Thursday, April 29, 2021

Budgeting: The Gateway to Financial Success


Budgeting is a fundamental financial planning practice. Without a budget, it is hard to manage other aspects of personal finance including credit, insurance, saving, investing, and achieving goals such as a new car or a comfortable retirement. Financial goals cannot be reached if there is no money set aside for them.

Budgeting has also been found in research to be associated with performance of positive health and financial practices. People who budget their money may be inclined to “budget” their calories and self-restrict their food consumption and/or adjust their physical activity to stay within their daily calorie “allowance.”

Below are ten things to know about budgeting:

¨      Positive Cash Flow is the Goal- A budget is a plan for future income and expenses, including savings. The goal is positive cash flow, i.e., income greater than savings. Ideally, a budget should be hand-written or computer-generated with specific categories of income, spending, and dollar amounts.

¨      Individual Factors are Important- Examples include individual needs and wants, whether you have a stable income (the same amount in each paycheck) or a variable income that fluctuates every month, and whether you prefer to use a “paper and pencil” worksheet, an Excel spreadsheet, or a budgeting app.

¨      Savings is a Fixed Expense- How much you need to save per month or per paycheck to fund future goals should be set aside as a fixed expense that stays the same from month to month in a budget. A general online financial goal-setting calculator can determine the correct amount to save. There are also specialized calculators for specific financial goals such as educational expenses and retirement.

¨      Budgeting Methods Vary- Many people use the same budget format from year to year, adjusting for changes in income and expenses. For example, twice a year, I project income and expenses for the next six months and work in irregular income and expenses. What matters most is that you have a budget, not how you budget.

¨      COVID-19 Impacted Budget Priorities- Many people are working less (or not at all) and are struggling to make ends meet. Others have earned as much or more than they did pre-COVID-19 and/or are saving more money due to decreased spending. Not surprisingly, there is increased interest in beefing up emergency funds.

¨      Unexpected Expenses Always Occur- It is not a question of “if,” but “when,” unexpected expenses happen. For this reason, financial experts recommend including a “fudge factor” dollar amount (a.k.a., a “miscellaneous budget category) in household budgets. If the money is not needed, it can be rolled over into savings.

¨      Expenses Can be Trimmed- Experts recommend starting with flexible expenses such as heating/cooling, subscriptions, streaming fees, food, and memberships. Also, look for less expensive shopping options (e.g., thrift shops), do more cooking at home, and consider ways to reduce fixed expenses such refinancing a home mortgage, selecting a less expensive apartment or car, and shopping around for insurance policy discounts.

¨      Income May Be Able to Increase- Options include increasing human capital through degree and certification programs, “leaning in” (i.e., asserting oneself professionally) to get promoted, and/or starting a “side hustle” or getting a second job as long as it does not violate your primary employer’s outside employment rules.

¨      Benefits Can Supplement Income- People who are struggling financially can receive public benefits (e.g., utility assistance or food from a food bank), if income qualified. This frees up income for other expenses. Other ways to increase income are to barter goods and services in lieu of spending cash and to sell unneeded items.

¨      Budgets Affect Credit Scores- A budget can prevent negative credit report data by including funds to repay debt as a fixed expense. Also, if followed, a budget can help avoid overspending on credit, which reduces a credit cardholders’ credit utilization ratio, worth about 30% of a FICO credit score. Finally, a budget can include funds to build an emergency fund so people are less likely to use credit in emergencies.

To start creating your own personal budget, track your income and expenses for a month or two to get accurate data and use this Spending Plan Worksheet from Rutgers Cooperative Extension.

Thursday, April 22, 2021

More Miscellaneous Insights From Recent Webinars


As I mentioned in last week’s post, I love learning new things and often attend webinars and podcasts to gain knowledge and/or continuing education credits for my CFP® and AFC® as well as to connect virtually with others. 

