Archive for June 2018 – Page 3

HOW THE GENERATION-SKIPPING TAX WORKS

Perhaps you’re one of the lucky people who are not only financially well off yourself, but whose children are also financially set for life. The down side of this is that they also face the prospect of high taxes on their estates. You may also want to ensure that future generations of your heirs benefit from your prosperity. To reduce taxes and maximize your gifting abilities, consider skipping a generation with some of your bequests and gifts.

But your use of this strategy is limited. The law assesses a generation-skipping transfer (GST) tax equal to the top estate tax rate on transfers to a “skip person,” over and above the gift or estate tax, though this tax is being repealed along with the estate tax. A skip person is anyone more than one generation below you, such as a grandchild or an unrelated person more than 37-1/2 years younger than you are.

Fortunately, there is a GST tax exemption. Beginning in 2004, this exemption was equal to the estate tax exemption for that calendar year. Each spouse has this exemption, so a married couple can use double the exemption. If you exceed the limit, an extra tax equal to the top estate tax rate is applied to the transfer — over and above the normal gift or estate tax.

Outright gifts to skip persons that qualify for the annual exclusion are also exempt from GST tax. A gift or bequest to a grandchild whose parent has died before the transfer is not treated as a GST.

Taking advantage of the GST tax exemption can keep more of your assets in the family. By skipping your children, the family may save substantial estate taxes on assets up to double the exemption amount (if you are married), plus the future income and appreciation on the assets transferred. Even greater savings can accumulate if you use the exemption during your life in the form of gifts.

If maximizing tax savings is your goal, consider a “dynasty trust.” The trust is an extension of this GST concept. But whereas the previous strategy would result in the assets being included in the grandchildren’s taxable estates, the dynasty trust allows assets to skip several generations of taxation.

Simply put, you create the trust, either during your lifetime by making gifts, or at death in the form of bequests. The trust remains in existence from generation to generation. Because the heirs have restrictions on their access to the trust funds, the trust is sheltered from estate taxes. If any of the heirs have a real need for funds, however, the trust can make distributions to them.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

MUTUAL FUNDS: FROM MYSTERY TO MAINSTAY

With more than 10,000 mutual funds now available, and most working Americans contributing to them via their employer-sponsored plans, mutual funds are no longer the mystery they once were. Instead, they’re the mainstay of many family’s investment portfolios.

But if you’re new to investing, you may have some questions. What is a mutual fund? And how do they work? This article is designed to answer these and other important questions.

Designed for the Smaller-Net-Worth Investor

So you want to invest in, say, the stock or bond market. But you don’t have enough cash to diversify your investments. Mutual funds may be the answer.

At its most basic, a mutual fund is a financial intermediary that manages a pool of money from investors who share the same investment objectives. By pooling their money together, the investors can purchase stocks, bonds, cash, and other assets as far lower trading costs than they could on their own. What’s more, rather than trying to manage their assets themselves – a daunting challenge even for experienced investors – a mutual fund is overseen by professional asset managers. These experienced managers are responsible for identifying and investing in the securities they believe will best help the fund pursue its investment objective.

A Range of Investment Objectives

When you invest in a mutual fund, you are essentially buying shares in the pooled assets and you become a shareholder in the fund.

One of the reasons for the popularity of mutual funds is that not only are they extremely cost efficient and easy to invest in, but you can choose from a wide range of investment options. Some mutual funds, such as money market funds and short-term bond funds, are quite conservative and offer a degree of stability and preservation of your principal. Others, such as aggressive growth funds, pursue above-average returns, generally with the volatility and risk that go along with them. And there are options all along the risk/reward spectrum.

The Added Benefit of Diversification

Earlier in this article, the topic of diversification was mentioned. Diversification is the concept of spreading out your money across many different types of investments to reduce the affect of any one investment on your overall returns. When growth stocks are declining, value stocks may be rising. When U.S. stocks are appreciating, international stocks may be falling. Diversifying your investment holdings across asset classes (stocks, bonds, and cash), sectors and industries, and geographic regions can significantly reduce your risk. However diversification does not protect against risk.

The most basic level of diversification is to buy multiple stocks rather than just one stock. A stock mutual funds generally holds many stocks, often between 50 and 100 but frequently many more. Achieving a similarly diversified portfolio on your own by purchasing individual stocks would not only be exponentially more difficult, but also more expensive as the trading costs for buying and selling stocks can quickly eat away a smaller portfolio’s value.

