Take Control Over Your Taxes Before It’s Too Late

MONEY TALKS – Congratulations, you finally finished your 2016 tax return (with 4 days to spare). If you, like most Americans, just sighed in relief and thought to yourself “thank goodness I don’t have to worry about my taxes for another eight months”; unfortunately, you couldn’t be further from the truth. This common line of thinking often gets taxpayers in trouble because waiting until January of 2018 leaves you with limited tax planning options and very little control over the size of the check you write, when filing your tax return. To get a jump start on the tax year, here are a few planning strategies you should be thinking about now so you can take control over your taxes before it’s too late.

Adjust Tax Withholdings – The majority of salaried employees receive a Form W-2 (Wage and Tax Statement) in early February showing their wages earned (Box 1) along with their Federal income tax withheld (Box 2). What you may not know is the amount withheld is generally dependent on two factors; your taxable wages and how you filled out Form W-4 (Employee’s Withholding Allowance Certificate) on your first day of work. If you owed money with your 2016 tax return, then you should consider adjusting your withholding so more tax is withheld. Rather than messing around with the number of allowances you are claiming, which confuses most people, the easiest way to increase the amount you want withheld from each paycheck is to simply write the dollar amount on Line 6. Conversely, if you received a large refund (over $1,000) then too much is being withheld from your paychecks. While it’s nice getting money back in April, if you are receiving a refund year over year then you are essentially giving the government an interest free loan. Lowering the amount of allowances you claim will reduce the amount withheld from each paycheck, giving you more money to invest throughout the year.

Manage Retirement Contributions – The easiest way to reduce your taxable income is by contributing to a qualified retirement plan such as a 401(k). The employee contribution limits for a 401(k) are $18,000 for those under 50 years old and $24,000 for those north of the border. Ideally, from a tax standpoint, you should be maxing out your contributions to lower the amount of income subject to taxation. If you aren’t sure how much you contributed last year, take a look in Box 12 of your W-2. You should see the letter D followed by a number, which was your 2016 401(k) contributions. If that number is below your respective contribution limit, increase your contributions to maximize your tax savings.

Spring Clean – Donating clothing and household items to a qualified charity is a great way to save on taxes because the fair market value of your contributions is tax deductible. Household items include furniture and furnishings, electronics, appliances, linens, and other similar items. Keep in mind that you can’t take a deduction for clothing or household items unless they are in good used condition or better. One area often overlooked is recordkeeping. Remember that the burden of proof is always on the taxpayer, not the IRS. If you gave property, you should keep a receipt or written statement from the organization you gave the property to, or a reliable written record, that shows the organization’s name and address, the date and location of the gift, and a description of the property.

As with most areas of life, proper planning is crucial to achieving your goals. Tax planning is a fundamental component of any good financial plan. The key take away here should be that it’s much more effective implementing tax strategies now rather than waiting until the next year’s W-2 shows up in the mail.

Seven Deadly Sins to Avoid During Tax Season

MONEY TALKS – Anyone who has poked their head outside the last two weeks couldn’t help but notice that winter is fading and spring is steadily approaching. While the melting snow and chirping birds may give some solace that the dark and cold days are behind us, it’s also a reminder that tax season is quickly approaching. Each year millions of Americans make simple mistakes hastily trying to get their tax returns filed before the deadline. Before you file this year’s return, be sure to check this list to make sure you are not making one of the seven deadly tax sins.

1. Missing the Deadline – If you procrastinate getting your tax documents together, there is a good chance you could miss the April 15th filing deadline. Missing the deadline itself is not a huge issue unless you fail to notify the IRS in advance. Be sure to file a Form 4868 extension request if you are going to be late filing your taxes, which will give you an automatic six-month extension to file your return. Keep in mind that the extension is only on the filing of the tax return, not the payment due. If you think you may have a balance due with your tax return, be sure to make an estimated payment with your 4868 to avoid any penalties and interest.

 2. Filing the Wrong Tax Forms – Opting to use the Form 1040EZ because, as the name suggests, it’s easy to file could be a costly mistake. The 1040EZ forces you to take the standard deduction and does not allow you to itemize your deductions. Opting to file Form 1040 instead will afford you the option of choosing to itemize your deductions or take the standard deduction, whichever is higher. If you had significant medical or dental expenses, live in a state that taxes your income, paid real estate taxes or mortgage interest, donated to charity, or had a home office, then you should seriously consider filing a 1040 to maximize your deductions.

