Source: Barron’s
When you think about estate planning, you probably think first about wills and trusts. But there are other financial tools with estate-planning potential. Here’s what to consider.
Tag Archives: Financial Planning
Congressional Energy Piñata
Politicians rarely let facts get in the way of a good sound bite and political theater.
Experience, economics and simple logic tell you that anything Congress does to “fix” a situation, like high consumer energy prices, will probably do more harm than good, writes Fisher Investment’s manager Elisabeth Dellinger, Senior Editor of MarketMinder. So it is a blessing for equity stocks and financial markets that gridlock on Capitol Hill will likely block any energy related legislation coming out of Washington.
Recently, Congress indulged in one of its favorite pastimes: a public flogging of large company chief executives…on this occasion the targets were major energy company chief executive officers. Politicians have accused the industry of price gouging, and a couple of Senators have proposed windfall profits taxes for energy companies.
The allegations at the Congressional hearings appear ‘more politics than substance’. For one, gas prices have ticked down slightly for three straight weeks. In reality, gas prices tend to follow oil at a lag, so gas’s failure to match oil’s rate of decline over the past four weeks isn’t a shock.
Moreover, the oil executives offered some simple, logical answers why gasoline prices haven’t matched the magnitude of oil’s retreat. Some cited rising costs and shortages of drilling equipment as well as transportation bottlenecks. Others pointed out that the industry is still dealing with the wild swings induced by lockdowns, which brought swift production cuts—and then a need for fast restarts when the companies didn’t have the labor or equipment to oblige.
And, there is a third reason, writes Dellinger: Oil isn’t the only major ingredient in gasoline. The ethanol mandate is still the law of the land. Gasoline sold in the US is required to have a certain amount of ethanol blended with refined petroleum—typically around 10% of every gallon. Ethanol is a “renewable” fuel derived from corn, which has jumped in price since Vladimir Putin invaded Ukraine. Corn is now up 42.2% over the past six months, and unlike crude oil, it hasn’t backed down from the post-invasion spike.[iii] Demand from all corners is keeping the price high, and that is feeding into prices at the pump.
But Congressional hearings are rarely about the truth and facts, especially when the facts put Congress’s past deeds in a bad light. True to form, politicians highlight a hot-button issue, press the blame button and advance a politically motivated policy solution, even though it isn’t likely to pass.
Senators’ have offered windfall tax proposals which are in response to claims that these taxes are necessary because energy firms are restraining supplies and production to keep prices up, tied to “financial discipline” demanded of oil firms by investors. Although these are strong emotional appeals intended for their loyal constituents, but the facts demonstrate that there isn’t much evidence of actual excessive windfall profits.
“Energy is a cyclical business, and companies won’t survive if they can’t bank on having good times to counterbalance the bad”, writes Dellinger. “If eventual profits can’t offset losses, there is no math there for shareholders or creditors. Essentially, a windfall tax implemented now would punish companies for surviving. Moreover, it would destroy the incentive to invest. What is the point in stomaching the high upfront costs it takes to drill and pump new wells if there is a risk the government will confiscate your profits retroactively? How can you plan? Retroactive taxes kill investment, and doing this in the oil and gas industry would probably whack US oil production, making prices even higher over time.”
On the bright side, the likelihood this windfall tax legislation goes anywhere stands about zero. The 50/50 Senate hasn’t managed to pass anything contentious and probably won’t start now—not with Democratic Senator Joe Manchin, who has effective veto power, representing a state with a big natural gas and coal industry.
Midterms currently look poised to deepen gridlock next year. Angry Congressional political tweets and sound bites might stoke fear and hit constituents’ sentiment during midterm campaigns, but financial markets should quickly view that these bills are likely to be ‘dead on arrival’.
Conversely, NYT foreign affairs columnist Thomas Friedman suggests that the U.S. needs to implement an ‘oil import tax’ that sets the price of oil in America at around $50 to $60 per barrel. This tax, he opines, would provide a stable, predictable price for oil companies, and eliminate the wild price swings and volatility in oil prices American have experienced over the past two decades.
“One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis.” Bill Ackman, Pershing Square
References:
- https://www.fisherinvestments.com/en-us/marketminder/dont-let-the-politicking-on-gas-prices-fool-you
- Federal Reserve Bank of St. Louis, as of 4/6/2022. US regular all formulations gas prices, 3/14/2022 – 4/4/2022. Data are weekly.
- https://www.cnbc.com/video/2022/04/08/the-us-needs-an-oil-import-tax-says-nyts-thomas-friedman.html
I Bonds
The main benefit of I Bonds is that they protect your cash from inflation. I bonds currently earn 7.21% through April 2022.