Reading A Mutual Fund Prospectus

Before investing in any mutual fund, you should read its prospectus. This is a legally mandated document that provides specific information about the fund’s investment objectives, managers, the types of securities it may buy, fees and costs, and other pertinent information. Recent legislation mandates that a prospectus must be written in clear, common-sense language that the general public can easily understand.

A mutual fund prospectus should outline these six factors that allow you to evaluate the fund and its potential place in your plan.

  1. Investment objective. Is the fund seeking to make money over the long term or to provide investors with cash each month? You’ll find the answers in this section of the prospectus.
  2. Strategy. This section should spell out the types of stocks, bonds or other securities in which the fund plans to invest. It may look for small, fast-growing firms or large, well-established companies. If it’s a bond fund, it may hold corporate bonds or foreign debt. This section may also mention any restrictions on securities in which the fund can invest.
  3. Risks. The prospectus should explain the risks associated with the fund. For instance, a fund that invests in emerging markets will be riskier than one investing in the United States or other developed countries. A bond fund should also discuss the credit quality of the bonds it holds and how a change in interest rates may affect those holdings.
  4. Expenses. Different funds have different sales charges and other fees. The prospectus will spell out those fees so you can compare them with the fees of other funds. It should also explain the percentage of the fund’s return that is deducted each year to pay for management fees and operation costs.
  5. Past performance. Although you shouldn’t judge a fund solely by its past performance, this can show how consistently the fund has performed and give some indication of how it may fare in the future. This section of the prospectus will also show you the fund’s income distributions and its total return.
  6. Management. This section may do nothing more than list the fund manager or managers, or it may give specific information about the management team’s experience. If the prospectus doesn’t contain enough detail, you may be able to find this information in the fund’s annual report.

Mutual funds provide investors with a convenient, effective tool for investing in the stock, bond, and cash-equivalent markets. Let us show you how they can apply in your specific situation.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WHY WORKING WITH A PROFESSIONAL MAKES GOOD SENSE

You wouldn’t think of being operated on by anything less than a board-certified surgeon. Or going into court without qualified legal representation. Or even repairing your late-model car without a trained mechanic. Then why do so many people believe they can manage their own financial affairs without professional guidance?

Investing is often a complex and confusing process. Even success can throw your investment strategy out of kilter. For instance, let’s say you want to have 60% of your portfolio invested in stocks. If the market does really well and you are realizing higher than expected returns on your stock investments, after a couple of years you may find that you now have 80% of your portfolio invested in stocks, even though you haven’t changed a thing. Without rebalancing to your target asset allocation, you might find yourself getting whipsawed by a volatile market, which happened to literally millions of investors in 2000 through 2002.

No matter what type of investor you are, it’s crucial to keep your plan on track. Revisit your asset allocation periodically (every year or so, depending on market conditions) to determine whether it needs adjustment. You should also periodically re-examine your risk tolerance and investment profile, especially as you get closer to your goal. You may discover you need to tweak your portfolio’s risk exposure over time.

Sitting down regularly to reassess your goals, time frame, and asset allocation allows you to fine-tune your strategy, keep your risk within acceptable levels, and make sure you’re on track. A skilled professional can help you identify investments that not only achieve the greatest absolute return over the years, but also subject you to the lowest overall taxes along the way. Your advisor will also show you how to properly allocate investments among your various accounts and work with you to integrate your investment and financial goals. A truly knowledgeable advisor will also help you stay abreast of developments in the financial marketplace as innovative new products and services become available.

Just as you see your doctor for checkups, your lawyer for legal advice, and your mechanic for tune-ups, consult a qualified financial advisor for financial planning.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

THE SKYROCKETING COST OF COLLEGE

Despite a decade of low inflation, the price of higher education has seemed to defy gravity. According to The College Board, a not-for-profit membership association whose mission is to help students and parents prepare and pay for college, tuition and fees at both private and public institutions have nearly doubled in constant dollars over the last 20 years.1

But a college education is clearly an investment that pays big dividends down the road. The College Board, citing U.S. Census Bureau statistics, estimates that individuals with a bachelor’s degree earn over 70% more, on average, than those with only a high school diploma.2 Over a lifetime, that earnings gap translates into more than one million dollars – more than enough return to justify the investment, even if the rise in prices is outpacing inflation.3

Help is on its Way

The College Board’s latest annual report, “Trends in Student Aid 2005,” reveals that $129 billion was distributed to students and their families from federal, state, and institutional aid sources. That’s an increase of $10 billion over 2004.

