Can you believe that January and half of February are behind us already? They seemed to have disappeared in a flash. Volatility appears to have returned and be ready to camp for a while. The good news is that 2018 is behind us!
As I work with clients I am finding that the 2017 Tax Cut and Jobs Act is a lot more complicated than we had been told. Many folks seem to be receiving less of a refund this year than last. There are a couple of things going on.
First, when the withholding allowances were adjusted there appears to be less being held back from each pay period. This effectively increases cash flow throughout the year, but for folks counting on a big return, it is definitely a big surprise. Secondly, filers who filed standard deduction last year and who had 3 exemptions saw their taxable income reduced by almost $25,000. This year with the elimination of the personal exemptions, that same filer will only receive a $24,000 reduction in taxable income. Finally, the threshold for itemizing for 2017 was $12,500 plus your personal exemptions of $4,150 per exemption. This year that threshold is $24,000 with no personal exemptions. All together these three factors look like the main culprits.
Have you ever heard someone say that experience is the best teacher? Here’s another one–there are no mistakes, just lessons. Well, I would like to take a slightly different tack. Experience isn’t the best teacher. Someone else’s experience is. Learn from other peoples’ mistakes and you can save yourself a lot of grief. In that spirit, I’d like to review the biggest financial mistakes I’ve seen and offer you ways to avoid them.
1. Living paycheck to paycheck
Too many Americans don’t have enough money in savings. According to CareerBuilder, nearly 80% of Americans live paycheck to paycheck to make ends meet. And lest you think this applies only to those who are in low-wage positions, nearly one in ten workers who earn over $100,000 or more are in the same boat. (http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey)
I’m shining a bright spotlight on this predicament in the wake of the recent government shutdown. During the closure, we were treated to a healthy dose of stories from federal employees who were running out of money after missing one or two paychecks. And these folks were guaranteed back pay and were offered plenty of assistance from banks and credit unions!
I’m not trying to minimize the frustration many of them experienced, but imagine what might happen during an extended period of unemployment. Don’t wait to start socking money away. Pay yourself by stashing away funds after each pay period. I would recommend at least three to six months of emergency funds. And I’d lean towards six months. A financial house that is in disorder is among the leading causes of stress. Savings will mitigate the emotional and mental burden.
2. You can’t start too early saving for retirement
I have a friend who is in his late 40s. He can probably retire comfortably by 60. Yet, he regrets waiting until 30 to begin putting money into a retirement account. What if he had started in his early 20s? The same holds true for another colleague who is 52. He’s semi-retired today but wishes he had enrolled in his company plan before he turned 26. For most folks, that would be a minor regret.
We all know the reason – earlier is better – it’s the magic of compounding. Those deposits made in our 20s will have a lifetime to grow. Don’t waste the chance to increase your savings now. You’ll never get it back.
3. Do you know where your money goes?
Without a spending plan that tracks expenditures, you may wonder why there is month at the end of your money, and not money at the end of your month. As I have shared with many of my friends and clients, Catherine and I started using a spending plan after listening to Financial Peace University in January 2009. In the ten years since we started, we have done a monthly spending plan EVERY SINGLE MONTH. It takes about 2-3 hours per month. We have increased our net worth from $175,000 in January of 2019 to $426,000 as of February 1st.
Had we not been disciplined in our approach to spending and savings, I am sure we would not be nearly as far along. Focus on the essentials–rent, mortgage, utilities. Leave room for your financial goals–repaying debts, retirement, emergency funds. And have some fun by budgeting for lifestyle choices–recreation, hobbies, vacation, and so forth.
If you are unsure how you might get started, call me! I can help you develop a spending plan that will help get your financial house in order. Using our new financial management software from Right Capital will be a big step in the right direction. Let me know when you are ready to start!
4. Credit cards and personal debt
Credit cards are a fantastic convenience and most pay some type of reward. But don’t place yourself in bondage to monthly payments. Pay them off monthly or you will suffer from steep interest charges.
If you feel like you’re buried under a mountain of credit card debt, an auto payment, student loans, and personal debt, you’ll need a plan of attack. Let’s talk. It will be the best financial decision you ever made. Just knowing there’s a roadmap to debt-free living will be liberating.
With the exception of a home mortgage, Catherine and I have not paid interest on any personal debt since 2012. We pay off our balances every month. We have built a "sinking fund" for major purchases and we don't trade in our cars. We drive them until they die! As a result, we have not had a car note since 2004.
4. Those luxury purchases
Having nice stuff is great. We all work hard and feel as if we are "entitled" to having nice stuff. I agree. However make sure that you own your nice stuff and that you aren't paying for it long after the luster has worn off. Save up, pay cash and always wait at least 24 hours before deciding to make a major purchase (for us that is a purchase over $250). If you do that, I suspect you will never suffer from that dreaded disease: "BUYER'S REMORSE"!
A kinder, gentler Fed
December was a bad month for stocks. There’s no way to sugarcoat it. Long-term investors recognize the need for disciplined approach, but that doesn’t mean extreme levels of volatility won’t create some degree of concern. I get it.
We touched a bottom on Christmas Eve, and shares extended gains into January. In fact, the Wall Street Journal ran an article stating the S&P 500’s advance last month was the best start to the year since 1987.
Table 1: Key Index Returns
YTD % 3-year* %
Dow Jones Industrial Average 7.2 14.9
NASDAQ Composite 9.7 16.4
S&P 500 Index 7.9 11.7
Russell 2000 Index 11.2 13.1
MSCI World ex-USA** 7 5.1
MSCI Emerging Markets** 8.7 12.3
Bloomberg Barclays US 1.1 2
Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, Morningstar
YTD returns: Dec. 31, 2018—Jan. 31, 2019
**in US dollars
Much of the data suggests the economy continues to expand, but one important reason the bull market is waking up from its late-year slumber is the Federal Reserve. In December, the Fed was talking about “gradual” rate hikes–possibly two this year. I placed gradual in quotes because that’s how the Fed phrased its guidance.
In late January, just six short weeks later, the Fed said it can be “patient” as it ponders the direction of rates. Yes, that’s right–the direction. When Fed Chief Jerome Powell was asked at his late-January press conference whether the next move in rates might be up or down, he didn’t tip his hand. Instead, he said it all depends on the economic data.
At this point, the Fed’s on hold–no more rate hikes, at least through the shorter term and maybe longer. It’s not that economic growth has stalled or even slowed considerably. The latest 300,000+ payroll number provided by the U.S. BLS would suggest the economy is not weakening.
But various surveys of consumer and business confidence have eased (University of Michigan survey, Conference Board, Wall Street Journal), and economic growth has slowed around the globe. Throw in a cautionary signal from investors late last year (fears the Fed was poised to tip the economy into a recession if it continued to tighten the monetary screws), and the Fed shifted its stance.
Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call at 804-323-3032 ext 101 or email me at email@example.com