3. Spelling Your Name Wrong – Believe it or not one of the more common mistakes you can make on your tax return is to misspell your name. Whether it was a typo, you didn’t use your full legal name, or you recently married or divorced and haven’t registered a name change with the Social Security Administration, you need to make sure the name listed on your tax return matches your Social Security Card. Making a simple error could lead to a rejected return. Even if your return is accepted your refund could be delayed if the name on the check doesn’t match that on your bank account.

4. Wrong or Missing Social Security Number – Forgetting to include or entering the wrong Social Security number for you, your spouse, or your dependents is one of the most common errors you can make when filing your tax return. The IRS uses Social Security numbers to cross-reference information it receives from your employer and other financial institutions. If unable to do so, the IRS could reject your tax return. Avoid this simple mistake by verifying each Social Security number on your tax return matches the corresponding Social Security card(s).

5. Selecting the Wrong Filing Status – Filing under the wrong status is commonly made by single parents whom mistakenly file as Single instead of choosing Head of Household. If you have a qualifying dependent living with you and provided more than half the cost of maintaining the home then you may be eligible to file as Head of Household, which will give you an extra $3,000 in deductions. Another common mistake is for a recent widow or widower to file as Single. Widows or Widowers can file as Married Filing Jointly (MFJ) in the year of death. Furthermore, you may be able to file as a Qualifying Widow(er) for two more years if you have a dependent child in the house.

 6. Forgetting to Sign and Date Your Return – Technically speaking an unsigned return is incomplete in the eyes of the IRS. This means that your return may not be accepted and could be considered late, leaving you liable for penalties and interest. Be sure to sign and date your return! Keep in mind that if you are MFJ, then your spouse has to sign as well. Remember, if you are electronically filing you are not exempt for this requirement. If you are e-filing you need to sign the return using an electronic Personal Identification Number (PIN).

 7. Making Math Errors – The most common error year over year on tax returns is mathematical mistakes. In fact, every year the IRS catches millions of math errors as a result of poor arithmetic and/or inaccurate transposition. Using a tax software program will dramatically reduce the likelihood of a math error. That being said, tax software does not guarantee your return will be mistake free. It’s imperative that you double check the numbers you input because the software is not smart enough to know whether or not you are entering the correct figures. Filing an inaccurate return due to a math error could lead to big trouble with the IRS and less money in your pocket.

5 Ways to Turbo Boost Your Savings in 2017

MONEY TALKS – Achieving your goals and aspirations may be closer than you think. Saving is the foundation to any good financial plan. Follow these five steps to boost your savings to the next level!

  1. Max Out Your Retirement Plans – In 2017 you can defer up to $18,000 of your salary into an employer sponsored retirement plan such as a 401(k), 403(b), or 457 plan. If you are age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000. If your employer doesn’t offer a retirement plan you may still be eligible to contribute to a Traditional or Roth IRA. The IRA contributions limits for 2017 are $5,500 or $6,500 for those age 50 or older. If you didn’t maximize your IRA last year there is still time. The Internal Revenue Code has a special provision permitting you to make a 2016 contribution up until April 17th of 2017.
  1. Know How Much You Are Spending – Most people have no idea what they are actually spending. While some bold participants may blurt out a response when asked, in my experience what people say they are spending and what they are actually spending are two very different numbers. A good back of the envelop approach to calculate your spending is to look at your final pay check for 2016. Take your year to date gross pay and subtract any taxes paid as well as any employee benefits such as medical, dental, and retirement contributions. This in effect is your take home pay. From there subtract any additions you made to long term savings accounts throughout the year and you have calculated your annual spending. Most people are surprised by how much they are spending. Now that you know how much you’re spending, keep any eye on major outflows and set up an automatic transfer to your savings account to ensure some money is put away before hitting your pocket.
  1. Review Your Investment Portfolio – When it comes to determining an appropriate asset allocation, most people take the set it and forget it approach. Meaning they randomly picked some stock and/or bond mutual funds when they enrolled in their employer retirement plan, and they have not looked at it since. For many of us this could be 5, 10, or even 20+ years. Review your most recent portfolio statement to see if your current allocation is still appropriate for your age. Traditionally younger investors can be more aggressive and allocate a higher percentage of their portfolio towards equities. On the other hand, seasoned investors whom are approaching retirement may want to reduce their risk by diversifying into more bond funds and less stocks. If your current asset allocation is appropriate for your age, be sure to rebalance your accounts annually to make sure your portfolio stays properly aligned.
  1. Take Responsibility – The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To use a weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.
  1. Invest in Yourself – Many people don’t realize that the greatest financial asset they have is themselves; i.e. their ability to earn a living. Investing in post-secondary education, technical training programs, and advanced degrees go a long way toward building a complete resume. Combine these skills with quality work experience and you have just positioned yourself for a financially rewarding career.    

