Tag Archives: Net Worth

Estate Planning

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“I want to leave my children enough that they feel they can do anything, but not so much that they do nothing.” ~ Warren Buffet

Your Estate Plan

Although estate planning can be a complex task, a well-informed plan can make a big difference in what is left for your loved ones.

Source: Fidelity Investment

Here are a few steps you can take to begin thinking about your estate plan:

  • Gather important documents, and make sure that key family members know where they are.
  • Gather a list of all the things you own, noting any liabilities (like your mortgage) as well. Record the value of each asset (properties, collectibles, jewelry, etc.). Print copies of your most recent statements from your relevant accounts. Note the values and benefits from insurance policies.
  • Consider and write down your objectives for your estate plan. Who should get which assets? Who should get them if something should happen to your beneficiaries? Do you have minors who need care if something were to happen right now? Who should handle your assets if you become unable to make decisions about them? And so forth.
  • Review your will, if you have one in place.
  • Review and update the beneficiaries of your retirement accounts or insurance policies.
  • Review and update powers of attorney for matters of health care or other affairs.
  • Consider if you want to establish a trust, and prepare to talk to an attorney and experienced financial adviser about it.

We never know what could happen tomorrow. But we do know that having a solid estate plan can help ease the burden of your passing on your loved ones.

Revocable vs. Irrevocable Trusts

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

  • Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.Trusts are a powerful and beneficial tool when properly used.

There are two types of trusts: a revocable living trust and an irrevocable trust. Some other terms associated with trusts include “grantor” and “non-grantor” — which are the parties creating the trust.

With a revocable living trust, you still control the assets, can change the trustee at any time, or sell your assets while you’re living, because the grantor — the person who created the trust — is normally the trustee as well. The only benefit a revocable living trust provides is to ensure your assets bypass probate. It does not provide any immediate tax benefits. In fact, income from a revocable living trust is taxed to the grantor.

An irrevocable trust is completely different. It can be used when “gifting” assets in order to reduce a grantor’s taxable estate. Be aware that once you transfer assets to an irrevocable trust, changes are permanent and cannot be undone — or at best — can only be made through a lengthy process. You no longer have any control to sell investments inside the trust and will have to ask your trustee — typically your children or grandchildren — to do so. Since you don’t legally own the assets any longer, they’re either taxed at trust income tax rates or your beneficiaries’ tax rates.

By using a will or trust to legally ensure that you will not only protect the things you worked hard to achieve, you will have the final say about those assets — taking care of the people you love when you’re no longer here. That means not leaving such decisions to attorneys, state governments or the IRS.

References:

  1. https://www.kiplinger.com/article/retirement/T021-C032-S014-estate-planning-is-more-important-than-you-think.html
  2. https://www.fidelity.com/life-events/estate-planning/basics
  3. https://www.fidelity.com/life-events/estate-planning/trusts

The Wealthy Next Door

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To accumulate wealth, you should start by reading and studying the behaviors of people who have successfully accumulated wealth and achieved financial independence.

In the groundbreaking financial book, “The Millionaire Next Door: Surprising Secrets of America’s Wealthy”, written in 1996 by William Danko and Thomas Stanley, found that people who appear wealthy may not actually be wealthy.

Their findings reveal that people who appear wealthy tend to overspend or live paycheck to paycheck. They often overspend on symbols of wealth like luxury vehicles and large homes — but actually have modest or negative personal net worths. On the other hand, wealthy individuals tend to live modestly in middle-income communities, drive modest vehicles, and shop at Costco Warehouse.

Lessons Learned from “The Millionaire Next Door” are enlightening on how the wealthy actually spend and save. Instead of appearing to be wealthy, they tend to:

Understand that Income Does Not Equal Wealth

It is a fact that higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is not spent on discretionary things, but is saved and invested. On average, wealthy individuals invest nearly 20% of their income. And, it finds that those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley

Work with a Budget

The majority of wealthy individuals have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it. As the authors wrote, “It’s much easier to budget if you visualize the long-term benefits of this task.”

Manage their Spend

Nearly two-thirds of the wealthy can answer know how much their family spends each year for food, clothing, and shelter. In contrast, only 35% of high-income non-wealthy answered yes to this question. The wealthy manage and track their spending.

