Categories
finance investing

COVID-19: Have We Reached the Stock Market Bottom?

You’ve likely heard the advice, “Buy stocks now, they’re cheap.” 

While generally, yes, you want to “buy the dip,” because buying anything of value on sale is great! Why pay more when you can get the same thing for less?

Those of us around during the 2008 recession know how bad things got then, but over the last few months we heard more about how much money people made when they bought their investments at the deepest parts of the recession, when everything of value was much cheaper.

The big companies were bailed out, and most American companies not only survived, but did much better in the years following the recession.

Is This Time Different?

What was different during a recession caused by a debt-bomb is there was nothing stopping from businesses from resuming operations, nothing stopping an American out of work from going to their neighbor’s house and offering to shovel snow for twenty bucks.

While times were rough in 2008, there were no state or national quarantines. Companies burned through cash, but had options to curb the bloodletting.

This time, under quarantine, companies are burning through cash and are told they cannot even resume operations in some cases. Who knows how many companies will go under from not having a hint of cash flow for weeks or potentially months. 

This time could be different.

I am not advising against investing, just being cautious and making sure any companies you are considering can last a few months worth of cash burn without having any inflow.

This is a critical time, and having cash on hand may be a more stable plan than investing in companies that have no hope of getting you a return on capital for possibly months.

So Have We Reached the Bottom?

Stock prices will continue to be volatile for maybe many months. No one can say when the volatility will stop until the threat of the virus has let up. Unfortunately, they go hand in hand.

If the headlines get worse and not better, the market will dip further and further as more people retreat to cash for fear that mainline American businesses do not have the proper emergency funds to last a prolonged stop to operations.

Read the headlines, stay safe, and think critically. If the virus begins to subside and businesses are allowed to begin reopening their doors, cash flow can resume, and the thoughts of a national recession– or worse, depression– will also dissipate. 

At that time, stocks will likely still be undervalued and you can have your pick.

But what do you think? Will this be long-lasting, or do we have nothing to fear?

Sound off in the comments below.

 


This article is not meant to constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
finance investing

Should You Change Your Investing Strategy Because of the Coronavirus?

Big changes have unfolded over the last two weeks, and with those changes, came questions of recession, depression, or perhaps just a general market correction.
These changes have made a lot of us question our investing strategy; many of us are wondering how bulletproof the mutual funds or stocks we’ve chosen are, now that the world seems to be crashing down around us.
You may be wondering if you should move money into safer assets, like bonds or cash, or you might be wondering if you should switch to other, seemingly undervalued assets now that they’re “on sale.”
These are the wrong questions to ask.
It’s never a bad idea to evaluate your investment plan. It is, however, not a good idea to completely switch your investment strategy during a major market downturn while tempers run high and emotions cloud good judgment.
The selling price of all assets decrease during a recession or general market correction. During a correction is not the right time to wonder if you’ve fairly priced the assets you’ve bought and the soundness of your investment decisions.
You want to come up with your bulletproof plan before the proverbial sh*t hits the fan.
But to get to the specifics, if you sell your investments now because you’re feeling defeated, you’ll likely sell close to the bottom of the fair market value for stocks during the downturn.
If you have a home, you try not to sell it during the deepest parts of a recession because you will get far less for it than if you sell it during a time when real estate prices are up.
To stick with the real estate scenario, the fair market value of your home changes as quickly and as drastically as any stock, but this change is invisible because there is no ticker telling you at any given time what someone is willing to pay for your home.

Selling your investments now is exactly like selling your home because you get scared because someone made a low offer to buy it.

If you’re not sure what to do, meet with a financial professional and review your options.
Do not make any rash decisions. And work on creating a plan bulletproof enough that during the next downturn, you feel confident enough about your investments you don’t even reconsider it.


This article is not meant to constitute legal advice. For help regarding your specific situation, please consult a local professional.

Categories
family finance term life insurance

“How Much Life Insurance Do I Really Need?”

The question usually comes up in regard to insurance planning: “How much life insurance do I really need?” This implies of course that the belief is held that either the amount recommended is incorrect or perhaps the insurance isn’t needed altogether. 

We’ll go over a specific scenario below.

Richard writes in: “I’m 36, recently married, and my wife has two kids from a prior marriage. As soon as we started to get serious, we met with a financial planner and of course one of the first things the planner wanted to talk about was insurance. He immediately recommended a $1,000,000 term policy.

I have a policy for $50,000 at work, so I should be covered, correct? Why would my beneficiaries need more than that? It should cover burial costs and give them something left over too if I am to pass.”

