line is that you can save yourself a meaningful amount of money if you’re willing to buy a car that’s even just a few years old.

And in some cases you might even be better off leasing, especially if the alternative is taking out a loan on a brand new car.

2. Go Down to One Car

With the availability of services like Lyft and Uber, is it still really necessary for you and your spouse to have two cars? What would you sacrifice by going down to one? How inconvenient would it really be?

And what’s the worst-case scenario? Maybe you find that you end up spending a little more than you would have otherwise, in which case you can simply buy another car down the line. But in the end there really isn’t much risk to trying one car.

This is something that’s at least worth considering the next time one of your cars needs to be replaced. There’s little downside and the potential for some huge savings.

3. Negotiate Like a Millennial!

We, millennials get a bad rap for constantly being “connected”, but in this case you can use those skills to your advantage and negotiate your car price over email.

That’s right! You no longer have to negotiate face-to-face, which both plays to the dealer’s strengths and can be more than a bit nerve wracking.

By leveraging the power of email, you can negotiate with multiple dealers all at once, securing a great deal before you even walk in the door.

Reduce Healthcare Costs

Healthcare takes a big bite out of just about every family’s budget, with research showing that the average employee spends $11,685 each year on insurance premiums and out-of-pocket expenses.

While many of those expenses are necessary (I would never recommend going without insurance or medical care), there are some ways to save money while still getting the care you need.

And with open enrollment coming up, this is the perfect time to put those strategies in place. Here are five ideas to keep in mind as you consider your options for the coming year.

1. Enroll in a High-Deductible Plan

While the instinct is often to run from high-deductible health insurance plans, they can, in some cases, save you significant money.

Think about it this way:

Your premium is a guaranteed cost. You will definitely have to spend this money on healthcare.

Your deductible is a potential cost. You may or may not have to spend this money on healthcare.

If you’re relatively healthy, you might end up saving hundreds, or even thousands, of dollars by switching to a high-deductible plan.

And no matter what, you should compare plans by adding the annual premium to the deductible and out-of-pocket max to see what your maximum possible cost could be.

In some cases there isn’t much difference between the high-deductible plan and the low-deductible plan, and the low-deductible plan at least gives you the possibility of spending less.

2. Self-Insure for Your Deductible and Other Out-Of-Pocket Costs

Whatever your deductible is, keeping that amount of money available in a savings account ensures that you can pay your medical bills without resorting to a credit card.

The last thing you want to do is compound the cost of your healthcare with interest. Self-insuring your out-of-pocket costs will prevent that from happening.

3. Contribute to a Health Savings Account (HSA)

If you’re eligible, contributions to a health savings account (HSA) offer a triple tax break:

Your contributions are tax-deductible

The money grows tax-free inside the account

You can withdraw the money tax-free for qualified medical expenses

In other words, an HSA allows you to pay for your healthcare completely tax-free. This can lead to significant savings, especially if you live in a high tax state like California.

On a side note, those same tax benefits can make HSAs fantastic retirement accounts.