U.S. Treasury issued Series I savings bonds are a low-risk savings product. They are a good hedge against inflation (the “I” in the name stands for “inflation”), because during their lifetime they earn interest and are protected from inflation.
Inflation can be a very destructive economic force that reduces the value and purchasing power of your money over time. With inflation at a 40-year high, many investors are looking for ways to protect the value of their cash, and Series I bonds could be a good solution.
These Series I bonds have two interest rates:
- A fixed rate that never changes for as long as you hold the bond — currently 0%
- A variable inflation adjusted rate that changes every six months based on the Consumer Price Index (CPI) — current annual rate is 7.12% through April 2022.
The Treasury will announce the new I bond annual interest rate based on CPI in May, which might be higher or lower than the current rate.
You may purchase:
- Electronic I bonds via TreasuryDirect.gov
- Paper I bonds with your IRS tax refund via IRS Form 8888
I bonds are sold at face value and earn interest from the first of the month in the issue date. Interest is earned monthly and is compounded semiannually: the interest the bond earned in the previous six months is added to the bond’s principal value; then, interest for the next six months is calculated using this adjusted principal.
Interest accrues until the bond reaches 30 years maturity or you cash the bond. You can’t access the interest payments until you cash the bond.
I bonds do not incur state or local taxes (SALT), but the bond owner will owe federal tax on the interest earnings unless the money is used for qualified education expenses.
You can’t redeem the bond for at least 12 months, and if you redeem the bond within five years, you forfeit the last three months of interest.
There are dollar limits on the quantity of Series I bonds you can purchase each calendar year:
- $10k maximum in electronic bonds per person (minimum $25)
- $5k maximum in paper bonds (minimum $50)
You can also purchase bonds for children under the age of 18 and, in some instances, for trusts and estates.
The main benefit of Series I bonds is that they protect your cash from inflation. And, Series I bonds can be a good solution if you have a savings goal over the next 2 to 5 years and want to protect the value of your savings.
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Inflation Will Persist
“Inflation is like chewing gum. It’s sticky and flexible, and you definitely don’t want to step in it.” Capital Group
For the past 30 years, investors haven’t had to worry much about dealing with inflation, says Capital Group fixed income portfolio manager Ritchie Tuazon. That changed last summer when COVID-related distortions and excessive government stimulus caused prices for energy and most consumer goods to skyrocket.
Today, the biggest questions for long term investors are how high will inflation go and how long will it last?
Adding to the uncertainty is that there are two types of inflation, according to Tuazon:
- Sticky inflation tends to have longer staying power. Sticky categories include rent, insurance and medical expenses.
- Flexible inflation — affecting items such as food, energy and cars — has risen much faster in recent months but many believe it won’t last.
From Capital Group’s perspective, they expect high inflation might persist longer than expected and should move closer to its 2% historic goal by sometime in 2023.
Higher inflation levels should remain elevated through late 2022, fueled by labor shortages and broken supply chains. “Consumer prices will eventually return to normal, but that process may take longer than Fed officials are expecting,” says Tuazon.
The Fed is left to react to inflation, but not overreact. Start, but not go too fast. Tighten, but not in the “wrong” ways.
Regarding inflation impact, “the first question is whether inflation will cool off enough on its own to not threaten corporate earnings growth or hurt consumer spending”, states Liz Young, Head of SoFi Investment Strategy. “The second question is less about whether the Fed can control inflation expectations with policy moves and more about whether the market is going to think they’re making a mistake and create a self-fulfilling prophecy.”
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Investing Involves Decision Making
Investing involves decision-making. But not making those investing decisions can be a more costly move in itself.
Choosing to invest your money in the stock market is like picking your first tattoo. The stakes are high and all the available options can seem overwhelming to your senses. Thankfully, there is an an abundant amount of good financial services, resources and advice available to help you avoid making a mistake mistake and to get you started.
There is truly no time like the present to start investing. Because the sooner you start, the more time your money has to grow and the more potential you have to earn, because of the power of compound interest. This is when your money earns money on itself and grows exponentially.
But, growth isn’t always guaranteed. Investing means taking in a certain amount of risk since the market moves in cycles. Although investing comes with some risk, it doesn’t have to feel like a high-stakes gamble.
Rest assured, historically, stocks have bounced back from every downturn in history. And, then continued to climb. Investing consistently overtime can make it easier to ride out the market volatility, the ups and downs.
The first step is determining what you want your future to look like financially in retirement. Retirement is probably your most important and expensive goal, and a good place to start.
It’s important to build a portfolio based on your time horizon, how you want to invest, how comfortable you’re with risk and what you plan to use your investment earnings are for. But, you must get started.
Ready, set, go(als).
Investing could help you owe the IRS less during tax time. For example, you have until the tax filing deadline each year to open and fund an IRA, which could help you claim an extra deduction.