Richard, thanks for writing in. For starters, the planner has one advantage that I don’t: the ability to ask you questions in a more direct format. 

That being said, I will speak first more generally and then get to specifics.

In general, if a person has a need for life insurance, their policy at work is usually not enough. 

The reason being is that yes, it could be enough to cover burial costs but usually if you have a need to do that, it means that you have other dependents that will rely on more than that and were likely relying on your income. 

Now this gets into the specifics as to whether your work policy is enough or not. Your planner likely asked if your new wife and her children are dependent on your income, or if your wife is able to support herself if something happened to you.

If your wife and new children are unable to support themselves in the event of your passing, they will need income replacement likely for perpetuity, not just a few years.

This is where the idea of a large term policy (around $1,000,000) comes into play. That large of a face amount placed into an interest-bearing account should give your beneficiaries a sizable income to help replace the income they lost from your passing. 

I hope this information helped, Richard.

 


Thank you for reading and feel free to leave a comment below to have your question featured. 

This article should not be considered legal or tax advice. Always consult a professional for advice on your specific situation.

 

Categories
Budgeting family finance

How Much Should I Have in an Emergency Fund?

We’re all on the path to better ourselves financially, and a big part to that is having a safety net. When it comes to our finances, that safety net takes a few different forms; but usually this boils down to a form of insurance.

And an emergency fund is insurance against going into debt.

A question we get a lot is: “How much money should I have in my emergency fund?”

The good news and the bad news is the same in this case: There is no right answer. Everyone is going to be different. At its core, the answer to this question is “however much money you need to have saved up not to go into debt in the case of an emergency.”

But What Do the Experts Recommend?

Financial planners generally recommend that you save up three to six months worth of expenses in an emergency fund. It is important to remember that we’re talking about three to six months worth of expenses, not income.

Look at your budget and determine how much money you have going out in expenses that are required to live every month. This does not include money going toward savings, investments, charities, etc. That income is strictly surplus money in the budget.

What Do You Recommend?

Generally, we recommend the same as the experts. Three to six months should suffice most financial catastrophes. But we like to call the number that works for you and your spouse the Sleep at Night Number.

What number in your savings account helps you sleep at night? What number in your account helps you not worry about what your investments are doing? What number helps you and your spouse not feel stress about money?

That number is your sweet spot.

What number helps you sleep at night? Do you agree with the experts with three to six months or do you have a different idea of what should be in your savings account?

 


This article is not intended to be financial, tax, or legal advice. Please consult a local professional for help with your specific situation.

Categories
Budgeting family finance

Should I Pay Off Debt and Invest at the Same Time?

We all want to pay off debt. And we all want to put more money into our retirement plans (401k’s, IRA’s, etc.). But do these two things conflict?

They shouldn’t. They’re both working towards the same goal: a better financial future for yourself.

So Do I Invest While I Pay Off Debt?

We hear the argument made all the time: “Why would I pay off debt at 3-4% interest when my investments make an average of 6-7% every year? I can make the minimum payments on my debt and invest and come out ahead.”

Look, we get that you can crunch the numbers. But this is personal finance. And it is important to remember that nothing in personal finance makes mathematical sense. Personal finance is almost entirely psychological, not numerical. And that statement alone is enough to make a person with a finance degree cringe.

If we made personal financial decisions based on what made numerical sense, we wouldn’t have debt in the first place.

So I Shouldn’t Invest While Paying Off Debt?

Yes. Saving and paying off debt are conflicting goals. This has nothing to do with the numbers making sense or that both of these actions help work toward your future.

They conflict because you can only do one thing aggressively at a time. If you try to pay off your pile of student loans at the same time you are trying to grow your investment portfolio, you will lose your mind. You will get burnt out and give up.

It is so important to feel small victories when working on yourself financially, just like it’s important to have small victories when dieting or exercising. This is where the psychological side of personal finance comes into play.

The balance in your 401k won’t matter when you have hundreds of thousands in student loan and credit card debt. The stress will pile up from the debt and your IRA won’t be there to comfort you until you turn 59 ½.

But what do you think? Have you gotten out of debt at the same time you invested? Do you think it’s more beneficial to focus on paying off debt before investing in mutual funds?

 


This article is not intended to be financial, tax, or legal advice. For help regarding your specific situation, please consult your local professional.

Categories
Business finance Taxes

Do I Get A Tax Deduction for Saving Into My 401K?