Have Defined Financial Goals

About two-thirds of wealthy have clearly defined short-, intermediate- and long-Term goals. Many of the wealthy are retired and have already reached their goal of financial independence.

Dedicate Time To Financial Planning and Education

Creating a budget, goal setting and financial planning all take time, but the wealthy were willing to spend it. Danko and Stanley found that people they labeled “prodigious accumulators of wealth” (PAW) spend many hours per month planning their investments. In fact, they found “a strong positive correlation” between investment planning and wealth accumulation. Each week, each month, each year, the wealthy plan their investments.

Buy and Hold Smaller Homes

Your purchase of a home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of the wealthy have lived in the same house for more than 20 years.

Stay Married

The majority of wealthy people are married and stay married to the same person. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced. Conversely, it’s important to partner with someone who possesses similar healthy financial behavior and habits.

Buy and Hold Pre-Owned Vehicle

The majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.

Live Happier Lives

Bottomline, living below your means is the one sure way to accumulate wealth and to live happier. Since, there exist a peace of mind living below your means and saving money. Danko and Stanley’s research indicates that, “financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Essentially, when it comes to financial security and retirement planning, adopting the lifestyle of the wealthy means you can save more toward your financial goals and destination. That’s a formula that can help anyone to accumulate wealth and achieve financial independence.

  • References:
    1. Thomas J. Stanley, and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Paperback, November 16, 2010
    2. https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/

    Written Financial Plan

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    “Establish a financial plan based on your goals.” 

    Research continue to show that creating a written financial plan is more effective and beneficial than simply thinking or talking about your goals. The research finds that more than two-thirds of people who have a written financial plan say they feel financially stable, whereas just 28% of those without a plan feel the same way, according to Schwab’s 2019 Modern Wealth Survey. Planners generally know what they’re saving for, how much they need to put away, and how long it will take them to reach their goals.

    “Long term thinking and planning enhances short term decision making. Make sure you have a plan of your life in your hand, and that includes the financial plan and your mission.” Manoj Arora, From the Rat Race to Financial Freedom

    Multiple surveys show that less than a third of Americans have a financial plan in writing. And among those without one, 2 in 5 Americans say it’s because they don’t think they have enough money or assets to merit a form and many say simply that it’s too complicated or they don’t have enough time to develop one.

    But in reality, financial planning is not inaccessible, too expensive or too complicated. A written financial plan is simply formalizing a person’s short-term goals and long-term goals and determining a path with saving and investing to achieve them. 

    Planning in small steps doesn’t take large sums of money to start.  In fact, financial planning can have a profound impact on lower-income households, by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and provides a way to measure success.

    Elements of a financial plan:

    • Create short, intermediate and long term goals
    • An emergency fund
    • A budget to determine cash flow and calculating net worth
    • Paying down and avoiding debt
    • Health and disability insurance
    • Start saving and investing early, pay yourself first and put it on automatic
    • Pay yourself first
    • Saving and investing for retirement and/or college
    • Saving and investing for shorter term goals like vacations or a home purchase
    • Trusts, wills and estate planning

    After creating your financial plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial plan.

    Planners demonstrate better money and investing habits

    For those looking for a way to stay the course, Schwab’s survey shows that more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a plan feel that same level of comfort. Essentially, those with a financial plan maintain healthier money habits when it comes to saving.

    A financial plan leads to better habits since financial planning isn’t just about investing. Many sound money management habits and financial decisions are more easily explained in quality-of-life terms—such as controlling consumer spending, the security that life insurance offers, or the peace of mind that having an emergency fund can provide. There are healthy money habits and there are good investing habits; a written financial plan can lead to both.

    “Spending is not the enemy, but it’s important to balance saving and spending so we can both enjoy life’s experiences along the way and achieve long-term financial security.”

    Creating financial goals and a financial plan isn’t going to help unless you stick to your plan over time. One good way to do that is to create a detailed quarterly schedule of money-related tasks.

    Successful planning can help propel financial security and net worth for those who stick with their plans.  Research shows that those sticking with their financial plans achieved an average total net worth three times higher than those who didn’t plan.