The average cost of tuition and fees at a four-year private institution in 2005-2006 is estimated at $21,235, up 5.9% from last year, while a four-year public institution will run $5,491 for 2005-06, an increase of more than 7%. Add in room and board, books, travel expenses, and other miscellaneous costs, and one thing becomes clear: Funding a college education for your children is going to take some careful planning and long-term dedication.

Some parents, especially those of young children, put off planning on the assumption they can make up for lost time later. Even if your children are very young, however, it’s not too soon to begin thinking about ways to prepare for helping them with the rising costs of a higher education. Given the proven power of compounding over time, starting early to save smaller sums of money each month can make a dramatic difference in the amount you can manage to put away over time.

1,2,3,5) “Trends in College Pricing 2005,” The College Board

4) “Trends in Student Aid 2005,” The College Board

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

CREATE A COLLEGE FUNDING STRATEGY

With all the other expenses competing for your monthly income – mortgage, car payment, 401(k) plan contribution, and the like – carving out a small sum of money to save every month for college isn’t easy. However, the earlier you start the more you’re likely to accumulate.

Let’s compare two hypothetical examples. The Smiths and Jones both want to send their children to a college whose four-year total cost is approximately $40,000. The Smiths start saving as soon as Junior is born, putting away $100 per month earning 8% per year. By the time Junior is ready for college, they will have saved $48,749 – more than enough to cover the entire cost plus account for inflation.

The Jones, however, wait until Precious is 10 years of age before starting to save. Even though they can put away $250 per month, when Precious is ready for college eight years later they have only saved $34,163 – meaning they’ll have to make up any shortfalls out of pocket.

Of course, these hypothetical examples are for illustration purposes only and do not represent the return of any specific investment. Also, taxes, fees, and other costs are not considered. But the message is clear: The earlier you start, the less you’ll need to save each month and the more you’re likely to end up with by the time you send your child or children off to State U.

Fortunately, several savings and investment strategies exist to help you accumulate assets for college.

College Funding Ideas

  1. Assess your needs. To determine how much to save, you need to estimate the future cost of tuition at public and private institutions. With education cost rising an average of over 8% a year for four-year institutions, you must save with inflation in mind.
  2. Save early and often. The sooner you begin to set aside funds for college, the less you will have to save on a monthly basis. Allow your investments to grow along with your child.
  3. Set up a systematic savings plan. Try to save monthly or quarterly, just as you would if you were paying off a car or a mortgage. (Please note, such a period savings or investment plan does not assure a profit and does not protect against loss in declining markets.)
  4. Keep a separate college account. The most popular are custodial accounts. These accounts ease the tax burden by allowing parents to shift some of their assets to the child at the child’s lower tax rate.
  5. Involve the family. Children are more aware of family finances and accept responsibility when they are involved. It also becomes easier for you if the child is able to contribute to the fund.

Create an incentive program with your child. Offer to match the money the child makes to his own account. Teach him or her to work and help contribute to their fund – they will value their education even more.

College funding takes discipline, effort, and planning. It’s also becoming more complex every year. Rely on our financial planning expertise to help design a program that best fits your family’s needs and situation.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

ADDITIONAL SOURCES OF FINANCIAL AID FOR COLLEGE

Even if you haven’t been able to save all the money you need for college, several alternatives exist to help you make up the difference.

Financial assistance comes in many shapes and sizes – from scholarships and grants, which do not need to be repaid, to federal loans, which carry very favorable interest rates and terms, but must be repaid eventually. The following are a few of the most popular sources of financial assistance:

Calculating Financial Aid

Usually due before January 1, the standard federal Free Application for Federal Student Aid (FAFSA) determines how much, if any, financial assistance the government will award to your child. Both private and public schools use this standard form to dole out their own scholarship monies as well. Additionally, some schools now require the Financial Aid Profile for assessing the need for non-government dollars.

Working with a number of factors, a school will determine each family’s need for financial aid. From there, financial aid officers will attempt to craft a package, often combining both grants, which don’t have to be paid back, and loans, which must be repaid later, usually with accrued interest. Clearly, the better deal is the free money. Often the earlier one applies, the more of their funds will come from the “grant” side of the ledger.

