Last week, I was out running errands and listening to the local news station on the radio. The 60 second financial segment came on, and they were talking about the volatility of the S&P and how the month of September had ended with “significant” losses.
I get it, it’s the news, and we all know their main goal is to sensationalize EVERYTHING.
Here’s the part that burns me.
The reporter goes on to make a comment, and I’m paraphrasing, about near retirees and how this will seriously impact their ability to retire.
And not just for near retirees, but comments along the lines of, “investors saw their 401(k)’s take a huge hit last month”.
In my not so humble opinion, this is reckless reporting of the “facts”. It’s sensationalism and exaggeration and although it is FACT that the S&P saw a decline in September, it leaves out other very important FACTS, and sends anxious listeners into a panic.
Here are two key facts, one which was reported, the other which was not.
The S&P finished the month of September “down” by 4.7%. Listeners definitely got the gist of that message, and then some.
Here’s what was NOT reported:
The S&P is UP 16% year to date through 10/11/21 (see lovely trend line in graph below).
Yes, that’s right, your 401(k) may have seen a decline in September, but I will bet the bank that if you have a well-diversified portfolio of investments, you still have more now than you did in January.
Heck, even if you only own the S&P index, you can see above that you are definitely up for the year.
I’ll leave you with two final thoughts that I know I’ve touted before:
Growing your wealth is not about one month of returns, positive or negative. You are in it for the long game. This means consistent and diversified savings of your earnings over time. DO NOT PANIC.
The stock market is always going to have up and down DAYS, MONTHS and YEARS. Always has…always will. And that’s a fact!
I often tell my clients that financial decisions are not always black and white – that it’s not always about the bottom line number.
There is often a gray area that comes into play and there is no formula for it on an Excel spreadsheet.
It’s called HUMAN EMOTION.
Last week, I “broke down” and made a purchase that wasn’t technically a need, but wasn’t necessarily a want either. I can definitely make the argument that it was needed for my mental well-being. Actually, I HAVE made this argument with myself, and won.
Do I have you wondering what the heck it was that I actually bought?
A fancy new car? Louis Vuitton bag? A year’s supply of Botox treatments?
Nope, nothing that fun.
I bought new bedroom carpet. Woohoo. Exciting stuff.
Here’s the catch – the carpet I have now is LESS THAN A YEAR OLD.
I won’t bore you with the dirty details (and they are, quite literally, dirty). Although, it’s a very good story and I get lots of jaw-drop reactions from it, especially among women. I’ve become a master story teller with this one.
I’ll give you three words to shed some light on the matter:
Male Coffee (a whole mug, covering a very wide swath) Bleach (yes, I said BLEACH)
I tried; I really did. I waited three months before breaking down. I laid down a throw rug to cover the damage, but it was a constant reminder of what was lurking beneath.
So that’s where the human emotion part of the financial equation came into play. Clearly, with the rug having just gone in last year, I didn’t WANT to replace it. But it wasn’t really a NEED either. It still served its purpose of covering the plywood floor underneath.
So, the decision came down to this: Which was going to tip the scale more? The EMOTIONAL SIDE of looking at the damaged carpet every day or the FINANCIAL SIDE of not wanting to pay for carpet less than a year after having paid for it the first time?
You already know the winner.
This is not to say we can ALWAYS let the emotional side rule. Human emotion is actually the piece of the equation that can get a lot of folks into trouble and a part that I help my clients manage in a healthy way.
But with a well thought out decision, taking BOTH financial and emotional factors into account, it very often can be the right move.
“We didn’t realize we were making memories. We just thought we were having fun.” -Winnie the Pooh
A friend of mine recently posed a question on her blog about Cryptocurrency.
You know-Bitcoin, Dogecoin, Ethereum-to name a few.
She was asking her followers what they knew about it, had they invested in it, and she made the statement that she thinks it may be here to stay.
I think she’s right, but whether I think the average person should be investing in it is another question.
Around the same time, I was talking with my oldest about needing to get his taxes filed so we could make a Roth contribution. I was trying to educate him about why this was a great investment for his future. I liken what he was probably hearing was akin to the teacher’s voice from Charlie Brown.