3 Easy Ways to Save on Life Insurance

MONEY TALKS – Last week I was approached by a colleague of mine who was concerned that he was paying too much for his life insurance policy. Naturally I wanted to help, so I began by asking some questions to get a better grasp on his situation. As it turns out, he was sold a $500,000 whole life policy by his brother-in-law and was paying an annual premium of $6,100 which was completely unnecessary for a number of reasons. Rather than get in the middle of a sticky family affair, I thought it would be best to step aside and offer some general guidance that can be used by anyone looking to purchase or reevaluate their life insurance needs.

  1. Understand What You’re Buying – Many people like the idea of having life insurance because of the protection it provides their families. However, when it comes to determining how much coverage is needed or what type of policy to purchase, they often feel confused and overwhelmed. While there are many different types of life insurance, the two most common policies are whole life and term life. Spend 30 minutes Googling the differences between the two types of policies so you know what you are buying before you buy it. Once you have figured out the type of policy that you’re interesting in purchasing, you’ll want to determine how much coverage you need. This can be an arduous process when done manually, luckily there are numerous life insurance calculators available online. Try a few out so you have a ball park figure in mind before talking to an insurance professional about your coverage needs.
  1. Buy Term Insurance – Permanent life insurance policies such as whole life or universal inherently combine insurance with a savings or investment component. While purchasing a whole life policy with an accumulating cash value sounds good on paper, as they say on Wall Street, there is no such things as a free lunch. These policies are extremely expensive for the protection they afford you. On the other hand, term life insurance has no residual cash value, but offers significantly lower premiums. A term life policy for the same amount of coverage might cost you one-tenth of the price of a whole life policy. To fill the void of the lost saving/investment component, take a portion of the reduced premiums, saved by switching from whole to term life, and increase your savings or 401(k) contribution amount. Separating the insurance and the investment component from one another will offer more transparency while saving you both commissions and fees.
  1. Ladder Your Policies – It’s not uncommon for someone’s insurance needs to change during the life of their policy. For example, your oldest child is graduating college in 2025 and your last mortgage payment is scheduled for 2030. For people with changing needs, term layering may be the best option because it offers maximum protection when you need it most and can significantly reduce your premiums. In the aforementioned scenario, the largest needs (education, mortgage debt) are within the first 10-15 years. Rather than purchase a large, say $2 million 30-year term policy as many agents would suggest, consider buying three different term life policies. The 1st policy would be a $1 million 15-year term policy. The 2nd policy would be a $500k 20-year policy and the 3rd policy would be a $500k 30-year policy. You’ll notice in Figure 1.1 that the coverage for the first 15 years ($2 million) remains the same and gradually decreases over time as your insurance needs subside.

Figure 1.1

life-insurance *Based on a $1,700 annual premium for a $2M 30-year term policy.

Determining your insurance needs in not as simple as reading a couple of articles online and plugging numbers into a calculator. Ask your financial advisor if he/she can recommend a qualified licensed insurance professional to help you determine the type and level of coverage needed to protect you and your family. When meeting with an agent to purchase a life insurance policy be sure to do your homework beforehand so you know exactly what you are getting and how much it’s costing you.

How Much Do I Need to Retire?

