In a recent National Association for Business Economics survey, 72% of respondents expect a recession to hit our country by the end of 2021. The last major recession, from December 2007 to June 2009, brought with it a huge dive in the stock market.
While no one knows when the next recession will occur, you need to learn what not to do so that you can make yourself financially stable. With that in mind, Business Insider reached out to experts to analyze the mistakes which hurt you and to offer ideas for avoiding them. Here are some of the top mistakes along with some additional tips to make sure you’re prepared for anything!
Avoid excessive spending
People think that they earn in order to spend. But in reality, money has four jobs: spending, saving, investing, and donating.
Spending is one factor of money management. Most people make mistakes by spending excessively. They spend more and thus get into serious debt.
When you pick up that extra cheese pizza, stop for a latte, eat out, or pay for a movie, your spending seems small. However, it adds up to a larger amount once you consider how much you spend on these small items in a year.
If you’re enduring financial hardship, you need to monitor your expenses closely.
Not having a detailed idea of all expenses
Having only a rough idea of where your money goes can land you in a difficult situation. As the saying goes, you can’t manage what you don’t measure. When asked how much you will spend this month, a quick answer would no doubt include a few bills and other expenses. But when you start going through your bank and credit card bills, you will be surprised to see where a substantial amount of your paycheck is going. So, in order to avoid these errors, it is mandatory that you detail all these individual expenses, and there are many good tools to help with budgeting.
Living on borrowed money
Excessively borrowing or spending on credit is not financially healthy. Using a credit card for day-to-day purchases or for the airline miles or rewards programs is normal. But if you’re paying interest on gas, groceries, and other items, then you’re making a big mistake. Credit card interest rates make the price of the items a bit expensive. Purchasing on credit also has the tendency to allow you to lose track of exactly what you are spending, often resulting in spending more than you earn.
If you use credit cards to make purchases, make sure to repay the entire bill at the end of every billing cycle.
Making minimum payments on credit card debt
Paying extra on credit card debt is certainly better than paying the minimum amount. You can repay your debt faster by putting extra money toward the debt with the
highest interest rate and making just the minimum payments on the rest. As one balance is paid off, shift those payments toward the next card with the highest rate and so on until you’re debt-free.
Paying bills late
Paying bills late means extra money goes out of the pocket. Many people forget the due dates of bill payments. To avoid this, automatic bill payment is a great solution. In addition, you can use your phone’s calendar alert and easy-to-use apps to send you text alerts when bills are due.
Halting on regular savings and investing
The stock market was volatile in 2020. Many investors panicked as their investment portfolio temporarily went off track due to a sudden fall in the stock prices. The only way to deal with this is to reset your investment portfolio.
Watching the market drop doesn’t mean you should stop investing—in fact, you get the benefit from stocks being cheaper than they previously were.
Make a financial plan, choose an investment strategy that’s appropriate for your needs, and stick to the plan unless there’s a major change in your financial life.
Stopping retirement contributions
If you or your spouse lose your job when unexpected expenses arise, you might consider stopping your contributions to your retirement savings to cope with increased financial demand. However, once the situation comes under control, do not neglect your retirement fund.
Spending more to maintain a lifestyle
A sudden rise in your income can entice you to improve your lifestyle. Resisting this temptation is the smartest thing you can do, particularly if you have a large goal like buying a house, good education for the kids, etc.
You can splurge a bit but don’t spend beyond your budget. Rather, focus on saving the amount you need to attain a financial goal.
Using home equity like a piggy bank
Having a shelter over your head is the most essential thing. Your home is your palace. Taking out a loan from it gives the authority over your house to someone else. So, if you can’t repay the amount, you can lose your home. Think twice before doing so.
Spending too much on the house
Dreaming of a big house is good, but it is not a necessity. If you have a big family, you may need a larger house, but to go for a luxury home is something that hampers your spending. Choosing a more expensive or luxury home will only mean more taxes, maintenance, and utilities. After knowing this, do you still want to take a chance for a long-term dent in your budget?
Having the wrong life insurance policy
Life insurance is important if you have dependents. A general rule of thumb is to have term insurance equal to ten times your salary. Work with an insurance agent you trust, one who’s not going to try and sell you a more expensive policy than you need.