His response, to my surprise, “I want to buy Dogecoin.”
My darling first born, you don’t even know what FICA taxes are or the difference between owning a stock vs a mutual fund, and you don’t necessarily need to understand all of this right now, but it’s also why you should not be buying Dogecoin with your very few hard earned dollars.
“Crypto” – it’s all the hype, I know. And don’t get me wrong, I’m not saying it’s a scam or investors haven’t or won’t in the future make money by investing in it. They have and they will. They’ve also lost a lot of money over the past month as well, at least on paper.
At this stage of the game, it is unregulated (which is kind of its modus operandi ), extremely volatile and very speculative. Its “buy in” has grown exponentially since its inception. I do think it has the POTENTIAL to EVENTUALLY be a small part of every investor’s diversified portfolio. Maybe. Time will tell.
It is my opinion, and only my opinion, that the AVERAGE investor, of which most of us are and why the term “average investor” was coined, should not be pouring our hard earned money into crypto, at least not for the hyped up reasons of turning a quick profit or easily becoming uber rich.
Unless you plan to “set it and forget it” like you would your 401(k) contributions and savings, and earmark it for the long term, then don’t do it.
Unless you are OK with potentially losing whatever you invest, don’t do it.
If you want to buy it to ride the wave and think it’s a get rich quick option,
DEFINITELY DON’T DO IT.
Because honestly, no one knows for sure what direction this is heading and I’m just not comfortable with the fact that a tweet from Elon Musk can singlehandedly make it soar or tank in a 24 hour period. Are you???
For the majority of us, investing is meant for the long term, using investment strategies that are tried and true, and have proven to pay off for 100% of those of us who follow a disciplined and diversified approach to saving and investing.
A very small percentage of your portfolio…for the long term…with money you don’t need and are OK with losing? OK, if you must, but do your research. Be aware, be informed and understand your decision.
To be buying and selling crypto currencies on a regular basis is nothing short of day trading or trying to time the market. Most lose at that game in the long run.
That’s my two cents…I wonder what it’s worth in Crypto?
When you make an IRA contribution of any kind during the tax year, the institution where you made the contribution is required to file Form 5498 with the IRS. You will also receive a copy and it should be kept with your tax records. It is usually right around now.
For a deductible IRA contribution, this filing “proves” to the IRS that you did indeed make the contribution for which you are getting a tax break.
For non-deductible IRA contributions, keeping track of the contributions you make is important because you don’t want to pay taxes on that portion (known as your cost basis) of the IRA again in the future.
The usual deadline for these filings is May 31st and you would receive your copy in June. Since the tax filing deadline was extended this year, they have until June 30th, so don’t be concerned if you don’t see it until July.
There is no action on your part other than to make sure it is accurate and keep it for your records.
This month I’m taking a proud auntie moment to congratulate my nephew Jimmy, who is Valedictorian of his Class of 2021 and off to West Point in just a few weeks. He gave an awesome speech to his Senior class this past weekend and used this quote from Mark Twain that I really loved:
“The two most important days in your life are the day you are born and the day you find out why.”
Have you ever heard of the Pink Tax? This is not an actual tax levied by the state or federal government, but rather refers to what has been described as “ a discriminatory pricing practice” that lends itself to charging women more for “substantially similar” products and services. That part is real.
If you have daughters, you’ve probably uttered the words, “geez, girls are expensive”, at least once.
Health and beauty care products, kids’ toys, clothing, dry cleaning and car repair services are found to be the biggest offenders of the pink tax.
Not for nothing, but in my house, regardless of gender, we don’t know what is legit for car repairs. But I suppose, “generally speaking”, men have (or are perceived to have) more general car knowledge and may be less likely to be quoted an unreasonable price.
Toy pricing came as a surprise to me. One example cited in the piece I read was a blue bike helmet costing less than the same helmet in pink. Same manufacturer, same product, different color. Maybe pink decals cost more?
The State of New York actually passed a “Pink Tax Ban” in 2020, prohibiting this practice and requiring certain service providers to present price lists for standard services upon request.