MONEY TALKS – Friends and family often ask me how much savings they need in order to retire. While I am more than happy to talk in generalities, I try to steer away from giving any specifics when I don’t have all the facts. Without a complete view of their financial picture, it would not only be impossible but irresponsible of me to answer their questions.

Unfortunately, more often than not, before I have a chance to respond, they hastily begin shouting out numbers. “Do I need ½ million? 1 million?” Typically this leads to me awkwardly trying to explain that the solution isn’t that simple and ethically I really shouldn’t answer their question. This response is usually met with a bewildered look and the inevitable “So you’re saying that’s not enough?” (Heavy sigh) At this point I coyly suggest that if they really want to know the answer they should become a client.

In an effort to provide friends and family with some guidance (and to quell the family banter), I have devised a quick back of the envelop calculation to give you a ballpark estimate of how much savings you need to retire. The calculation is rather easy to complete but does require some preliminary information before you can get started. I have included here a list of the necessary data as well as a simple worksheet that will walk you through this back of the envelope approach. Please bear in mind that this is a rudimentary calculation that won’t give you an exact figure, but it can be used as a reality check to see if you are on target to retire comfortably.

Here’s what you will need:

  • Pay statement
  • Federal and state tax returns
  • Social Security statement
  • Pension statement
  • Estimate of any other income you may receive in retirement.

In order to help illustrate the underlying methodology let’s consider the following scenario:

  • Tom (60) and Rachael (58) are married with four kids. Tom, an engineer by trade, is the primary wage earner with a gross salary of $150,000 per year. Rachael works as teacher earning $50,000 per year. Tom’s net take home pay is $3,750 and Rachel’s net take home pay is $1,250.
  • They both get paid twice per month, for a total of 24 times per year.
  • Last year they paid $18,400 in Federal taxes and $6,600 in state taxes.
  • Neither Tom nor Rachel are eligible for medical benefits through their employer after they retire. When eligible, they plan to go on Medicare and purchase a supplemental Medigap policy.
  • Tom is eligible for Social Security and expects his annual benefit at full retirement age to be about $43,000. Rachel earnings as a teacher do not qualify for Social Security benefits; however, through her teachers union, she is entitled to a pension benefit of $40,000 per year. Neither plan to seek part-time employment in retirement.
  • Tom and Racheal both plan to work until their mid-sixties. They live a healthy lifestyle and plan to live well into their nineties.

Now let’s work through the numbers:

retirement-chart

Based on the chart above, Tom and Rachel would need about $1.5 million in order to retire.

While I hope that you find the above exercise helpful, please keep in mind that is a static calculation which doesn’t take into account life changes that may occur in retirement. To get a more precise calculation or recommendation, I would encourage you to reach out to a qualified financial advisor.


*Multiplier is based on a success rate of 90% or more for a 15, 30, and 45 year portfolio. The calculations were completed by William P. Bengen, CFP® and can be found is his book Conserving Client Portfolios During Retirement.

** Note: the Savings Required field is not specific in nature and does not take into account your individual facts and circumstances. Accordingly, this should not be relied upon when determining how much money you need to retire, nor does it substitute for any legal, financial, tax, or accounting advice.

A Beginners Guide to Maximizing Your 401(k) Plan

MONEY TALKS – In today’s workplace environment, unless you are working as a teacher, police officer, firefighter, or state/federal employee, the chances are you do not have a pension plan. In other words, when it comes to funding your retirement YOYO (you’re on your own). For most private sector employees, defined contribution (DC) retirement plans are their primary savings vehicle. DC plans are a type of retirement plan where an employer and/or employee make regular contributions. They differ from a pension plan in that there is no guaranteed income stream at retirement. Instead, both the employer and employee contributions, plus any investment earnings, grow together in an account where the employee has control over the cash distributions during their retirement. The most common DC plan is the 401(k) plan which has grown to become America’s de facto retirement savings plan since its inception in the late 1970’s.

A 401(k) plan is a great savings vehicle for a number of reasons. First and foremost any contributions made by the employee are tax deductible. Secondly, any earnings in the account grow tax free until they are withdrawn. Unfortunately many Americans are not taking full advantage of the benefits a 401(k) plan has to offer. There are two primary culprits behind this underutilization; lack of participation and low contribution rates. In order to ensure you are getting the most out of your 401(k) plan, make sure to follow these guidelines.