You should set aside extra funds for emergencies. They can happen to anyone at any time. Unforeseen circumstances like a job loss, car repair bill, illness, etc., should be planned for as much as possible. An emergency fund can protect you from crippling debts. A good rule of thumb is to have at least 3 to 6 months of your spending set aside in an emergency fund.
Avoiding the mistakes and following the strategies shared above can help you have a healthier financial life in 2021.
Written by: Phil Bradford | Exclusively for Merriman.com
Author Bio: Phil Bradford is a financial content writer and an enthusiast. He is not employed or associated with Merriman. He has expert knowledge about personal finance issues and he is a regular contributor toDebt Consolidation Care. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.
Updated 12/23/2020 by Geoff Curran, Jeff Barnett, & Scott Christensen
National real estate prices have been on the rise since 2014, and many investors who jumped into the rental industry since the Great Recession have substantial gains in property values (S&P Dow Jones Indices, 2019). You might be considering selling your rental to lock in profits and enjoy the fruits of your well-timed investment, but realizing those gains could come at a cost. You could owe capital gains tax in addition to potential depreciation recapture on the profits from your rental sale.
One strategy for paying less tax is to move back into your rental and use the property as a primary residence before selling. Living in your rental full-time for at least two years prior to selling can help you take advantage of the gain exclusion of $500,000 ($250,000 if single), which can wipe out all or most of your gain on the property. Sounds easy, right?
Let’s take a look at some of the moving pieces for determining the taxes when you sell your rental. Factors like depreciation recapture, qualified vs. non-qualified use and adjusted cost basis could make you think twice before moving back into your rental to avoid taxes.
One of the benefits of having a rental is the ability to claim depreciation on the property, which allows you to offset rental income that would otherwise be taxed as ordinary income. The depreciation you take reduces your basis in the property, potentially resulting in more capital gains when you ultimately sell. If you sell the property for a gain, the amount up to the depreciation you took is taxed at the maximum recapture rate of 25%. Any remaining gains are taxed at the lower long-term capital gains rate. Moving back into your rental to claim the primary residence gain exclusion does not allow you to exclude your depreciation recapture, so you might still owe a hefty tax bill after moving back, depending on how much depreciation was deducted. (IRS, 2019).
When the Property Sells for a Loss
Keep in mind that if you sell your home for a loss, whether it’s currently a rental or is now your primary residence, you aren’t subject to depreciation recapture or other gains taxes. However, due to depreciation decreasing your cost basis in the property each year until it reaches zero, it’s more common that sales of former rental homes result in gains. (more…)
The devastating effects of COVID-19 are still making themselves known, as cities all over the world face longer lockdowns and restrictions in a bid to stop the spread of the virus. Life has certainly changed, with working from home now the new normal and public transport dwindling to a few people on each bus or train.
You may find that your life has been uprooted severely, and adjustments have had to be made in order to cope. With unemployment at an all-time high, there is a global concern for all of our futures. Many older workers were also looking to retire this year, but with the uncertainty surrounding when exactly life will return back to something resembling normal, seniors have been putting their plans on hold—and it might be time you followed suit.
Assessing retirement options
Currently, one in five American workers of retiree age have put their twilight-year plans on hold specifically due to COVID-19. With so many families’ finances taking a turn for the worse during this incredibly difficult time, delaying retirement could be a very smart idea.
The benefits of delaying retirement
Older workers may find employment more difficult to navigate due to the high level of young workers also vying for a small number of positions. With 13 applications for every 1 job available, recruiters and employers may find that the younger generation have more qualifications and are physically more fit than their senior counterparts. Older workers are often looked over despite their decades of experience; also, knowing retirement is on its way, it’s more cost effective for the business to hire someone who is guaranteed to be there for the long term.
Delaying retirement eliminates this issue. The employer you already work for and have been employed with for some time has been happy with your work; perhaps you’ve been in the same role for 15+ years. It’s a lot smarter to stay there and put your retirement on hold for now. Remember—it won’t be forever. Think of it more like a “putting in the last extra mile” situation.
Putting the brakes on your retirement plans for now also gives you further opportunity to add more funds into your superannuation account. Some super funds even have a clause that means you’ll receive more money by delaying withdrawing for a few years, with potentially up to 24% more benefits coming your way.