“Upon request” being the key words there. I’m not sure how the state will effectively police this. Time will tell, but it’s a start.
The point I want to make on this topic is this: I believe the best defense for stuff like this is a good offense.
How do you create a good offense?
AWARENESS. Through awareness you create knowledge and power, and that goes for anything.
As women, are we always unaware we are paying more? Of course not. Sometimes we make the choice to. I am fully aware I am paying more for my “spa” shampoo, which is why I treasure every drop and don’t share it with the men in my house, but I do have the choice to buy a lower cost product and still get my hair clean.
If you’ve never heard of the pink tax before this, now you are aware that it is actually a thing and you can be an informed consumer. Granted, you probably don’t want to smell like Axe body spray or Old Spice just to pay a lower price, but you can still make choices of one product over another or ask informed questions of a service provider.
Be AWARE. Stay INFORMED. The best defense is a good OFFENSE.
Financial Fitness Tip
I have been involved with a wonderful organization for a number of years called The Fresh Air Fund. April is financial literacy month and they asked me to sit on a panel with some teens to talk about what I do for a living as they learned about financial topics.
Kudos to The Fresh Air Fund for putting this program together for their teens!
They shared a short You Tube video offering some basic, and some not so basic, financial education in an easy to understand format, which I am always a big fan of.
Take some time to view the video and share it with others you think might benefit!
My Favorite Quotes
Since it’s financial literacy month, I am sharing a quote that promotes one of the single most important tenets of growing your wealth over time:
“Do not save what is left after spending. Spend what is left after saving”
It seems every year between Thanksgiving and New Year’s Day I can’t seem to find the time to fit in my workouts. Now it’s mid-January, and I still haven’t gotten back at it, despite knowing I feel 150% better when I do.
So now, I will pay the price.
I have not performed any studies, but I would venture to guess that exercise/diet and getting a handle on one’s finances are two of the most common resolutions people make each January.
I can’t give much advice on the former – I welcome it if you have any – but here are a few suggestions on the latter:
1. Get Organized:
Know what you have and where you have it. Create a spreadsheet or use a tracking software to note the type of account, where it is held and username/passwords. I mentioned Last Pass in a previous newsletter and now can’t imagine a day without it. It’s technically a password management software, which in itself is awesome, but you can also organize everything into folders and keep notes for each one.
2. Automate bill payments:
There’s nothing worse than having to pay late fees and interest charges because you missed a payment. Anything that can be automated should be automated.
4. Track your spending (everyone hates this one, even me)
Why do we hate it? Because it’s SO eye-opening and we sometimes do not like what we see. There is software out there to help. Quicken, Mint or Tiller seem to be the most popular. But even an old fashioned spreadsheet will work.
5. Review and update estate planning documents:
Life insurance and retirement account assets do not pass by way of will. You must have named beneficiaries on these assets if you want your wishes to be carried out. Review your beneficiary designations, powers of attorney, health care proxies and any other estate documents to be sure they still reflect your wishes.
Commit to even just one of these now and email me here to let me know which one you choose. Sometimes “saying it out loud” is the only force we need to take action.
Financial Fitness Tip
For those of you who have teens or young adults with part-time jobs, they will have a W2 detailing their wages and any taxes withheld. They will have had to pay FICA taxes (Social Security and Medicare). This is mandatory.
If their W2 indicates they have also had Federal and State taxes withheld, then they may want to file for a possible refund. Chances are, they did not earn enough throughout the year to owe any federal or state income taxes, so whatever was withheld from their paycheck is theirs.
However, they will have to file a tax return to get it back.
Things I Love: A Great Quote
Don’t you just love a great quote? I’m changing things up for 2021 and moving from “Things I Love” to “My Favorite Quotes”.
Since I’m writing this newsletter on MLK Jr. Day, I thought I would kick off with one from him:
“We must learn to live together as brothers or perish together as fools.”
Thanks to the progress we’ve made, he would most definitely include “and sisters” if he were giving his inspiring speeches today.
Everyone thinks that being a financial advisor means I am great with numbers, but there are lots of numbers that confuse the heck out of me.