Government Loans – Stafford: With a Stafford loan, the US Government either provides the funds for the loan, or guarantees the funds loaned by other institutions. The loans are available regardless of family income, but for families with incomes under $70,000, no interest accrues and no payments are required until the student leaves school.

Government Loans – PLUS: The Parent Loan for Undergraduate Students (PLUS) loans are federally funded and guaranteed loans issued through local banks, credit unions and savings & loan institutions. The maximum loan amount is defined as the total cost of college, minus the amount of financial aid received. Repayment of principal and interest begins immediately with interest capped at 9%. Loan insurance is required to qualify for a PLUS loan.

Work/Study Grants: Many colleges and universities offer work/study grants. Sometimes their earnings are deducted from tuition and other times the student earns a salary.

Americorps: This network of national service programs engages more than 50,000 Americans each year in intensive service to meet critical needs in education, public safety, health, and the environment. It is open to U.S. citizens, nationals, or lawful permanent residents aged 17 or older. Members serve full or part time over a 10- to 12-month period.

After successfully completing a term of service, AmeriCorps members who are enrolled in the National Service Trust are eligible to receive an education award. The education award can be used to pay education costs at qualified institutions of higher education or training, or to repay qualified student loans. The award currently is $4,725 for a year of full-time service, with correspondingly lesser awards for part-time and reduced part-time service. A member has up to seven years after his or her term of service has ended to claim the award.

The GI Bill: Veterans, active duty personnel, and their families are eligible for a wide variety of benefits and loan repayment programs under the GI Bill, U.S. Army college fund, and VA educational services.

These are just some of the many ways to defray the rising costs of college. Contact us for more information on how to make higher education a reality for your children or grandchildren – or perhaps even yourself!

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

FINDING SCHOLARSHIP OPPORTUNITIES

The vast majority of the nation’s institutions of higher learning offer various types of scholarship, granting money to college students based on a host of criteria such as academic merit, financial need, and in some cases, racial or ethnic background.

Although the application process can be complicated and redundant between scholarships, a great deal of money is available for those who are willing to jump through the right hoops and prove their merit and/or need.

Finding Out About Available Scholarships

Your child’s high school guidance counselor should have a great deal of information on local scholarships. From there, you can consult the college’s financial aid office. Many corporations offer college tuition aid or reimbursement to their employees and some offer scholarships to their employees’ children. In addition, many religious organizations offer scholarships.

Review college financial aid books at your library. Some of them have extensive listings of sources that you can’t find elsewhere. Contact both the U.S. Department of Education and your state department of education.

Many books have been written on the application and qualification process, which can help guide you through the process, which you can also access at your local library or bookstore. Finally, search the Internet for the numerous websites offering college savings calculators and information on financial aid. Start with the website of the college or university you want to attend, as well as local and national banks offering loan programs. The College Board (www.collegeboard.com) is another valuable source of comprehensive information.

Helpful Tips

You can significantly reduce the cost of your college experience using some of these helpful tips:

  • Plan to spend your first two years at a community college.
  • Live at home and commute, if possible.
  • Work part-time, particularly in your desired field of future employment.
  • Join AmeriCorps and earn education awards in return for national service.
  • Join the Reserve Officers Training Forces (ROTC); it will pay for tuition, fees, and books and also provides a monthly allowance. You’ll have to serve four years as an officer in the military after graduation.
  • Work full-time at a company that offers tuition reimbursement.
  • Take advanced placement courses in high school; convert them into college course credits by scoring sufficiently well on advanced placement exams.

Funding college isn’t easy, but the rewards are clear. Let us help you design a plan to fund the rising costs of higher education.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

BUDGETING BASICS

Let’s face it: Nothing in life ever goes exactly as planned. And that goes double for money matters. How many times has this happened to you? Just when you think you finally have some breathing room in your budget, an unexpected expense comes along and wipes it out.

One way to prepare for the unexpected is through budgeting. In technical terms, budgeting is the systematic allocation of one’s limited resources (income and liquid assets) toward a potentially unlimited number of needs and wants (expenses). To put it simply, budgeting is merely balancing your outgo versus your income.

Unfortunately, the word “budget” -sort of like “diet” or “economize” — has negative connotations. Although sometimes tedious and difficult to stick with, smart budgeting can help you better control how your income is being spent – leaving you with more money to invest or put away for those inevitable rainy days. A budget is a financial plan for spending; not a bookkeeping chore of keeping track of every penny.