Start Contributing Early
During your first week of work you will likely be given a large packet of information listing everything from your vacation accrual to your medical benefits. Included in this packet should be an enrollment form for your employer’s 401(k) plan. You should sign up for your 401(k) plan immediately. Some employers may have restrictions on when you can start contributing or an elimination period before the employer themselves match any contributions; however, these restrictions typically do not prevent you from enrolling in the plan.

If you have already been working but have yet to sign up, there is no time like the present. To borrow a line from a colleague of mine, “You will never be younger than you are today.” When it comes to investing, the longer the time horizon, the greater the growth potential.

Maximize Your Employer Match
Most employers will make a modest contribution to your 401(k) plan presuming you do one thing; contribute to the plan yourself. While there is a wide range of company match levels, a typical employer match policy might read something like this: XYZ agrees to match 50% of employee contributions for the first 6%-of-salary that an employee contributes. In this scenario, in order for an employee to maximize their employer match, they would need to contribute 6% or more of their salary into their 401(k) plan. Any contribution below 6% means the employer is not obligated to contribute the full match.

Maximizing your employer match is critical to building your retirement nest egg. Not contributing or under contributing to your own plan means you are essentially throwing money out the window. An employer match is a guaranteed return on investment which is rare if not impossible to find in this day and age.

Take It to the Limit
The most common way to contribute to a 401(k) plan is through automatic payroll deductions. Many plans allow you to designate a percentage of your gross income to be allocated to your 401(k) plan. A good rule of thumb is to contribute 10% or more of your salary into your 401(k) plan. Unfortunately, for many young or underpaid employees this figure is simply unrealistic. For those who can’t save 10% or more, start off by saving the minimum allowable contribution that enables you to maximize your employer match. Most employer plans require employee contributions between 4% and 8% to receive the maximum match.

Automatic contribution increases are another great way to get the most of your 401(k) plan. As the name infers, an automatic contribution increase is simply an election you make to annually increase your contribution percentage (typically by 1%). The beauty of this election is it forces you to save more each year and they typically coincide with a merit increase so the effects are negligible. If your company doesn’t offer this election then remember to manually adjust your contribution percentage each time you get a raise.

Keep in mind that the Internal Revenue Service regulates how much an employee can contribute to their 401(k) plan. In 2016 the contribution limit is $18,000. If you are lucky enough to be age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000.

10 Habits of the Healthy, Wealthy, & Wise

MONEY TALKS

1. Save – Saving more than you spend is a key concept to accumulating wealth. The extra money saved can then be invested to grow and compound over the years. Given enough time, your investment earnings may one day actually exceed the money you are saving!

2. Build a Reserve – Establishing a cash reserve or long term savings account can give you the security you need in the event of an emergency. Having liquid funds available may allow you to weather the storm without having to deplete other investments that are subject to market conditions.

3. Organize Spending – Creating separate bank accounts for your personal spending, household bills, and long term savings can go a long way towards balancing your budget. Start by funding your household checking with enough money to pay your monthly bills. Next, create a dedicated savings account funded based on a percentage of your income, say five or ten percent. The remaining money should be deposited into your personal checking and can be used for whatever you desire.

4. Buy Used Things – No one thinks twice about buying a “used” home; however, when it comes to buying a car, furniture, or children’s toy, the concept suddenly becomes taboo. Before making your next large purchase consider what alternatives exist in the secondary market. You may walk away with a lot more than you think along with some extra change in your pocket.

5. Don’t Procrastinate – Not paying your bills on time can lead to late fees and interest penalties. Over time these can accumulate to the point where the majority of your payment is going towards interest and penalties rather than paying down principal. Avoid getting stuck in this rut by paying your bills on time and in full.

6. Ditch Bad Habits – Daily stops for coffee and weekday lunches out with your colleagues can accumulate into some serious spending over time. Drinking your employer provided coffee and bringing last night’s leftover dinner for lunch are easy alternatives to help curb those bad habits. Don’t be afraid of treating yourself to the occasional iced coffee or Friday lunch to celebrate your accomplishments.