Blood pressure, tire pressure and my son’s PSAT scores come to mind.
A number that is a mystery to many is their credit score.
Sure, you know the higher the better, but how do you get there? And how do you stay there?
This time of the year has me scrambling about at a variety of stores for holiday shopping.
Something I hear over and over again, from one cashier to the next: “Would you like to save 10% by opening a Fill In The Blank credit card today?” NOOOOO, I would not, but thank you for asking.
I’m a financial advisor – why wouldn’t I want to save 10%?
Here’s the thing. Having multiple credit cards won’t necessarily harm your credit score, it may even help it, when managed properly. It’s the “when managed properly” part that gets many into trouble and can inadvertently affect your credit score.
What Factors Affect Your Credit Score?
Creditors want to see a trend of you making payments on time, every time, even if it’s just the minimum payment due.
Carrying a balance on a high interest credit card is a financial planning 101 topic separate and apart from this (don’t do it), but paying the minimum amount due ON TIME is imperative to maintaining good credit. This is the factor most heavily weighted.
Credit Utilization Ratio (you want this number low)
Simply stated, if your credit cards are “maxed out”, your ratio is not good. Lenders want to see that you have the option to use the credit, but don’t.
For example, if you have three credit cards each with a $10,000 limit ($30,000 total limit), lenders don’t want to see you carrying a $25,000 balance. You are using almost 85% of your available credit (25/30). Conversely, if you are carrying a $5,000 balance you are only using about 15% (5/30) of your available credit. Lenders like this.
Length of Credit History
Different from payment history (and not as heavily weighted in your score), creditors look at the average length of all your credit accounts. This is why it often makes sense to keep an old credit card open, even if you’ve moved on to a new shiny one.
This is why it’s also good to get teenagers/young adults started with some form of credit in their early years, and teaching them how to use it responsibly. This will put them on a solid foundation for a good credit score, which they will need for their first car loan or apartment.
Types of Credit
Having a diverse mix of credit and being able to manage all of them effectively at the same time helps boost your credit score.
This doesn’t mean various credit cards from Macy’s, Amazon and Homegoods. This means entirely different types of loans, such as a mortgage, car and student loans, along with your credit cards.
New Credit Inquiries
How many new accounts you’ve opened and how many “hard inquiries” that come in from lenders have an effect on your credit score. Hard inquiries happen any time you are opening a new card or applying for a loan.
Too many in a short period of time makes a lender nervous.
Financial Fitness Tip
Separate from your actual credit score is the report that makes up your score.
You can and should be checking your free credit report at least annually. The report will provide a comprehensive overview of your credit history and allow you to flag any activity that does not look right.
There are three major credit reporting agencies: Transunion, Equifax and Experian. They have come together to make requesting your credit report more seamless and to help you avoid scammer websites offering “free” credit reports.
Follow this link to bring you to the ONLY official website you should be using. In “normal” times, you can request a report from each of the three agencies once per year, but due to COVID-19, they are offering free weekly online reports through April 2021.
Things I Love
These beautiful faces are now 17, 15 and 13, and ornaments like these become my favorites more and more every year. I am so blessed. Time is going too fast.
God Bless you and your families this holiday season, as we eagerly wave goodbye to 2020!
The first impactful memory I have around money always comes to me right away. It’s a story I shared at my dad’s 70th birthday celebration. I was about 10 years old and was with him at the ATM. He always counted the money before putting it in his wallet.
When he counted it on this particular morning, there were two $20’s stuck together.
My 10-year old mind thought, “How AWESOME is THAT”?
I must have not only thought it but also said something along those lines because I remember CLEAR AS DAY my father’s response:
“Susan, this is not my money. I’ll return it to the bank on Monday”.
Sometime not too long after, he called me over to his chair where he sat every night to watch the evening news and read the paper. He showed me a piece of mail he had just opened. It was a letter from the president of the bank thanking him for his honesty in returning the $20.