Below, in no particular order and on a variety of topics, are seven “nuggets” that I heard recently:


¨      Retirement Spending- Spending in later life is not a scientific process. It is a human endeavor grounded in behavioral finance biases. Many theoretical assumptions and expert retirement recommendations are not embraced by retirees. The biggest reason that older adults do not spend down assets is saving for unforeseen costs (e.g., long-term care or LTC) according to research by the Employee Benefit Research Institute. Another factor is bequest motives. A suggested work-around is earmarking chunks of accumulated savings for specific purposes (e.g., LTC or bequests) so you can see that you have enough and can feel comfortable spending.


¨      Alzheimer’s Disease- 5.8 million Americans are living with Alzheimer’s and there is no current cure. The biggest risk factor is age and, after age 65, risk doubles every five years. Warning signs include an inability to calculate a tip, struggling to find words, and reading something and immediately forgetting what you read. No two individuals progress the same way. Lifestyle factors can reduce a person’s risk of disease and “things that are good for your heart are also good for your brain” (e.g., diet, exercise, sleep, and social engagement).

¨      Investment Fraud- According to the FINRA Investor Education Foundation, studies have found that social isolation can make people susceptible to fraud for several reasons. First, isolated individuals are separated from social networks and community resources to run details about questionable “opportunities” by. Second, loneliness has been found to correlate with lower levels of cognition, which increases scam susceptibility. FINRA research also found that short video and text messages (as outreach methods) can help reduce fraud.

¨      Retirement Planning- Retirement is the most expensive purchase people will ever make. People can live 20 to 30 (or more) years in later life without a paycheck versus attending college, typically for 4 or 5 years. In addition, people cannot take out “retirement loans” to cover their living expenses. For many people, two or three “legs” of the proverbial “3-legged stool” (savings, employer pension, and Social Security) are wobbly or non-existent. What to do? Any savings is better than none. If need be, start small and increase the savings amount by 1% or 2% per year. Lifestyle adjustments like working longer or downsizing may also be needed.

¨      Women and Money- A new documentary film, Savvy, explores why it is critical for women to take control of their personal finances instead of abdicating control to others or ignoring key financial decision-making topics such as credit and investing. The film features a mixture of financial experts and case studies. A key message is “when women are financially independent, the world becomes a better place” and viewers are encouraged to “be the CEO of your financial life” rather than “live one accident or illness away from financial ruin.”

¨      Later Life Time Use- A common error is viewing retirement as a “20-year vacation.” Another is thinking you can “just wing it.” People crave meaning and structure, especially “control freaks” who are used to planning and those whose identity is strongly tied to their job. People receive five things from a job, besides a paycheck: identity, status, purpose, structure, and socialization. A key challenge in retirement is answering the “who am I now?” and “what do I do?” questions, which takes thought, planning, and practice. One good place to start is to remember what you enjoyed doing when you were younger according to Joe Casey from Retirement Wisdom. Another planning strategy is talking to people who are doing things that you want to do in the future.

¨      COVID-19 Retirement Impacts- The pandemic rocked people’s worlds, including their finances, and changed many personal plans to retire. Some people decided to work longer because they could work remotely and avoid long commutes, while others were laid off or decided to leave their jobs earlier than planned. Research by the American College of Financial Services found that Americans, on average, have a poor understanding of the amount of annual or monthly income than a certain amount of savings translates into. Financial educators and counselors should highlight this more in their interactions with clients. Also, focus on things that people can control: spending, gifting, saving, their investment risk profile, and tax management. Things that cannot be controlled include longevity, market returns, inflation, and the economy.

Thursday, April 15, 2021

Miscellaneous Insights From Recent Webinars


As I have mentioned frequently in previous blog posts, I love learning new things and often attend webinars to gain knowledge and/or continuing education credits for my CFP® and AFC® as well as connect virtually with others.