    References:

    1. https://www.aboutschwab.com/modernwealth2019
    2. https://content.schwab.com/web/retail/public/about-schwab/schwab-modern-wealth-survey-2019-atlanta.pdf
    3. https://www.schwab.com/resource-center/insights/content/does-financial-planning-help
    4. https://www.schwab.com/public/schwab/investing/why_choose_schwab/investing_principles
    5. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan

    Seniors Are Stressed About Income in Retirement. What To Do. – Barron’s

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    A large number of American workers closing in on retirement are showing anxiety not just over how much they’ve saved but also over how to manage their different income sources during their post-career lives.

    A new study by Charles Schwab found that most pre-retirees—defined as those within five years of retirement—have at least one fear about their income in retirement. The findings were gleaned from a survey last summer of 1,000 Americans aged 55 and older with $100,000 or more in investable assets, half of whom fell into the pre-retiree cohort. 
    — Read on www.barrons.com/articles/most-seniors-stress-about-income-in-retirement-heres-what-theyre-most-worried-about-51582977602

    7 ways to build wealth today, according to financial planners – Business Insider

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    “The very first step to building wealth is to spend less than you make.” Brian Koslow

    • Wealth building doesn’t happen overnight, but financial planners say a few steps can put you on the right path.
    • Start by tracking your cash flow, calculating your net worth, eliminating bad debt, and, making saving and investing a habit.
    • Then, they suggest using high-yield savings accounts or a 401(k) with an employer match to keep those savings growing.

    The key to accumulating wealth isn’t always simply to make more money. Sometimes, it’s about using what money you have more effectively or using what you financially control to your advantage. Maybe it’s as simple as moving your savings into an account with higher interest rates, spending less than you earn, or taking advantage of an employer’s 401(k) match.

    Most importantly, experts say one of the most important elements to building wealth is to believe that it is possible and simply give it time. The best ways to start building wealth today, according to financial planners, are straightforward and simple.

    The seven (7) ways, according to Business Insider, to build wealth are:

    1. Figure out your net worth
    2. Start saving automatically
    3. Take advantage of your employer’s 401(k) program
    4. Look at your cash flow
    5. Don’t just let money sit — keep it growing
    6. Make your savings, investing and accumulating wealth a priority
    7. Be patient and think long term

    Financial Milestones

    One rule of thumb for building and monitoring wealth says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40, and so on. If you fall short, don’t fret, it’s never too late to increase your savings rate and it never hurts to aim high—

    Take full advantage of your employer match, if one exist. For example, with a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 each year. Most people’s pay consists of a package that includes salary and employer benefits. You wouldn’t accept a $3,000 pay cut without a fight; by letting your employer match go to waste is kind of the same thing.

    Build an Emergency Fund

    Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. And, once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.

    Retire Bad Debts

    It imperative to eliminate or reduce bad debts. We all know which ones they are: the loans used to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a Sailor at an open bar. And, making only the minimum monthly payments on credit card and consumer debt. It is recommended set a deadline for repayment and getting rid of the growing interest and debt.

    Benefits of a Budget

    Money is often stretched in many directions. Daily expenses, entertainment, life events and long-term goals—all competing for the same dollar. Budgeting can help ensure you’re covering the essential monthly expenses, saving for the future and, with some discipline, have some extra cash to reward yourself for your good work.

    — Read on www.businessinsider.com/best-ways-to-build-wealth-starting-today-2019-8

    https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

    A Penny Saved is a Penny Earned | Financial Literacy

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    ”One penny may seem to you a very insignificant thing, but it is the small seed from which fortunes spring.”

    Orison Swett Marden

    “A penny saved is a penny earned” is a way of saying that one should not waste money but should save it, even if the amounts are small. Over decades, even small amounts of money saved regularly and if invested wisely, have the potential to add up thanks to the magic of compounding.

    This well-used financial idiom is often attributed to Benjamin Franklin.

    When money is saved instead of spent, you end up ahead in your financial total net worth by the amount saved instead of down by the amount spent. It means that you are two steps ahead of where you would have been financially.