I’d be remiss to leave out my mom in my earliest memories around money and the impact they’ve had on me. Mom handled all the day to day family finances and taught me how to balance a checkbook…to…the…penny. Of course, with today’s technology I don’t balance a checkbook anymore, but I do still watch every penny. It was also her influence that taught me that just because you can afford something doesn’t mean you should buy it and that if you can’t afford something, then you definitely shouldn’t buy it.
That’s Cash Flow Planning 101 Needs vs Wants Spend less than you make.
And from all this, a trusted financial advisor was born. Thanks Mom and Dad!
My clients have heard me say that not every decision around money is black and white, that there is often an emotional component to our decisions that can make things a bit gray. Behavioral Finance has become a field of study in and of itself and is often a seminar topic at financial industry conferences.
I’m sure my parents had NO IDEA at the time that all these little things would serve as defining moments for me and my approach to all things money in the future.
But it makes me stop and think, what little impacts am I having now on my kids and the way they head into their future thinking about money? I guess we’ll just add it to the list as one more thing to worry about, because parenting is definitely filled with a whole lot of gray.
A friend reminded me this past week of the story I tell on my website about my dad and taxes. “Don’t just file those away”, he said to me years ago. “Look them over and get an understanding of what’s going on”.
It was an early catalyst for discovering my love of personal finance. Many folks feel overwhelmed by any talk around taxes. This is understandable. Our federal tax code can be a tough code to crack. It is a moving target of rules, income phaseouts and brackets which seem to change on a near constant basis.
Effective Tax Rate vs Marginal Tax Rate
We follow a progressive tax system in the US. This means the amount of tax we pay on the first dollar we earn is less than the tax we pay on the last dollar we earn. This progression results in a taxpayer’s Effective Tax Rate, or average overall tax rate, being less than their Marginal Tax Rate, or the tax rate of their final dollar(s) earned.
It tends to be a taxpayer’s marginal tax rate that is referred to most often, however it is the effective tax rate that more accurately reflects the average amount of tax you pay. When a taxpayer falls into the 24% tax bracket for example, this is their marginal tax rate…24%. This simply means that the highest level of tax paid was 24%, even if it was only $1 of income in that bracket. But their effective tax rate, the amount of tax they paid as a percentage of their overall income, is typically lower.
Total Tax Liability vs Amount You Owe
If you look at page 2, line 23 of your 1040 you’ll see “Amount You Owe”.
This is NOT your total tax liability for the year, which is up above on line 16, aptly named “total tax”.
Amount you Owe is what is still left to pay of your total tax liability for the year, unless of course, you are getting a refund.
Your total tax liability in any given year depends on many different factors. And even if the figure on line 16 is higher this year, it doesn’t necessarily mean you are paying more in taxes.
You have to take into account what percentage of your overall income that number represents, which as you read above, is your effective income tax rate.
Let’s compare apples to apples:
In 2018, I picked 100 apples and had to give 20% of them to Uncle Sam. That’s 20 apples (Total Tax, line 16). I paid in 1 apple each month for the year, so in April I owed 8 more apples (Amount You Owe, line 23).
In 2019, I picked 200 apples and had to give 20% of them to Uncle Sam. That’s 40 apples (Total Tax, line 16). I paid in 1apple each month for the year, so in April I owed 28 more apples (Amount You Owe, line 23).
Since 40 is more than 20, it would appear I owed more to Uncle Sam in 2019, and as a flat amount of apples I did, but as a percentage of my overall apple income, my taxes did not go up.
I owed the same amount as a percentage of my apple income…20%.
And since the amount I owed in April (line 23) was 28 instead of 8 this year, it may appear as if I owed more in 2019, but it’s because I didn’t pay enough apples each month along the way in 2019 (paycheck withholdings). Overall, I still paid 20% both years.
Now for purposes of simplicity in this example, I used a flat tax of 20% instead of a progressive tax that I explained up above. You may be thinking this would not happen, because if I picked more apples, I would have owed more than 20% this year. However, this example helps to demonstrate what the expanded tax brackets did for many Americans with the passing of the Tax Cuts and Jobs Act of 2017.
From 2018 through 2025, when this law is scheduled to sunset, many Americans can earn more while remaining in the same tax bracket, or in some cases a lower bracket, than they were in prior to 2018.