Harvesting losses in your brokerage account could help you reduce your capital gains taxes for the year.
If you want more control over your investment portfolio, self-directed investing is the way to go. Self-directed investing is for people at all experience levels.
However, if you prefer a hands-off approach, financial advisors or automated robo-advisors can help you capture your financial goals and tailor an investment portfolio to achieve your financial goals, complete with regular rebalancing.
But, before you jump headfirst into investing your money, it’s wise to assess your present financial status first (your cash flow and net worth) and make sure you’ve got a solid savings foundation to build on.
Finding a balance between saving your money and building wealth through investing for your future is not rocket science. It is simple to build savings and help take the fear and uncertainty out of investing.
References:
Great Retirement
Millions of Americans retired sooner than they anticipated because of Covid-19
The pandemic pushed millions of older Americans out of the labor force. They retired sooner than they anticipated because of COVD-19. But according to economists, the Great Retirement of Baby Boomers should have spawned a surge in Social Security benefits applications — but applications for Social Security benefits are roughly flat. Perhaps because they aren’t retired.
The disconnect has economists wondering how many of these baby boomers might come back to the workforce — a key question when job openings have remained near record levels for months now.
The retired share of the population is now substantially higher than before COVD-19, according to a Federal Reserve analysis. About 2.6 million older workers retired above ordinary trends since the start of the pandemic two years ago, based on estimates by Miguel Faria e Castro, an economist at the Federal Reserve Bank of St. Louis.
Americans retired early for many reasons, including because they lost their jobs, feared for their health or had to care for family members. Another factor was the boom in the value of financial assets such as investments and real estate, which gave some Americans an opportunity to stop working earlier than they anticipated.
Average net worth jumped 12% and 14.8% among families with a head of household aged 55 to 69, and 70 and older, respectively, Fed researchers found.
Under the U.S.’s federal retirement program, eligible workers receive a percentage of their pre-retirement income in monthly payments from the government. Workers can start receiving Social Security payments at age 62, with full benefits coming at age 66 or 67 depending on their date of birth.
Despite the surge in baby boomers saying in surveys they retired, applications for Social Security benefits have been fairly flat, based on calculations by the Boston College Center for Retirement Research.
The surge was led by older White women without a college education, according to research by the St. Louis Federal Reserve. And, the Great Retirement — whether forced or by choice — was driven by baby boomers aged 65 and older, the regional Fed bank wrote in a blog post.
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Tax Refunds are Free Loans to US Government
A tax refund is an interest-free loan you gave to the U.S. government.
A tax refund, the payment most taxpayers receive after filing, is an interest-free loan you gave to the U.S. government. But only 7.4% of taxpayers agreed with the statement “I don’t like getting tax refunds because it means I overpaid throughout the year” in a nationally representative survey of 1,039 taxpayers by LendingTree Inc.
In fact, 46% of Americans say they’re looking forward to get a refund check from the IRS this year.
Many Americans plan to use tax refunds to help build or add to a cash cushion this year, according to the LendingTree survey. Forty-six percent said refunds would go into savings, up from about 40% in the last two annual surveys. The second-most cited use for a refund was to pay down debt, at 37%.
Many consumers overpay as a sort of enforced savings program, and to ensure they don’t have to write a big check to the IRS at tax time. On average, refunds are around $3,000.
However, rather than overpay in taxes, using that money during the year to pay off high-interest rate credit cards is one way to try and ease any financial pressures, financial advisers say.
It important for taxpayers to check that you are having enough tax withheld. Those who want to try and fine tune payments so they don’t get a refund can use the IRS tax withholding estimator; you’ll need last year’s filing on hand to fill it out.
Always remember, the tax “refunds” you receive are actually interest free loans given to the federal government and paid back when the IRS decides to give the money back.
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Staying Invested Matters
Investors are more likely to reach their long-term goals if they remain invested and avoid short-term decisions that may take them off course.
Staying the course during market volatility is often difficult for many investors. Some choose to move to cash investments, while others try to time the market. Regrettably, these investors are often buying high and selling low—and miss the rallies that follow the challenging periods.
Yet, staying invested through market ups and downs can help you stay on track to reach your investment goals.
Once you’ve determined how much you want to invest, setting up automatic transfers to your investment account or periodic investments can help you stay on track.
For example, investors often make suboptimal investing decisions when emotions take over, tending to buy out of excitement when the market is going up and sell out of fear when the market is falling. Markets do ultimately normalize, and when they do, those who stay invested may benefit more than those who don’t. Consider this:
- By missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolio. Market timing can have devastating results.
- Seven of the best 10 days occurred within two weeks of the 10 worst days.
- The second worst day for the markets during the early days of the COVID-19 pandemic, March 12, 2020, was immediately followed by the second best day of the year.