The differences between what a 65-year-old may receive once retiring in comparison to what a 70-year-old could receive may be as high as an 8% difference in funds per year. It’s a good idea to have a look at your super fund at this time, just in case you weren’t aware of such retirement clauses.
The cons of delaying retirement
By making the decision to delay retirement, there are a few cons to be on the lookout for. Firstly, your physical health is very important, and any issues that arise in the future could find you out of a job. Even if you look after yourself well, accidents and falls are statistically at a much higher level amongst older people. Regardless, many may find that they also need to leave work earlier to care for a partner or family member who has become too unwell to continue working.
It also might be tempting to get yourself further into debt throughout the pandemic as well. Taking out credit cards and personal loans might help in the short term to help you get back on your feet, but paying these off in the long term can result in even further debt. It’s important to have Plan Bs for all scenarios, just in case those retirement plans don’t pan out the way you expected them to.
Holding out on retirement a little longer
There is absolutely nothing wrong with planning for your retirement at this stage, but as 2020 has proven to all of us, it’s a good idea to ensure you stay flexible or have adaptable plans that can easily be changed. The future is so unexpected that it’s hard to stay one step ahead, but being as organized as you can will assist with navigating these uncertain times.
However, it’s also important to note that delaying retirement at this time might just not be possible, and you’ll need to look at every angle to see what an unexpected retirement might look like for you and your family.
Written Exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.
In the weeks following news of the corona virus outbreak, the S&P 500 lost over one third (34%) of its value (between February 19th and March 23rd).
Unemployment figures so far have fallen to 6.7% for the month of November, down from 11.1% in June, yet the S&P 500 has rallied 61.87% from the March 23rd low (through November 30th).
Markets and the economy seem to have decoupled—should we be worried? Have we seen this before? Let’s look at past major market declines to see how markets and economic measures have acted in the past.
In the 1973–74 market crash, the S&P 500 bottomed on October 3rd, 1974, and started to rally forward while unemployment continued to increase until May 1st, 1975, seven months later.
In the aftermath of the tech bubble bursting in the early 2000s, the S&P 500 bottomed on October 9th, 2002, after dropping 49%; and it began a swift rise while unemployment rates also continued to increase for nine months until June 2003.
In the aftermath of the financial crisis just over a decade ago, the S&P 500 bottomed on March 9th, 2009, after losing over 56% of its value. The markets began a lasting bull market while the news and data grew worse. Unemployment continued to increase through October 2009 (eight months later), GDP continued to decline through June 2009, and bankruptcies of banks continued at record rate throughout 2009 and into 2010. Again, the stock market seemed to have “decoupled” from economic data.
The stock market is considered a “leading economic indicator.” The news and measurements of the economy determine what has happened while the market looks forward to what may be coming.
There is precedence for what is happening with markets rebounding before we see the elusive “light at the end of the tunnel.” History shows that markets have typically rebounded ahead of economic measurements.
So, what is next?
The events that have unfolded in 2020 emphasize how unpredictable the future is and will continue to be. While many knew that the possibility of a global pandemic existed, we had no idea when it would strike, causing the 34% drop in February and March while fear took control of the markets. Further, economic measurements did not signal when markets would begin a recovery. Once again, there was no “light at the end of the tunnel” to signal the 62% market surge from March 23rd through November 30th.
We may not yet be through the worst of this pandemic. Markets may drop again, possibly even further than they did in March. Perhaps the roll out of the vaccine will change things more quickly than previously expected. Maybe the market will continue to grow from here.
The future is fundamentally unpredictable, and the world is always changing; yet the very real effects of fear and greed that each of these cycles elicits is predictable and consistent. We know that fear and greed create chemical reactions in our brains that lead to poor decision making. We need a disciplined framework to lean on to keep from making decisions we later regret.
The best strategy for capturing the highest risk-adjusted returns remains keeping your money invested in a massively diversified portfolio, rebalancing when your allocation deviates from its target. This will have you take advantage of market swings.
At Merriman, our rebalancing sensitivities were triggered in March and April for many portfolios. This generally had us buying stock funds after the big decline with proceeds we pulled from bond funds after they had rallied in response to the fear of current events. Going further back, rebalancing had us trimming from stock funds throughout the more than decade-long bull market that started with the recovery from the financial crisis of 2008 to add to our bond funds, preventing greed from taking those profits back.
