March Personal Finance Newsletter
March 14, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The March personal financial planning newsletter is now available. It includes an update on the investment market, tips on cutting discretionary spending to build your cash reserve, planned charitable giving, and social security survivors benefit. There’s also a special guest column from attorney Rania Combs on the complexities of dying intestate (without a will) for individuals in blended families in Texas. Click here to read the newsletter.
June Monthly Newsletter
June 11, 2010 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The June newsletter is now available with an investment market update and some historical perspective on stock market returns over time to put recent volatility into perspective. It also include a how-to on deciding if you should pay off your mortgage and an invitation to the upcoming budgeting workshop at the Keller Public Library. I’m also pleased to share in the newsletter that no-load, low-cost, passively managed Dimensional (DFA) Funds are now available for investment management clients. Click here to read the June 2010 newsletter.
2nd income analysis
July 27, 2009 by Jean Keener, CFP, CRPC, CFDS · 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.
Keep an eye on your credit
June 29, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The Credit Card legislation passed last month should ultimately help consumers. However, in the short term, many people are being squeezed. We have a combination of factors:
- banks attempting to shore up their financial statements by reducing the available credit on credit cards, home equity lines of credit, and business credit lines
- credit card companies seizing the opportunity to raise rates and fees while they still can
- far fewer 0% and low-interest balance transfer offers available
What does this mean to you?
If you are carrying any consumer debt or rely on a line of credit for emergencies, you need to keep an eye on it. You need to read all your mail from lenders and especially watch for changes in your terms including interest rate changes, shortened grace periods, reduced credit limits, or increased fees.
If you’re carrying balances and your interest rates are going up, take action.
- Come up with a plan to pay off the debt as soon as possible.
- Investigate competitor’s offers.
- If you have cash in excess of your needed emergency funds, go ahead and pay off the balance now.
If you’re relying on a home equity line of credit for emergency funds and it’s reduced below what you need, take action.
Start accumulating a cash emergency fund immediately. Here are 10 tools to do this. Long-term, it doesn’t make sense to be at the whims of creditors for your financial security. Cash in hand is the only way to ensure you can handle the unexpected without doing long-term financial damage.
Bottom line, don’t just ignore changes in your credit terms. You need to be a conscious credit consumer. Your best best is to avoid credit card debt all together. But if you are carrying some revolving credit, take steps to ensure that current lending conditions don’t do permanent damage to your financial future.
10 Tools to Build an Emergency Fund
June 22, 2009 by Jean Keener, CFP, CRPC, CFDS · 4 Comments
So, you know you need an emergency fund. You’ve been trying to build one, but just can’t seem to get there.
The percentage of people living paycheck to paycheck ranges depending on who’s surveying from 47% (Careerbuilder 2008 survey) to 71% (American Payroll Association 2008 survey). This issue isn’t unique to any particular income level — the Careerbuilder survey also shows 21% of Americans with $100K+ incomes living paycheck to paycheck. Whatever the actual percentage is, if you’re one of the people in the paycheck-to-paycheck boat, you know how challenging it can feel to change the situation.
If you’re determined to make this change, you have to do more than nickel and dime your emergency fund. More than the popular “save the change” program on your credit card (nothing wrong with this, it’s just not enough). The small things do add up, but it’s very slow and doesn’t really give you that sense of accomplishment most of us need to continue.
First, set a goal.
Ideally, you’d have 6 months’ of living expenses in an emergency fund. But for a true paycheck-to-paychecker, thinking about the ideal makes you laugh. So start with $1,000. Then when you get that, you can change your goal to one month’s expenses. Then three, etc.
Second, set a timetable.
Don’t give yourself a lot of time to save $1,000. You want a sense of urgency to achieve your first milestone. I’m not going to get specific here because depending on your income level, it might be reasonable to do it in one month or three months. But I wouldn’t suggest more than six months for anyone.
Third, pick 3 things on this list that you can do today.
1. Set up an automatic transfer from checking to savings on payday. Enough to be a little painful initially, but not so much that you can’t stick with it.
2. Take a one-month spending vacation. Don’t starve yourself or skip doctor’s appointments if you’re sick, but don’t buy anything that’s not absolutely necessary. Put everything you have left over in your emergency fund.
3. Have a garage sale (or sell your stuff on Craigslist, eBay, etc.). Some people can generate the $1,000 from this alone.
4. Use 3 paycheck or 5 paycheck months. If you get paid every other week, then there are 2 months a year when you have a 3rd paycheck. If you get paid every week, you have 1 month every 3 months with a 5th paycheck. Most people just kind of absorb this extra paycheck into their spending. Instead, make sure you’re living strictly on your regular number of paychecks each month, identify the months where you’ll receive an extra one, and put that money directly into your emergency fund on payday.
5. If you get a bonus, over-time, or extra commission, put it in your emergency fund.
6. If you get a raise, calculate how much extra you get on your first check after the raise, and increase your automatic transfer to your emergency fund by that amount. Don’t increase your spending.
7. Get a part-time job or start a small business (one without a lot of overhead) and save everything you earn from it.
8. Write down all of your expenses for an entire month. Pick at least two to eliminate or reduce.
9. If you’re part of the 21% of people earning more than $100K living paycheck to paycheck, when you max out on social security ($106,800 limit this year) and your paycheck goes up, put the extra money in the bank instead of spending it.
10. If the above aren’t enough to get you there, consider big changes like a less expensive car or place to live.
Fourth, write it down and show it to someone.
I will save $_______ by ______ (this date) by doing items 1)______________, 2)__________, and 3)____________. Your chances of success increase exponentially when you write your goals down and share them. Good luck!