I recently had the opportunity to help out at our local high school with a group of students who were participating in a program called “Credit for Life”. I had never heard of it, but with a quick Google search, I learned it is a nationally recognized program designed to help high school students develop personal financial management skills. SIGN ME UP!
I had a blast. I really did. I was assigned to the “Savings and Retirement” booth. I got so jazzed up talking with these kids about real world money matters. OK, granted, some of them I was talking at instead of with, but that was to be expected. But for the ones that were really listening and trying to take in what I was saying, it was very fulfilling. I had my first glimpse into the satisfaction teachers get out of molding young minds.
The advice I was repeating over and over to each group is really no different than what I would tell a client. At any age, the foundations of financial security and independence are the same. I didn’t want to throw so much at them that they walked away feeling overwhelmed and having learned nothing, so I kept repeating the following during those precious few minutes I had their attention:
Don’t spend more than you make.
Pay yourself first.
Most eyes glazed over when I spoke the phrase, “power of compounding interest”, but when I pulled out my graph to show them a visual of what their money could do for them if they committed to paying themselves first, and how that money could grow exponentially over time, their eyes lit up. I pointed out on their expense tracker that this sum of money they were “spending” from their paycheck was different than every other expense they had listed on that sheet because IT WAS STILL THEIR MONEY!
Imagine my excitement when I heard one student approach a group of friends and say something along the lines of, “guys, go over there, pay yourselves first”. Eureka! My heart skipped a beat. And my pure, unadulterated joy when a friend shared with me that her daughter told her, “Mrs. Danson said I can start contributing to a Roth IRA and it will keep growing and growing and I won’t have to pay taxes on it”. Wowzer! This young lady is going to be just fine when it comes to her future financial well-being.
Full disclosure, there was another student I overheard saying, “don’t go there, she takes 10% of your money”. I laughed out loud and said to the huddle of teens, “I’m not Uncle Sam, this is still your money”! I’m sure none of them understood the Uncle Sam joke, but I knew you would appreciate my humor. They’ll understand soon enough.
But interesting, isn’t it, that this was student #2’s interpretation of my message?
Have you been watching Amazon’s hit comedy “The Marvelous Mrs. Maisel”? Do you love it? I have-and I DO! It’s simple. It’s funny. I can fall asleep after it is over with a light heart. I binge watched Season 3 over the holidays.
The story line focuses on Miriam “Midge” Maisel, a NYC housewife in the late 1950s/early 1960s who discovers she has a knack for stand-up comedy and begins actively pursuing a career. To keep it simple without need of spoiler alerts, her husband can’t handle her success, has an affair with his secretary and they separate.
I love that it brings current day recognition to the female pioneers that paved the way for the careers we women pursue today (although still today, this is not without challenges and/or risks to our financial well-being, but that’s a topic for another newsletter).
“Mrs. Maisel” depicts, in a “making fun of what used to be” sort of way, the early phases of breaking the mold during a time that was probably anything but fun for women choosing this path. I love that it makes me recognize and appreciate how much things have changed for women.
Yet after watching an episode of Season 3, I began to wonder if in some ways, despite the 1960’s setting, “Mrs. Maisel” is also current day art imitating life when it comes to many women and their finances. As Midge gains earning power, she washes her hands of money management and leaves it in the trusted hands of her talent manager Susie, who fails miserably. And then, of all people, Susie goes to Midge’s EX-HUSBAND, begging him to take over Midge’s finances. So Midge has a successful career and is taking on the world…but will still be relying on her ex-husband to handle her money.
Unusual for the times? No, not at all. Women weren’t even allowed to apply for their own credit cards until 1974! But how much has truly changed in regards to women being fully engaged in their finances?
Certainly, there have been HUGE strides over the decades in so many areas for women, but there are still inroads that we need to make for our financial security and that of our families.
I leave you with this question:
On a scale of 1-10, how “in the loop” are you in the understanding of your personal or family finances?
If you are not an 8 or above, I encourage you to become more engaged, ask questions if you don’t understand, and make 2020 the year that you become your own pioneer in financial empowerment.