Rebalancing has us buying asset classes at low prices when fear can make it difficult, then selling asset classes after they have grown to higher prices when greed can have us wanting more.
Rebalancing is a disciplined framework that helps us with the number one goal of investing: Buy Low, Sell High.
Feel free to reach out to us if you’d like to discuss how to apply rebalancing to your specific situation!
Important Disclosure: Past performance is not indicative of future results. No investor should assume that future performance of the S&P 500 will be similar or equal to previous years/periods. The S&P 500 is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S stock market. S&P 500 performance data was obtained from Yahoo Finance.
The Tax Cut and Jobs Act (TCJA) passed at the end of 2017, and the Setting Every Community Up for Retirement Enhancement Act (SECURE) passed at the end of 2019. These both made significant changes to annual tax-planning strategies.
The COVID-19 pandemic and the CARES Act relief package that followed created a new layer of complexity. Unfortunately, many taxpayers miss opportunities for significant tax savings.
Here are six moves to consider making before the end of the year to potentially lower your taxes both this year and in years to come.
Take the Standard Deduction Later. The new tax rules nearly doubled the standard deduction and eliminated many write-offs, limiting the benefit of itemizing deductions for most taxpayers. However, you can optimize your deductions by “bunching” itemized deductions in a single year to get over the standard deduction threshold and then by taking the standard deduction in the following year.
Example: Instead of giving $10,000 to charity annually (which will likely leave you with the standard deduction anyway), gift $50,000 every 5 years. This will give you a greater tax benefit in the first year while still claiming the standard deduction in the other years to maximize tax savings.
Pre-Pay Your Medical Expenses. Have major medical-related expenses coming up? You can potentially maximize the tax deduction by paying out-of-pocket medical expenses in a single calendar year—either by pushing payments out to the next year or pulling later expenses into this year.
A surprising number of medical expenses qualify, including unreimbursed doctor fees, long-term-care premiums, certain Medicare plans, and some home modifications.
Note: Medical expenses are an itemized deduction, so this strategy may be best used with the “bunching” strategy described above, including possibly paying medical expenses in a year you maximize charitable donations.
Give Money to Your Favorite Charity Right Now from Your IRA. If you’re over 70 ½, you can make up to $100,000 of annual Qualified Charitable Distributions (QCDs) directly from your IRA to a qualifying charity. Even better, for retirees who don’t need to take their Required Minimum Distribution (RMD) each year, these qualified charitable distributions count toward the RMD but don’t appear in taxable income.
Even though the CARES Act allowed RMDs to be skipped in 2020, you can still make a QCD this year.
Note: QCDs must be made by December 31 to count for this tax year.
Take Advantage of Years in a Lower Tax Bracket with a Roth Conversion. A Roth conversion can permanently lower your taxable income in retirement by converting tax-deferred assets (IRA / 401k) into tax-free assets in a Roth account. It is best to do this in years where you are in a lower tax bracket than you expect to be in the future.
Example: If a taxpayer at age 63 is in the 12% tax bracket, then moving $10,000 from an IRA to a Roth account will owe an additional $1,200 in taxes. That same taxpayer at age 73 may be in the 24% tax bracket due to Social Security, pension, and RMD income they didn’t have at 62. Taking that same $10,000 from an IRA will now result an in additional $2,400 in taxes.
Optimize Your Investment Portfolio to Improve Expected After-Tax Return. Prior to the TCJA, you could write off some fees you pay for investment management. The TCJA did away with that deduction. There are still ways to pay fees with pre-tax dollars that may make sense depending on the types of accounts used.
Likewise, some investments will be more tax efficient, and other investments will be less tax efficient. Where possible, move the most tax-efficient investments into a taxable investment account and the least tax-efficient investments into a tax-advantaged retirement account. The goal is to determine an ideal overall allocation, even if each individual account has a slightly different allocation.
Both strategies above can potentially help maximize the after-tax return on investments.
Optimize Your Retirement Contributions. The most important step you can take right now to reduce your taxes this year may be to review how and where you’re making retirement contributions. You may be missing out on critical tax savings (and investment growth) if you’re not optimizing your contributions.