    “Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.”

    Will Rogers

    So when you save your hard earned money, it will be there when it might be needed, especially in emergencies or retirement. This fact makes money saved similar to money earned. Thus money saved creates the same financial benefit as money earned (trading time for money) through work, thus, a penny saved can be viewed as the same as a penny earned.

    The suggested amount of pennies saved should be at least 10 to 15 percent of your monthly income. But, if 10 to 15 percent is not currently possible, even small amounts of money are better saved than spent.

    “The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.”

    Darren Hardy

    If you’re patient and disciplined, your pennies or money can work for you and make a real difference in your account balance over time.

    Secret to Financial Success

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    The secret to financial success is positive cash flow.

    Positive cash flow means that you’re earning more than you’re spending monthly. It means your cash inflows exceed your cash outflows.

    And, if you have positive cash flow, you have the basis for building and achieving financial success. How you build that financial success depends on your long-term financial goals, personal risk tolerance and your existing lifestyle and habits.

    Yet, no matter how wealthy you are or how much you earn in monthly income, you must manage your spending. Many professional athletes and entertainment celebrities have earned millions of dollars of income during a professional career only to file for bankruptcy during their lifetimes due to reckless or undisciplined spending. Consequently, spending matters greatly.

    Cash Flow Basics

    To accumulate wealth, you must spend less than you earn. This is the fundamental law of money:

    [WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

    This law tells us three things about cash flow:

    • If you spend more than you earn, you are losing wealth — a negative cash flow. Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt.
    • If you spend less than you earn, you are accumulating wealth — a positive cash flow. Positive cash flow may allow for you steps to save, invest or even to pay off debts.
    • If you spend equal to what you earn, you are neither accumulating or losing wealth — a neutral cash flow. Neutral cash flow is spending to the penny exactly what you earn.

    Subsequently, the greater the difference or delta between earning and spending, the faster you lose (or accumulate) wealth. And, there are only three things you can do to increase your cash flow: spend less or earn more or do both.

    Smart personal finance is very simple. Everything else — paying yourself first, investing ten to twenty percent of what you make, building an emergency fund — is done in support of and dependent on this fundamental law of positive cash flow.

    References:

    1. https://farnoosh.tv/?s=Financial+sUccess
    2. https://www.getrichslowly.org/the-power-of-positive-cash-flow/
    3. https://financialwellness.utah.edu/counseling/cash-flow.php

    Know Your Net Worth | Financial Literacy

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    “What gets measured gets managed.” Peter Drucker

    This principle of ‘what gets measured gets managed’ means that examining or quantifying an activity, such as personal finance and net worth, will change the activity and its result by forcing you to pay attention to it.

    This principle said another way…’you manage what you measure‘ is pertinent to personal finance. The principle can be applied to help us manage our personal finances and to permit us to get our hands around our personal net worth. Creating a net worth statement, and updating it each year, will help you monitor your financial progress and meet financial goals.

    As you prepare to invest, you’ll need to know your net worth. And, it’s simple to calculate. You simply add up what assets you own and subtract what liabilities you owe.

    Creating a net worth statement, and updating it each year, will help you monitor your financial progress and meet financial goals. It will also enable you to calculate how much you have (or don’t have) to invest.

    www.finra.org/investors/personal-finance/know-your-net-worth

    The 5 Step Guide to Avoid Making Investment Mistakes

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    “The only man who never makes a mistake is the man who never does anything.”

    If you apply this famous quote by Theodore Roosevelt to investing, the easiest way to avoid mistakes while investing is by not investing at all. But, that is the biggest investment mistake one can make.

    Investing is important to build wealth in the long term. However, just investing is not enough as investing right is equally important.
    — Read on www.entrepreneur.com/article/343454

    How much money you’d have if you invested $500 a month since 2009

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    CNBC calculated how much you’d have now if your investments had grown at a 4%, 6%, or 8% rate of return over the past decade.

    In order to beat inflation and ensure that your savings will work for you long term, it’s crucial to invest in the stock market, whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else.
    — Read on www.cnbc.com/2020/01/07/how-much-money-youd-have-if-you-invested-500-dollars-a-month-since-2009.html