7. Know Your Limits – Most investors lose money because they overestimate their risk tolerance. When the market goes down they panic, sell their holdings, and suffer catastrophic losses. Choosing a more conservative portfolio and staying the course will get you far ahead of the typical investor who changes direction based on current market conditions.

8. Eat Healthy – Small changes can make a big difference in your overall health. Drinking water instead of sugary drinks is a great way to cut calories and reduce your sugar intake. Adding color to your meal is an easy way to improve your plate appearance and get more essential vitamins, minerals, and fibers into your body. Choose red, orange, and dark green fruits and vegetables when preparing dishes.

9. Exercise – Heart disease has risen to become the leading cause of death in the United States. Regular exercise can help combat disease and prevent a wide range of health problems. Not to mention, exercise and physical activity can also help you to maintain weight loss, improve your mood, boost your energy, and promote better sleep.

10. Wear Your Seat Belt – Each year about 33,000 people are killed in motor vehicle crashes. Tragically many of these fatalities could have been prevented. Seat belt use is the most effective way to save lives and reduce injuries in motor vehicle crashes. Make sure that you and your passengers buckle up every time you get into a vehicle no matter how short the trip.

Friendly Advice during Tax Season

MONEY TALKS – Winter is fading away, and the 2016 tax season is now upon us. Unfortunately, with the tax deadline fast approaching, many of us are feeling stressed. To help alleviate some of your stress I have put together a quick list of tax tips to help you get past the finish line. Remember to always to consult your CPA or tax advisor before implementing any tax strategies herein.

New Tax Deadline

In 2016 you will have a few extra days to complete your tax return. Federal law mandates that any holiday in the nation’s capital also applies to offices there. Due to Emancipation Day falling on April 15th, the usual due date for annual 1040 filings is pushed back to Monday, April 18th. Taxpayers in Massachusetts and Maine get an extra day because of Patriots Day. The due date for filing 2015 personal income tax returns for MA and ME residents is Tuesday, April 19th.

 Itemized Deductions

Most individuals remember to deduct the state income and real estate tax they paid; however, not everyone is aware that you can also deduct any local excise tax paid on your vehicle as long as the tax is yearly and is based on the value of the vehicle. Charitable deductions are another area that are often overlooked. Remember that the deduction is not just for cash contributions; clothing and other personal items can also be deducted. Lastly, be sure to include any fees paid to your CPA or Financial Advisor as they may be deductible.

 Retirement Contributions

Technically you can still make an Individual Retirement Account (IRA) or Roth IRA contribution for the 2015 calendar year up until April 18th of 2016. The contribution limit, although subject to Adjusted Gross Income (AGI) limitations, is up to $5,500 per person with an additional $1,000 “catch-up” contribution allowed if you are over 50 years old. If you make an IRA contribution it may be deductible on your 2015 tax return and could reduce your tax liability.

Avoid Fraudulent Schemes

The IRS does not reach out to individuals through the phone or by email, they generally send letters via snail mail. If you receive a phone call or email from someone claiming to work for the IRS, it’s probably someone trying to scam you. Do not give any personal information over the phone or email, and report the incident to the proper authorities immediately. The IRS, through their website, continues to issue warnings about tax scams, including fake IRS agent phone calls, email phishing, and other identity theft attempts by criminals.

Protect Your Personal Information

Never enter personal information through a link or an unsolicited email. Many of these links contain phishing schemes where they clone a page to look like the real site; however, it’s actually a fake site designed to steal your user credentials. Any electronic documents containing sensitive information should be password protected or encrypted before it is transmitted online. All paper documents containing confidential data should be shredded, unless they are being used to support your tax return. Supporting paperwork should be filed away in a safe and secure location.

Choose Direct Deposit for Your Tax Refund

If you are being issued a refund, a direct deposit refund into your personal bank account is the most secure method. Since your refund goes directly into your account, there’s no risk of having your refund check stolen or lost in the mail. Furthermore, direct deposit is the fastest way to get your refund. You should deposit your refund into an account in your own name. Avoid making a deposit into accounts owned by others. If you are filing a joint tax return, some banks require both spouses’ names on the account to deposit a tax refund.