The Budgeting Process

Budgeting is essentially a management process that follows these steps:

  1. Establishing your goals.
  2. Estimating your monthly household income.
  3. Estimating your monthly expenses.
  4. Balancing the budget.
  5. Putting your plan into action.
  6. Adjusting the budget as necessary.

Step One: Establishing Your Goals

First, review your family situation (marital status, dependents, family additions or departures). This review will set the table for establishing your short-, intermediate-, and long-term goals. Short-term goals may be purchasing a new car, taking a vacation or building a new home theater. Intermediate-term goals might include changing careers, sending a child or children to college, or saving for a house downpayment. Longer-range goals include accumulating a retirement portfolio, buying a vacation home, and leaving a financial legacy to your heirs. Each of these takes money – and planning, including budgeting.

Step Two: Estimate Your Income

Whether your household income is regular, such as a paycheck every two weeks, or irregular, such as that received by a farmer or other person in business for him or herself, helps determine how a budget is established and followed. Whether expenses are regular or irregular also makes a difference in the budget.

Add together all your income sources including take-home pay, interest, dividends, bonuses, pensions, alimony and child support, etc. If you’re self-employed, determine just how much you have available for living expenses by examining personal and family goals, business goals, and living and business expenses. If your income fluctuates, underestimate your income and overestimate expenses. Avoid relying heavily on bonuses or overtime pay

Step Three: Estimate Your Expenses

Your expenses will likely fall into four categories: 1) fixed expenses, such as rent or mortgage, car payment, utilities, telephone, cable, and the like; 2) periodic expenses such as annual homeowners insurance, car insurance and maintenance; 3) flexible expenses including food and clothing, entertainment, travel, and other leisure activities; and 4) emergency expenses such as car accidents, home repairs, medical expenses, and so on.

Are you planning a major change during the coming year such as a move, changing jobs, buying a house, getting married, having a child, entering the job market or buying a new roomful of furniture? Be sure to account for these changes, because every major life event affects your budget.

Step Four: Balance Your Budget

Subtract fixed expenses, including an amount for investing and saving, from your expected income. Then, subtract the total amount of flexible expenses from what is left of income. If you need to cut back on your expenses, start first with the flexible expenses, then move to irregular expenses, and finally, to fixed expenses. If you have a surplus after subtracting expenses from income, consider adding more to your goal-related savings and investing.

Step Five: Put Your Plan into Action

This is probably the most difficult part of using a budget. Keep records of actual spending and compare them with your budget plan at the end of the month. By keeping records, you can better understand exactly where your money goes each month, discover if you’ve over- or underestimated certain expenses, and identify areas you might be able to cut back (like those daily $3 gourmet coffee drinks!).

Step Six: Adjust Your Budget

Adjust budget plan figures if necessary, based on the recordkeeping in Step 5. It may take several months of adjusting and re-adjusting before your plan works smoothly.

The real payoff of working with a budget plan and keeping records will come when you use your past year’s budget and records to plan for the future. Budget records can help you pinpoint spending leaks or spot potential trouble before it occurs.

Some Smart Budgeting Tips

Keep it simple. Don’t detail your plan to the penny. Keep track to the nearest dollar or even the nearest five dollars. This works only if you set your “breaking point” and stick to it. For example, if you prefer to keep track to the nearest dollar, set $.50 as your breaking point. If the amount to be recorded is $49.49, you drop the cents and write down $49. But if the amount is $49.50, you write $50. Such a system keeps some of the drudgery out of recordkeeping.

Be realistic. Consider all expenses, including vacations, spending money, alcohol, tobacco and hobbies. To build in a margin of safety in your plan, overestimate your expenses and underestimate your income.

Provide for personal allowances for everyone in your plan. Then give each person total control of his or her allowance. By providing everyone with an allowance, no matter how small, you are giving everyone money to spend as they wish when the urge comes. This is especially helpful in helping children learn that money is not an infinite resource!

Don’t expect someone else’s budget to work for you. When you see a budget in the newspaper or magazine, realize it is for a particular situation or for an “average” or “typical” family. It’s important to tailor a spending plan to your individual needs and situation.

Distinguish between wants and needs. Buy what you need first. The wants belong in the “what’s left over” category.

Borrow with care. Remember, you create a fixed expense each time you charge something or pay “on time.” Even though it might give you pleasure to own something right now, consider all the interest you’ll be paying and ask yourself if it’s really worth the price. If possible, use cash for ALL your impulse purchases.

