January 2010 Newsletter
January 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The January 2010 newsletter is now available. Beginning in 2010, it will be published the second week of each month. This month’s newsletter includes a brief 2009 market update, an update on the estate tax for 2010, how to conduct a home inventory, and more. Click here to read it.
Recovering from Unemployment
January 11, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.
Quoted in Kiplinger Personal Finance Magazine
December 7, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
I was recently quoted in “4 Ways to Trim Your Spending” by Laura Cohn in the January 2010 issue of Kiplinger Personal Finance Magazine. Laura and I discussed that having one or two areas of luxury in your life is not a bad thing — it’s actually a good thing because it helps avoid a sense of deprivation that can lead to seriously blowing your budget. But choosing an area or areas of indulgence that makes sense given your income, other expenses, and goals is important. Where we can really get into trouble is allowing the indulgence to spread to too many aspects of our lives. The luxury vehicle, a nice home, designer clothes, fine dining, spa services, wine and grocery purchases, and lots of travel are some of the areas that can be just fine if we have one area of indulgence and it’s supported by our budget. But these same areas can lead to spending trouble for all but the wealthiest if we enjoy too many on a regular basis.
December 2009 Newsletter
December 3, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The December 2009 newsletter is now available. It includes a market update, tips on tracking your expenses, year-end investing moves designed to save on taxes, and more. Click here to read the newsletter.
Buying a home to cash in on home buyers tax credit?
November 12, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
You may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also. For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income. A deduction, depending on which tax bracket you’re in, saves you between 10% and 35% of the deduction. The credit saves you 100% of the credit amount. The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?
Yes, this is a good idea. If it’s just a question of changing your timing by a few months to take advantage of the tax credit and there aren’t other substantial costs with the change, that makes all the sense in the world.
If you weren’t planning to purchase a home already, should this credit motivate you to take action?
Definitely not. If you weren’t planning to buy a home and aren’t financially ready for the purchase, this tax credit doesn’t significantly change that math.
For existing home owners, the costs of a move are too high to even come close to being offset by this credit. Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn’t significantly change whether home ownership is right for you. Yes, the $8,000 is a nice bonus. But it’s a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit. The mortgage is just the beginning of the cost of home ownership – consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment. There’s also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it’s up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan. The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children’s college. But the credit shouldn’t tempt you to make a decision that will end up hurting you financially long-term. Make sure your math includes the long-term total cost of your move!
October 2009 Newsletter
October 2, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The October newsletter is now available. It includes a reminder about the October 15 deadline to recharacterize 2008 Roth IRA conversions, a market update, how to calculate your net worth and why net worth is the financial number to watch, and more. To read the newsletter, click here.
30-Second Financial Gut Check
August 26, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re like many Americans right now, you’re worried about your finances. Even if nothing has particularly changed for you in the past year – perhaps you still have the same job, same mortgage payment, same retirement accounts – you likely now have a gnawing sense of insecurity about what the future holds. And if something has changed for you – like loss of a job, a pay-cut, increased credit card interest rates, or a looming foreclosure – your worry level may be magnified by a factor 10 or more. Even though we’ve had a nice run in the stock market over the past 5 months and there is some encouraging economic data in the news, that sense of confidence that many felt just a year ago is nowhere to be found.
So, is your worry justified? I’m going to give you 5 quick questions to answer. It’s the 30-second financial gut check. If the gut check reveals that you have reason to worry, you can take the anxiety and use it to motivate yourself to take action. On the other hand, if it shows that you’re really doing ok, then you can use this gut check to start getting your confidence back.
- Are you spending less than you earn?
- Do you have an emergency fund equal to at least 3 months’ fixed expenses (6 months if you’re a highly compensated employee or in a volatile industry)?
- Do you regularly save for retirement or any other goals at the levels needed to fund them?
- Do you have zero debt or is your debt level going down?
- Have you taken steps to manage financial risks – either by avoiding the risk, saving the funds to cover the cost of potential losses, or purchasing insurance?
If you can answer yes to all of these 5 questions, you have great reason to start feeling more confident. You are taking the basic steps necessary to create a solid financial future. Great job! Now it’s time to focus on the next steps which are making sure your investments are working hard for you, that you’re not paying too much for products and services, that you’re optimizing tax-efficiency, and that your estate plan is in order.
If you can answer yes to 3 or 4 of them, you still have good reason to feel confident. Depending on the severity of the 1 or 2 issues that you said no to, you may be really close to mastering the financial basics. The key for you is to address the 1 or 2 issues as soon as possible.
If you answered no to 3 or more of the questions, it may be time to let your sense of anxiety be a motivator for you. There are some life transitions – for example, when you’re starting a new business, in career transition, or adjusting to the loss of a family member – that you may answer no to every single question. If the situation is temporary, especially if you’ve prepared the financial reserves to weather it, there’s no cause for concern. It’s when these situations extend themselves over years and become accepted as the status quo that alarm bells need to go off.
If you answered no to 3 or more questions and your situation is not temporary or prepared for, you have multiple warning signals that your financial situation is precarious. It’s time to take immediate steps to increase your income levels and/or reduce your expenses. You need to develop a plan to bring your financial life into balance. Many financially successful people have been in this situation and through creativity and hard work gotten themselves on the right track. It is attainable by coming up with a plan, making tough choices, and then working your plan. Good luck!