Below, in no particular order and on a wide variety of topics, are eight “nuggets” that I heard at recent webinars:


¨      Memes in Financial Education- Memes (pronounced “meems”) are a piece of media- often humorous- that spreads rapidly through the internet, particularly social media. They are a fun and useful financial education method to spark students’ creativity and recall of topics. As Next Gen Personal Finance noted in a recent webinar, teachers can provide memes, have students write financial captions for them, and debrief the activity.


¨      Professional Brands Take Planning- Professional brands are what people are known for or stand for. If you don’t shape your own personal narrative, someone else will. Successful branding requires paying attention to audiences (e.g., what tasks do they need performed or questions answered?), competitors, and social media profiles, especially LinkedIn. Search engine yourself to see what others are seeing about you.

¨      Financial Education Teaches Decision-Making- A key outcome of personal finance classes is teaching learners to make good choices. This is much more important than memorizing facts or definitions. Students don’t need to have a lot of money to put financial education to use. Rather, educators need to meet people where they are and give them tools to navigate their life. Every small win that “moves the needle” is progress.

¨      Imposter Syndrome is Common- Many people experience feelings that they are “not good enough” or “not qualified enough,” which decreases their self-confidence. Imposter syndrome can be overcome, however. The antidote is embracing the fact that you will not- and cannot-know everything. You do not need to know all the answers about particular topics. Rather, you simply need to know where to look or who to contact to find them.

¨      Working From Home and Taxes- Many employees worked away from their employer’s office in 2020 (at home or another remote location) and may owe income tax in two states. They also incurred expenses to set up an office and purchase supplies. While workers may feel that they are owed a tax break for these cash outlays, a Wall Street Journal webinar repeatedly stressed that there is no home office deduction for 100% employees. Only self-employed workers and those with “side hustles” can take a deduction using Schedule C.

¨      Day Trading and Income Taxes- People who traded stock frequently during 2020 can expect complex tax returns this tax season with multiple short-term capital gains on securities that were held a year or less. Short-term gains are taxed at the same rate as ordinary income. Tax returns also now have a very prominently-located question on Form 1040, which is signed under penalty of perjury, about taxpayers’ use of cryptocurrencies.


¨      Gambling and Personal Finance- Gambling has the highest suicide rate of any addiction according to Dr. Lia Nower from the Center for Gambling Studies at Rutgers University. People can generally hide it longer before they “crash and burn.” Insurance does not pay for gambling addiction unless it is comorbid with something else (e.g., depression). Youth gambling rates are generally twice the general adult population and problems peak at 18-24. Parents should “de-glamorize” gambling (e.g., don’t buy lottery tickets as “stocking stuffer” gifts).

¨      Ticking Time Bomb” Retirement Accounts- Some people funded retirement savings plans for decades and they have grown substantially. However, traditional individual retirement account (IRA) and 401(k) or 403(b) savings is technically not all theirs. They may only really have two-thirds (or less) of what they think they have after required minimum distributions (RMDs) starting at age 72. It may make sense for those with significant savings to pay some tax at an earlier age at lower tax rates. Qualified charitable distributions (QCDs) from traditional IRAs are another tax-saving option. With advance planning, retirees can help control their tax rate.

Thursday, April 8, 2021

“Accidental” Pandemic-Related Financial Planning Opportunities


Financial planning is often pictured in graphic images as an upwardly sloping straight-line path that moves seamlessly from Point A to Point B. People set financial goals, develop a plan, “work the plan” by taking action to reach their goals, and review and revise the plan every so often or when major lifestyle changes occur. 

While this approach can sometimes work well in normal times, the past year has been anything but normal as a result of COVID-19.


Many personal financial plans (e.g., jobs, education, moving, travel, retirement dates) “blew up” amidst layoffs, lockdowns, lost loved ones, and lives fraught with uncertainty. In addition, legislation and the law of supply and demand (e.g., the current U.S. housing market) presented opportunities that nobody could have foreseen, much less planned for. 

A better graphic image for the financial planning process for many people, especially during the past year, is a tangled ball of yarn.