Potential retirement account strategies people often miss include Solo 401k for self-employed individuals, backdoor Roth contributions, or “mega” backdoor Roth contributions at certain large employers.
Everyone’s situation is different, and today’s retirement environment is complex. Working with a financial professional who coordinates with your CPA can help ensure you’re not missing any opportunities to optimize your portfolio and pay less in taxes.
Investors like you are, by definition, actively planning for your financial future. At Merriman, we understand that you also want to make sure the world is bright for future generations.
To help align your investments with your values, we offer our Values-Based Investing portfolios. These portfolios are built in a manner consistent with our overall investment philosophy and designed to deliver similar after-fee, after-tax returns while offering you the ability to have an impact through your investment choices. One of these values-based options is our Sustainability portfolio. The UCLA Sustainability Committee defines sustainability as “the physical development and institutional operating practices that meet the needs of present users without compromising the ability of future generations to meet their own needs, particularly with regard to use and waste of natural resources.”
Our Sustainability portfolio focuses on including and overweighting companies that score high on sustainability measures. By choosing this portfolio, clients have the ability to shift money away from companies that have negative environmental impacts and into companies that rank better than their peers.
For the equity allocation in our Sustainability portfolio, we have selected funds managed by Dimensional Fund Advisors. When it comes to determining environmental impact, Dimensional’s approach to sustainability investing stands out. While many asset managers offer binary screening to exclude certain securities, Dimensional tilts toward companies that rank high on its sustainability framework while reducing the weight of companies with negative scores. This approach ensures a company doing better than its peers is rewarded even if it lags behind other companies in different sectors. This process is important because while a software company won’t have a very large environmental impact, investing in an energy company that has better environmental business practices than its peers can end up being more impactful on reducing carbon emissions in the future.
Incorporating sustainability considerations is a complex task. The sustainability funds we have selected use a Sustainability Scoring Framework on an industry level. The table on the right shows how the sustainability scores are determined, taking into account both the greenhouse gas emissions the company reports as well as potential future emissions from their fossil fuel reserves. This process penalizes companies that enable others to emit more or will themselves emit more in the future.
Dimensional also screens out companies with particularly negative practices around factory farming, cluster munitions, tobacco, and child labor.
Equities aren’t the only asset class where our portfolio includes sustainability considerations. Real estate has a high environmental impact and is an asset class where we are able to successfully incorporate sustainability considerations with minimal impact on investment returns.
Per the UN Enviroment Programme (UNEP), “The construction and operations of buildings account for 40% of global energy use, 30% of energy-related GHG emissions, approximately 12% of water use, nearly 40% of waste, and employs 10% of the workforce.”
As shown in the graph below using data from the Intergovernmental Panel on Climate Change, buildings have the lowest cost to reduce emissions. A great example of this comes from the iconic New York Empire State Building, which in 2010 underwent a retrofit. Windows were rebuilt, HVAC was replaced, and reflective insulation was installed. These changes resulted in the building having an annual energy reduction of 38% which translates to a cost saving of $4.4 million per year. This type of cost saving is also beneficial to the investment as profits from these endeavors are passed through to the investors.
Source: VERT Asset Management
We are partnering with some of the most informed individuals in the field of sustainable real estate investing by using the groundbreaking Global Sustainable Real Estate Fund from VERT Asset Management. This fund targets companies that meet a threefold criteria of environment, social, and governance factors. These include both positive and negative screening and tilts. The fund overweights REITs with energy, GHG, and water reductions and also screens out prisons, businesses, or companies with environmental fines. The Venn diagram below shows how VERT incorporates a multi-dimensional scoring methodology. VERT focuses on companies that exhibit “Comprehensive Excellence,” those that fall in the middle of the Venn diagram. After this, VERT targets “Focused Excellence” REITs which fall into two of the Venn diagram categories. In this way, VERT builds a portfolio targeting the best of the best first.
Source: VERT Asset Management
There is more than one way to invest in line with your values. Whether by using sustainable funds like those from Dimensional and VERT, or one of our other investment offerings, Merriman is by your side. We want to make sure your investments not only fulfill your financial goals but also allow you to live fully, knowing that you are making a difference for future generations.