The government wants to help encourage its citizens to save for things it thinks are beneficial, such as: retirement, healthcare, and college. And one of the ways it does this is by making certain plans and savings vehicles “qualified.”

All that the term “qualified” means is that the savings vehicle is tax advantaged in some way. These include things like Health Savings Accounts, Individual Retirement Accounts, and yes, your employer’s 401k.

So What Kind of Advantage Do I Get for Saving Into My 401k?

Aside from saving money for retirement and letting it grow, you do get other advantages. Money going into a normal 401k goes in pre-tax. This term means that the money going into the account is excluded from income subject to federal income tax.

So the Money Goes in Completely Untaxed?!

But this does not mean that the money is not taxed at all. This only means it is not federally taxed when it initially goes into the account.

The money is still taxed by Social Security, Medicare, State, and local taxes. You only get to exclude this money from your income subject to federal income tax. This distinction is incredibly important to make, however it does not delegitimize how impactful saving into a retirement account can be.

On top of these taxes hitting the contributions to a 401k, the distributions in retirement are then taxed at your federal income tax bracket.

So How Much Can I Save Into My 401k Every Year?

You can save the lesser of your earned income at a given employer or $18,500 for 2018, every year in your 401k. It is important to note that only wages can be saved into a 401k as contributions.

The only other money going into a 401k account can be from rollovers from a different qualified plan, such as an IRA or a 401k or 403b at an old employer.

 


This article is not intended to be legal, financial, or tax advice. For information regarding your specific situation, please consult a local professional.

Categories
Budgeting finance

What Category Do I Start With For My Budget?

Jason writes in: “My family and I are trying to figure out where to even begin with budgeting. What category do I start with?”

Thanks for writing, Jason. Where you start is going to depend on you and your family. Specifically, it is going to depend on where you are on your journey to becoming debt-free, as well as your family’s values.

A good place for anyone to start with the budget is the essentials: you have to eat, you have to keep the heat/air conditioning on, you have to keep the lights on, and you have to pay rent/mortgage. If you are really struggling to get by, that is where your budget will start every month until you have breathing room.

If you and your family are having trouble staying above water, then you will be living as frugally as possible: no going out to eat, working extra hours, or even taking a second job.

But if you are not struggling, then you may want to consider broadening your budgeting categories. You might start with charitable giving. If your family values helping others, then this would be a good place to start as it puts your values on the forefront and helps to change your mindset toward money.

If you struggle with saving, you may want to make the first and second categories Long-Term Savings (Retirement) and Short Term Savings (Emergency Fund, New Car Fund). This makes it easier to save so it isn’t something that is on the back-burner but instead is something that you do at the beginning of every month with little thought.

The most important thing to remember is that budgeting is a personal process and everyone will have different categories, values, and percentages set aside for every category. The important aspect of this is remembering to even start the budget. Knowing where your money is going is the first step to changing any potentially bad behaviors. It is also potentially revealing as to what your family values.

Thanks for reading. What category does your family start the budgeting process with?


This article does not constitute legal, financial, or tax advice. For specific information on budgeting and helping your family get out of debt, please consult a local professional.

Categories
finance retirement

What Is a Qualified Retirement Plan?

The Federal government has outlined what are referred to as “Qualified” plans, meaning they are earmarked for retirement. Everyone has access to a Traditional IRA, most people have access to a Roth IRA, and depending on who you work for, you may have access to a 401(k), a 403(b), or a 457. We will touch on each of those options in a future post.

But what happens if you don’t work for anyone and you feel like you’ve lost out on potential tax savings because of the low contribution limits on IRAs? After all, the contribution limit for employer-sponsored plans for most people is $18,500 annually and the contribution limit for Traditional and Roth IRAs is $5,500 annually for most people.

If you are self-employed, IRS publications outline different options for you. There are a few easy to implement and cheaper options in the form of a SEP plan and a SIMPLE plan.

We will go over the specifics of each of these plans in future updates, but here we will specifically be discussing what these plans all have in common.

These plans are all meant for retirement and are often implemented by financial institutions such as banks, insurance companies, or brokerage firms.

When Can I Draw Money Out of the Accounts?

All of the accounts have a stipulation that you cannot begin drawing money out in the form of distributions until age 59 ½. If you are to take money out early, you will incur not only normal income tax payments but also a 10% penalty on the money that is withdrawn.

Why Would I Put Money Into One of These Plans?