5 New Year’s Resolutions for 2016

1. Pay off Consumer Debt

Credit cards can have interest rates well into the double digits. Paying off credit card debt is a great way to free up cash flow for the future. Credit card purchases are generally for short term items that have no lasting value. Putting away your credit cards and learning to live within your means can go a long way towards financial independence. If you are prone to consumer debt, try consolidating your credits cards down to one and using cash for everyday purchases.

2. Build an Emergency Reserve

Wage earners should have a minimum of 10% of their gross annual income in a long term savings account. An additional 20% should be saved as an emergency reserve. The best place for your emergency reserve is within your 401(k) or other tax sheltered accounts because the interest earned is tax deferred. Self-employed and retired individuals should build their cash/emergency reserves to an even greater level. As an additional test, the combined value of cash and emergency reserves should be at least 20% of your mortgage balance.

A Home Equity Line of Credit or HELOC is loan where a homeowner can borrow against the equity they have in their home. Unlike a conventional home equity loan where the borrower is advanced the entire lump sum up front, a HELOC is different in that the borrower only draws on the line of credit if needed. A HELOC could be used to cover a variety of expenses including unforeseen outlays for home improvements or medical bills. Homeowners should consider getting a HELOC as a supplement to their cash/emergency reserves as an added security blanket.

3. Purchase Long Term Disability Insurance

For most workers, the ability to earn a living is their most significant financial resource. A disabling illness or injury stops income, often leads to additional medical costs, and prevents savings for key goals such as education and retirement. Despite these facts, employees are more likely to have dental insurance than long term disability. The reason for this is most people associate disability with serious accidents. Since very few employees have high risk jobs, the general inclination in the workforce is to say, “I don’t need it” when it comes to disability insurance. In reality this couldn’t be further from the truth as 90% of disability claims are due to illness not injury. Even people who don’t have high risk jobs are still at risk of disability from cancer, cardiovascular, muscular, or other illnesses. A disabling illness or injury can have a devastating effect on you and your family. Purchase long term disability insurance now to protect you and your family’s financial security.

4. Increase Retirement Savings

Most company retirement plans allow you to enroll in a plan where your contributions are automatically deducted from your paycheck and directly deposited into the retirement plan. The beauty of automatic deductions is, since you never see the money, it’s nearly impossible for you to spend it. The only problem with this out-of-sight, out-of-mind enrollment process is most people set up a standard contribution rate when they enroll in their plan and never think to increase it. Lots of employers now offer an auto increase plan where your contribution percentage will increase by 1% per year. If your employer offers an auto increase plan be sure to enroll, if not then be sure to increase your contribution percentage manually each year. Consider investing in an Individual Retirement Account (IRA) if your employer does not offer a retirement plan.

 5. Create an Estate Plan

Approximately 55 percent of American adults do not have a will or other estate plan in place. The primary reason for this staggering statistic is twofold; one being that no one wants to think about their own demise. The other; more alarming reason, is because many Americans are ill-informed on benefits of an estate plan. The most common excuses I hear are; “I don’t have children so I don’t need an estate plan” and “estate plans are only for wealthy families.” Both of these statements couldn’t be further from the truth. Most people don’t know that one of the primary purposes of an estate plan is to give guidance while you are still living. Questions such as, whom do you want to make medical decisions on your behalf or what are your wishes concerning life-prolonging procedures are typically addressed in a comprehensive estate plan. Regardless of your wealth or family situation an estate plan is beneficial for everyone involved.

Tip of the Week – Setup a Savings Account for Non-Monthly Bills

Setup a Savings Account for Non-Monthly Bills

Each and every one of us has reoccurring bills that we need to budget for. Some are payable monthly and are fairly uniform. The larger issue at hand is those bills such as oil, insurance, and taxes that sneak up on you quarterly, semi-annually, or even annually. These bills, as fate may have it, tend to be larger and always seem to hit when you can least afford it. To prevent being stung by these large infrequent bills, set up a separate savings account. Take an estimate of the total yearly cost of all your non-monthly bills, add them together, and divide by 12. This is the monthly amount you should be automatically transferring into your savings account (Hint: If you are having a hard time estimating this, take the total of last year’s non-monthly bills and multiply it by 9%). Next time one of these bills comes unexpectedly in the mail, you’ll have the funds to pay the bills, and you might even earn some interest on your savings.