Plan for and develop an emergency fund! This is perhaps the most important element of all.

If you would like help in developing a budget that meets your income and expenses of today while designed to provide financial security for tomorrow, we can help. Please feel free to contact us for advice and guidance.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WELCOME TO “LIFE CYCLE PLANNING”

Financial planning means something different to everyone. For some, it’s about getting by month to month on their paycheck, for others it’s about watching how their stock portfolio performs each day.

Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day – witness the dramatic rise in financial-related publications, radio and television shows, and websites.

Because each person’s situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps “Life Cycle Planning” because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.

Development of Human Capital

Human capital refers a person’s ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.

In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.

It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.

Expense Management and Budgeting

Once your “human capital” investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.

Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.

A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a “rainy day” fund, as well as saving and investing.

Ensuring Adequate Liquidity

As your budget begins to pay off in a healthy savings account, you might begin to wonder how best to apply your limited savings to your unlimited needs and wants.

Without exception, the first financial need you should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short-term needs using cash instead of leveraging your future earnings through costly loans. As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.

Ample Insurance Protection

A major disability, the loss of a family breadwinner, a fire in your home, a family member’s major medical problem or need for skilled nursing care … the most dramatic emergencies can seldom be paid for completely using personal savings.

Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.

Life insurance, disability income insurance, property and casualty (P&C) insurance, long-term-care insurance, and major medical insurance all have a place in your “Life Cycle Planning.”

Long-Term Funding Objectives

Once you’ve accumulated sufficient funds to cover your emergency needs and purchased protection against financial risks, you can begin saving for your long-term goals in earnest. We can help you design a plan to pursue your retirement objectives that fits with your personal financial goals, risk tolerance, and time horizon.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

IT’S TRUE – TIME IS MONEY!

People often overlook the time value of money. Economists know full well that a dollar received today is worth more than a dollar received a year from now. Why? Because that dollar could be invested, saved, or used to purchase an asset such as real estate that will appreciate in value. What’s more, inflation slowly but steadily erodes the purchasing power of your money, rendering tomorrow’s dollar less valuable than today’s.

The relationship between time and money provides the foundation for virtually every financial decision you will make. Whether you are saving money for a future event or considering a loan to pay for a current financial need, you will be greatly affected by the time value of money. The following are some tips for making the most of your dollars, today and tomorrow.

Time Value Tips

Whether you are saving for retirement or a down payment on a home, college funding or dependant care needs, you will be greatly affected by these simple time value tips.

Time Value Tip #1: The longer you have to prepare, the less your objectives will cost. Assuming you are able to invest your savings and earn a positive return, you will always be better off saving for your goals in advance. Not only will your savings earn interest, but the interest you earn will also begin to earn interest. This is called “compounding” and was referred to by Albert Einstein as the “the most powerful force in the universe.” (No one knows whether he was serious or joking.)

Time Value Tip #2: The higher the rate of return you are able to secure on your savings, the faster your money will grow. Generally, the amount of risk you are willing to take on your investments will determine your long-term rate of return. The longer you have to save for your goals, the more risk you should take on your investments, and the greater rate of return you should expect.

Time Value Tip #3: It’s almost always better to postpone paying taxes on your investment proceeds. When you have the choice, you should usually choose to delay paying taxes on investment proceeds as long as possible. That’s because as long as you retain all your investment’s growth, instead of losing some to taxes, you can continue to earn more interest on that growth. Once you pay the taxes, you will never earn interest on those lost funds again. One way to postpone the payment of taxes is to invest in qualified retirement plans, such as IRAs and 401(k) accounts. Another tactic is to invest in annuities, which also allow your money to grow tax-free until withdrawn.

Time Value Tip #4: Factor inflation into your long-term plans. When preparing for long-term financial objectives, you must factor inflation into your plan. Over the last 20 years, inflation has averaged about 4% per year. At that rate, in 20 years a salary of $50,000 will buy what only $22,100 does in today’s dollars – that’s less than half. Looked at another way, that $30,000 luxury car you’ve had your eye on will cost you a whopping $67,872 just two decades from now!

The cost of some financial objectives will grow even faster than this — college costs, for example, have increased by some 8% annually on average. Planning for such cost increases will ensure that your asset accumulation level is sufficient to meet your objectives.

What’s the best time to start preparing for a sound financial future? Twenty years ago, goes the old joke. Failing that, the second-best time is today. Why not start now by contacting us?

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.