Qualified plans are tax-favored, meaning that the money put in is either exempt from tax when it is contributed into the plan or distributed from it, but not both. Traditional plans provide for tax savings upfront, but are tax-deferred, meaning they are taxed as ordinary income when distributed.

Roth plans are taxed upfront in the year contributed, however they allow for tax-free growth.

So Should I Save Into Roth Plans or Traditional Plans?

It may depend on what is available to you and what strategy you are pursuing. Employer-sponsored plans allow for greater contribution rates but it may be harder to find an employer that sponsors a Roth 401(k), 403(b), or 457.

Because of this, you may want to pursue a mixed strategy where you save into a Roth IRA outside of your employer and then save into a pre-tax account with your employer.

Why Would I Save Into One Plan Over the Other?

If you believe you will be in a lower tax bracket when you retire, then it will be wisest to put money into a pre-tax account where you get the tax break upfront when your tax bracket is higher.

If you think your tax bracket will be higher when you retire, you will be better off saving into Roth plans where you can get the growth of your contributions tax free when you would otherwise have to pay more on earned income.

 


This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.

Categories
finance Taxes

Can I Claim My Student Loan Interest As a Tax Deduction?

There are a few benefits post-college beyond hopefully an increase in earnings potential and a newfound confidence from higher education.

The Federal Government allows for certain tax provisions to those who are paying down their student loans. For years the tax code allowed a maximum deduction of $2,500 of student loan interest to be deducted from one’s income.

And although some had believed this provision was being eliminated in last year’s proposal in the form of the Tax Cuts and Jobs Act, the student loan interest deduction will remain intact.

So How Do I Know If I Can Claim The Deduction?

There are a few questions that need to be answered to determine if you are able to claim your interest on your student loans as a deduction; the first question being whether or not you are being claimed as a dependent. If you are, then you are not able to claim the deduction.

However, the person claiming you as a dependent may claim the student loan interest deduction if they both are legally obligated to repay the loan and actually made the payments.

If you are not being claimed as a dependent, then you are able to claim the student loan interest deduction if you are both legally obligated to repay the loans and you actually made the payments yourself.

Are There Any Other Restrictions?

If you were to have landed a good job after college, the amount you are able to deduct may be reduced even if you meet all of the other requirements. The phaseout for this deduction starts at a modified adjusted gross income of $60,000 for single filers and $125,000 for married filers.

Are There Any Other Caveats?

A nice feature of the student loan interest deduction is that it is what is referred to as an “above-the-line deduction,” meaning that it can be deducted regardless of whether a taxpayer itemizes their deduction or uses the standard deduction.

The student loan interest deduction therefore is deducted in addition to either the standard deduction or your itemized deductions.

 


This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.

Categories
finance Taxes

Can I Claim My Parents on My 2019 Tax Return?

The world of tax is constantly changing and dependents and dependency exemptions are no exception. In the past, you were able to claim dependents on your tax return; these included either your children, your dependent parents, or others that we will go into in a more detailed post later.

Claiming your dependents in the past would lead to a dependency exemption that was indexed for inflation, but in 2017 the amount was $4,050 per dependent. Each dependency exemption would reduce your taxable income.

In 2018 however, dependency exemptions are no longer available. To make up for this, the standard deduction was nearly doubled from $6,300 in 2017 to $12,000 in 2018 for single filers. The ones likely to benefit from this change are single filers with no dependents and the ones likely not to benefit are those that are married and who would otherwise claim multiple dependents.

Because of this change, you may no longer claim your dependent parents for the dependency exemption in 2018. However, there are some caveats to this:

The Child and Dependent Care Credit

Just because you no longer get to claim the exemption amount does not mean that the government doesn’t want to give you some tax breaks for helping mom and dad.

The Child and Dependent Care Credit is available for those that have to pay for their parents’ care so they are able to work. The credit is available to cover between 20% to 35% of the amount up to $3000 that was paid to care for you parents or other dependents. The amount that is covered depends on the income of the taxpayer claiming the dependent.

Because this is a credit and not a deduction, this credit reduces your tax liability, not your taxable income.

For more information on the Child and Dependent Care Credit, please consult the IRS publications.

The Medical Expense Deduction

If you have paid qualified medical expenses for your parents, you may be able to deduct them on your tax return. There are complex guidelines for this deduction, however in general, you may deduct the amount over 7.5% of the amount that is over your adjusted gross income.

In order to receive this deduction, your parent that you have paid the medical expenses for must be your dependent on your tax return.

Again, because of the complex nature of these deductions and credits, please consult the IRS publications if you feel you may qualify for them.

 


This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.