Five examples are presented, below, of “accidental” financial planning opportunities that were not on most people’s radar screens until recently. They could not have been included in personal financial plans previously because they were not feasible, not applicable, or did not exist under previous tax laws. 

All of these strategies have arisen in some way, shape, or form as a result of the pandemic and may be useful to consider during the months ahead, if applicable:


Deploy Tax Savings from Unemployment Tax Leniency

Under the American Rescue Act (ARA), signed into law on March 12, many taxpayers are exempt from income tax on up to $10,200 of unemployment benefits that were received during 2020. Normally, this money would be fully taxable as ordinary income (i.e., at a taxpayer’s regular marginal tax rate, like wages, salaries, and tips) on federal tax returns. This tax break was a last-minute addition to the ARA that few people saw coming and came a month into the 2020 tax filing season.


Most people probably had taxes withheld on their unemployment benefits or sent the IRS quarterly estimated payments in expectation of a future tax liability. As a result of the ARA tax law change, they could now save $1,000 or more on their income taxes (depending on their tax rate and other income sources), resulting in a larger refund or a smaller tax bill. For example, $9,000 in unemployment benefits in the 12% tax bracket  =  $1,080 (9,000 x .12). This is a nice chunk of change to save or repay debt with.


Take Tax Credits Available as a Result of  Reduced Income

Some taxpayers may qualify for income tax breaks in 2020 that they previously earned too much income for. An example is the Earned Income Tax Credit (EITC), which maxes out at $15,280 ($21,710) of adjusted gross income (AGI) for a single taxpayer and married couple filing jointly with no children and $41,756 ($47, 646), $47, 440 ($53,330), and $50,594 ($56,844) with one, two, and three or more children, respectively.

Maximum credit amounts for zero, 1, 2, and 3 or more children are $538, $3,584, $5,920, and $6,660 for 2020 tax returns. A tax credit is a dollar for dollar reduction in tax liability (e.g., $6,000 tentative tax bill minus $3,584 EITC = $2,416 final tax bill). For the first time ever, perhaps, taxpayers who always earned more than the maximum AGI for the EITC may qualify if they lost income as a result of the pandemic. The tax savings could provide funds for an emergency fund or debt repayment.


Use a Big House Profit To Pay Off Accumulated Debt

Some homeowners who lost income and got behind on mortgage payments are cashing out during the current “red hot” housing market. In one case that I know of, a home seller who owes over $18,000 in arrearages on a federally backed FHA mortgage and has no money with which to repay it when the foreclosure moratorium expires on June 30 will make about a $60,000 profit as a result of selling the house in a bidding war. After paying back the mortgage arrearage and home selling expenses, the seller will walk away with about $20,000 after less than two years of homeownership and will “punt back” to apartment living until household finances stabilize.


Use a Big House Profit and Downsizing to Build a Retirement Nest Egg

Similarly, people who planned to move and downsize anyway and lack sufficient retirement savings can benefit from selling their home in the current sellers’ market and moving to something smaller. They essentially become cash buyers who are better able to compete for new housing in the area where they live or elsewhere. In addition, the spread between their old home’s price and the cost of a new one provides income for future living expenses. For example, $300,000 of home sale profit placed in a balanced mutual fund with an 6% average return will throw off about $18,000 of annual income.


Increase Savings and Philanthropy

Some Americans have experienced financial silver linings that they could have not anticipated as a result of COVID-19: increased income due to demand for their industry sector or work skills and/or reduced expenses such as commuting costs, child care, and other expenses. Like home sale profit and income tax breaks, increased cash flow provides an opportunity for increased savings, debt reduction, or both.

There are also new opportunities for philanthropy. On 2020 tax returns, married couples filing jointly or singles who do not itemize can deduct $300 in cash contributions to qualified charities. In 2021, the tax write-off for couples increases to $600. In addition, the 60% of AGI cap on donations made by itemizing taxpayers is suspended in 2021 to encourage philanthropy for coronavirus relief.

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