August 2009 newsletter
August 5, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The August newsletter is now available. It includes information on 2010 social security and medicare numbers for planning purposes, whether creditors can go after your 401(k) and more. To view it, click here.
2nd income analysis
July 27, 2009 by Jean Keener, CRPC, CFDP · 1 Comment
If you’re like many folks right now, you may be trying to determine if having a stay-at-home spouse go back to work would be beneficial to your financial situation. The answer is not always clear-cut, so you want to make sure you do the math.
A second-income analysis involves an evaluation of the net after-tax benefit derived from a second income. For some couples, a second income is a financial necessity. For others, it is simply a means of achieving specific financial goals, such as ensuring a comfortable retirement.
There are two situations in particular that warrant a second-income analysis: (1) when a nonworking spouse considers entering the workforce, and (2) when a retired person considers full- or part-time employment to supplement Social Security and other retirement income.
If you wish to determine whether a second household income is advisable, you need to consider personal ramifications as well as the financial and tax aspects of your decision.
Personal ramifications
How will time spent away from the home impact you, your relationship with your spouse, and your children (if any)? For instance, if an at-home spouse with children is thinking about entering the workforce, the impact of such a move on the children may be a primary concern. In some cases, the economic benefit provided by a second income may not justify the loss in family or personal time. In other cases, of course, personal preference must take a back seat to financial necessity.
Financial aspects
Clearly, a second income can offer financial benefits. These advantages include: additional wages, salary, or self-employment income brought into the household, as well as additional fringe benefits (if any). You’ll want to look closely at the potential for saving additional income toward retirement and whether one spouse’s employer-provided health plan is more comprehensive than another.
There is also a financial downside to a second household income. Financial costs include possible extra expenses for commuting, parking, meals, clothing, child care, housecleaning, and dry cleaning.
Tax aspects
A second income could trigger certain unanticipated tax consequences, resulting in more or less after-tax income than you may have expected. Therefore, you must evaluate the overall tax impact of the second income, particularly if you’re collecting Social Security benefits.
What information must you gather to perform an analysis? You’ll need to obtain information about your current and projected financial and tax position. Regarding your current situation, you can review last year’s tax return and a recent pay stub for tax and salary information. You should also gather details about the second income, including estimated hours to be worked, wage rates, and benefits. Then, you’ll want to estimate expenses associated with the second income. Finally, you can fill out a worksheet to determine the net economic benefit of a second income. For information about how the net economic benefit of a second income affects your overall financial picture (as a couple), you might want to construct a cash flow analysis. This cash flow worksheet can get you started.
Which tax considerations are especially important? Generally, each additional dollar of income is subject to regular income tax, the 1.45 percent Medicare portion of the FICA tax (or 2.9 percent for self-employment tax), and the 6.2 percent Social Security portion of the FICA tax (12.4 percent for self-employment tax).
You’ll want to consider whether extra earnings will push your household into a higher marginal tax bracket (e.g., from the 15 percent bracket to the 25 percent bracket). But you’ll also need to consider how your increased adjusted gross income (AGI) affects the amount allowed for certain types of tax deductions. (Your AGI may be defined as your gross or total income minus certain deductions.) Common deductions that are subject to AGI limitations include the following:
- Phaseout of overall itemized deductions based on AGI (deductions reduced by 3 percent of AGI in excess of threshold amount)
- Miscellaneous itemized deductions subject to 2 percent AGI floor
- Medical expenses subject to 7.5 percent of AGI floor
- Phaseout of personal exemptions based on AGI (exemptions reduced by 2 percent of each $2,500 of AGI in excess of threshold amount)
- Phaseout of the child tax credit based on modified AGI
- Phaseout of deductible IRA contributions for certain qualified plan participants based on modified AGI
- Phaseout of exclusion of Social Security benefits based on modified AGI
- Phaseout of Roth IRA and Coverdell education savings account contributions based on modified AGI
Tax impact of second income on earned income credit
The earned income credit (EIC) is a refundable credit available to certain low-income individuals who have some earned income and meet certain other requirements. Because the EIC phases out as modified adjusted gross income increases, a second income may reduce or even eliminate your eligibility for the EIC, resulting in an after-tax benefit from the second income that is substantially less than you had anticipated.
Tax impact on retirees who receive Social Security benefits
Retirees receiving Social Security should consider the impact that supplemental earned income may have on those benefits before making the decision to work. In certain cases, taxpayers may have to include 50 percent to 85 percent of Social Security benefits in taxable income. In addition, Social Security recipients under full retirement age who have earnings in excess of an annual exemption amount are subject to a reduction in Social Security benefits.
Free Financial Webinars
July 10, 2009 by Jean Keener, CRPC, CFDP · 3 Comments
The National Association of Personal Financial Advisors is starting a new series of free webinars on various financial topics including Money 101, Kids & Money, Investing Basics, Protecting What you Have, and more. These sessions are designed to provide a convenient, accessible way to get financial information to help you most effectively manage your finances. Each one is instructed by one of my fellow NAPFA members. The first session is August 7. For the full schedule and to RSVP, visit NAPFA’s website.