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.

“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.

 

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.

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.

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.

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.

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.

When Should You Buy Term Life Insurance?

Thinking about what kind of life insurance to buy can make your head spin. First you have to comprehend what the different kinds of life insurance are, and then you have to think of the applications of that policy and how it might affect you and your family.

And, while this isn’t the best forum to discuss what kind of life insurance to buy due to having a general audience, we will help to go over what some kinds of applications for term life insurance are and when buying it might be advantageous over buying a permanent policy.

So What Is Term Life Insurance?

We’re going to specifically be discussing level term life insurance. We have to specify because there are several types of term life.

Level term life insurance is a fixed premium insurance that insures a person’s life for a specific amount (death benefit). The term will usually be 10, 20, or 30 years. After that term is over, the insurance will expire and if the insured further wants to be covered by life insurance, they would have to reapply, at which point insurance coverage would likely be considerably more expensive.

So When Should I Buy Term Life Insurance?

The timing for when to buy term life insurance is usually triggered by a life-changing event: getting married, having children, etc. As soon as a person has others relying on them, that will generally be the best time to consider buying a term life insurance policy. The reason for this is because if that person is to pass away, their spouse, children, or whomever they name as beneficiary will receive the death benefit outlined in the policy.

In general, level term life insurance is best when coverage is only needed for a specific term. If a family believes that they only need coverage during their accumulation phase when they are saving for retirement, their kids’ college expenses, and any other expenses that come up during that time, term life insurance for a 20 or 30 year term might suffice.

Some people fail to save enough for retirement in time and as they approach it, and they may be scrambling to save everything they can. Without sufficient saving reserves at the moment, a term life policy for 10 years (although considerably more expensive due to age) might make sense for them.

You’ll want to own term life insurance when you need the coverage for a specific term and only the specific term. Otherwise, if you would need to be covered for your entire life, it might make sense to look at owning a permanent life insurance policy.

Another strategy that a family may use is to own a large term life insurance policy as well as a modest permanent life insurance policy during the accumulation phase. As retirement approaches and their savings are enough to cover them in event of a disaster, it may make sense to drop the term life insurance policy and keep the smaller permanent life insurance policy in force because they no longer have the need for a lot of coverage.

We will look at this strategy and many others in-depth in future posts.

 


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

What is Level Term Life Insurance?

Wading through the world of life insurance can be a headache just waiting to happen, especially when you are wondering if the person on the other end of the table attempting to sell it to you has your best interests in mind.

There’s a few different types of temporary life insurance, and a whole world out there of permanent insurance; as a side note, make sure you know exactly what you’re getting if you decide to go the permanent route.

But here we’ll be discussing only one type of temporary life insurance so your head hopefully won’t be spinning after you’re done reading.

So What Is Level Term?

To make it as simple as possible, level term life insurance can be explained as working for your life as car insurance does for your car. You pay premiums to an insurance company that agrees to pay your beneficiaries the death benefit (face amount) if you are to pass in the allotted time that you had bought the insurance for.

There’s a Time Frame They Allow You to Die In?

Kind of. This is essentially where term life insurance and car insurance differ. The insurance companies knows that there is a chance you may never get into a car accident. However, there is a 100% chance that everyone will eventually die.

So what the insurance companies do in exchange is lock in premium rates for a certain amount of time (usually 10, 20, or 30 year increments). The premiums are guaranteed not to increase during this time as long as the policy does not lapse.

This is also why term life insurance is so much cheaper than permanent insurance; there is a good chance that you will not pass away in that 10-30 year period, so the cost of insurance is lower. However, a policy that covers your life permanently is guaranteeing to pay out, meaning the cost of insurance has to be high enough to pay a claim for an event that is supposed to be guaranteed to happen.

So What Does ‘Level Term’ Mean?

This is where the phrase ‘level term’ comes into play. Essentially, it is your premiums that are level throughout the life of the policy. The cost of insurance increases as a person gets older because statistically there is a higher chance of passing away at older ages. Level term life insurance has these cost of insurance changes already built into their premium costs over the term of the policy.

Because the cost of insurance is already built into the product, the longer the term that an insured locks in will cause the monthly premiums to be higher. This is of course because someone is more likely to die within the time period chosen if they choose to be covered for 30 years as opposed to 10 years.

 


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

To Rent or to Buy?

To buy or not to buy?

That is the question.

To clarify, we’ll solely be discussing the benefits and drawbacks of renting and buying of houses, however some information may pertain to other purchases, such as cars.

So to start, we’ll tackle the obvious benefits of buying a house, the one everyone loves to say when in the discussion of renting or buying: You build equity!

And you do. But the drawback that no one likes to mention is that in order to build equity, you have to take on a massive, massive liability. In accountant speak, you are now financed more by liabilities, and not equity. Your balance sheet doesn’t look very attractive immediately after taking out the mortgage, and it won’t look very good for quite a few years thereafter.

It takes years to pay off much of the principal (the portion of the mortgage that builds equity for you once it’s paid). For the first few years, all you’re doing is paying off a huge amount of interest expense. Essentially, the only actual equity in your house is the down payment and the small principal that you pay on the principal every month.

But You Don’t Build Any Equity At All When You Rent!

True, and that’s why we won’t be talking about that. Just because renting property doesn’t build you equity, doesn’t mean it doesn’t have any benefits.

And just to be clear, we feel that owning a home should be the end goal for anyone and everyone. But sometimes in the short term, some benefits of renting may outweigh the fact that you won’t build equity.

When renting, much of the repairs and maintenance of your apartment or rented property are handled by your landlord. The tradeoff for not being able to build equity is the ability to save on expenses. In essence, you are shifting the liability of ownership as well as the expense of maintenance and repairs onto the actual owner.

What we’re trying to say is, depending on where you are in life, renting or buying may be the best choice for you.

So Who is Renting For and Who is Buying For?

Just because a college kid’s parents are pressuring him or her to buy their first house and not “waste” the money on renting, that doesn’t mean it’s the best choice for them.

If you’re fresh out of college or trade school and starting a new career, you’ll likely have to put in a lot of hours working. Those hours may restrict you from having to put in the time and energy for regular maintenance of your home and you may lack the ability to pay for the expense of having someone else take care of the maintenance, such as a lawn care service.

If you’re young, lack the time for the maintenance, or lack the money for a down payment of a house, renting may be the best option in order to build up your bank account. The hidden costs of home ownership may outweigh the mostly upfront fees of renting a space.

But what do you think? What are your personal experiences with renting and how do you feel about a young couple trying to buy a house? More importantly, what tips would you like to give to them?

 


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