Trying to time the bottom is never considered a sound strategy for long-term investing.
Staying invested during periods of heighten market volatility is an important strategy as, historically, six of the ten best days in the market occur within two weeks of the ten worst days; those who miss the best days miss out on performance.
Thus, the decision to stay invested during market turmoil is often better than timing
when to sell and buy.
References:
Positive Wealth Building Thoughts
“Wealth is the product of a man’s capacity to think.” – Ayn Rand
“We become what we think about.” — Earl Nightingale
Wealth building begins and ends with your mindset, thoughts and behaviors. Thus, it’s imperative to keep your thoughts focused on the positive, on success, on making an impact, on changing the world and on changing people’s lives for the better.
There is an old adage that goes:
- Watch your thoughts, they become words.
- Watch your words, they become actions.
- Watch your actions, they become habits.
- Watch your habits, they become your character.
- Watch your character, it becomes your destiny.
You must not fix your eyes on current world conditions or even your own personal situation. Instead, you must focus on what you can control, on how you respond, and on how well you maintain a positive and winning mindset and attitude. Focus on the solution not the problem.
So, your keys to success tips include:
- Use only positive words while thinking and while talking. Use words such as, ‘I can’, ‘I am able’, ‘it is possible’, ‘it can be done’, etc.
- Allow only feelings of happiness, strength and success into your awareness.
- Every time a negative thought finds its way into your mind, immediately replace it with a positive thought or an affirmation.
- In your conversation, use words that bring forth feelings and mental images of strength, happiness and success.
- Before starting with any plan or action, visualize clearly in your mind its successful outcome.
- Read at least one page of an inspiring book or an inspiring article every day.
- Associate yourself with people who think positively.
- Act courageous. Always sit and walk with your back straight. This will strengthen your confidence and inner strength.
In order to build wealth and to achieve financial freedom, you must develop a wealth building mindset and follow a deliberate plan. As you will discover, your wealth grows to the extent that you do.
“We become what we think about most of the time, and that’s the strangest secret.” – Earl Nightingale
Bottomline…for success, keep your focus and thoughts on wealth building!!! Because, what you focus on expands and establishing habits is the key to expansion.
Don’t focus on the problems your dealing with today or the conditions of the world; fix your eyes on your systems, habits and the destination.
Napoleon Hill describes success as the product of having a definite objective. In achieving that objective, you need a clear definite aim and a definite plan to get there.
A definite chief aim means in simple terms that you must have a clear objective that you are aiming to achieve. Success — building wealth and achieving financial freedom — will not come to you and you will not be able to manifest what you want, unless you know what you want.
Success is ultimately achieved by focusing on a clear objective, and pursuing that objective deliberately and with all the means at your disposal. In simple terms, success is simple, but not easy.
“Whatever the mind of man can conceive and believe it can achieve.” Napoleon Hill
Actually, you just have to be exceptionally clear about what you are trying to achieve, passionate about achieving it, comfortable and happy that what you’re doing matches your values: and finally, and perhaps more important than anything else, you must believe that you can achieve it, you must expect to do so, and you must have a plan to achieve it.
So it’s imperative that you use the power of your thoughts and mind to focus on the positive aspects of your life. This works similarly to building strength in the muscles of your body. As you focus on what’s going right in your life, it will grow and expand like a muscle.
What you focus on grows and expands!
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9 Good Financial and Wealth Building Habits
Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.
Having healthy finances starts with having healthy financial habits. Here are some tips to set yourself up for success! pic.twitter.com/2ZFbFNV4oC
— Summit Home Mortgage (@Summithomemtg) February 12, 2022
When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.
Below are nine good financial habits.
1. Create a budget.
The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.
When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.
2. Avoid or consolidate higher-interest credit card and personal debt.
Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.
The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.
If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?
3. Understand your financial circumstances.
You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.
With an understanding of your finances, you’ll always know what makes the most sense for you and your money.
4. Learn from past mistakes and failures.
Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.
It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.
5. Set goals and create a plan .
Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?
Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.
According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”
6. Ask questions.
Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.
For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.
7. Save for retirement.
Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.
You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.
8. Automate your savings.
There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.
Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.
9. Pay down debt.
Taking on debt can be a successful strategy as long as you’re comfortable with two things:
- The monthly payment
- Your ability (and willingness) to pay down the debt.
The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.
If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.
Creating a wealth plan
A well thought out wealth plan rests on three essential pillars:
- Save
- Invest
- Repeat
These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.
A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.
Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:
- Clear vision over goals
- Easily control expenses and estimate savings
- Automate investments
- Define a strategy to achieve wealth
- Adapt your strategy over time
In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.
In essence, a wealth plan acts as a roadmap to financial freedom.
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