Moving On Up – Ways You Can Prepare for Your Next/Forever Home

Moving On Up – Ways You Can Prepare for Your Next/Forever Home

 

High on the list of stress-inducing situations is the process of buying a home. And while folks tend to think of the first home as being the hardest, I believe it is the next or your “forever” home that causes the most consternation.

The process of buying a home has a lot of moving pieces to contend with for the buyer; and when you add in the sale of your existing property along with the need to be financially stable enough to balance both homes (hopefully not for long), it can make the move feel untenable. Here are a few things that I wish I had known back when I was making that move:

  • Cash is KING right now. Having excess savings set aside will help the process—but it is not the only way to finance your move.
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  • You may be able to use your current home’s equity to finance your down payment. Depending on the situation, doing this can give you a leg up on the competition, particularly in this hot real estate market. To accomplish this, you may be able to use a home equity line of credit (HELOC) or a second mortgage. In some cases, a bridge loan may also be a wise decision.
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  • Your investment portfolio may offer some temporary cash for that next down payment. If you have assets in a taxable investment account and don’t want to sell them, you may be able to use a margin loan or a securities-based line of credit. Like a HELOC, you can borrow against the value of something—in this case, your stock portfolio.
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  • You may be able to negotiate a lease back of your current property if the next place is not available.
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  • With home prices on the rise, rolling equity into your next home could help keep your payments reasonable.
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  • Speaking of payments, interest rates are also on the rise. Working with an experienced mortgage broker can help you get set up for success. Start that process early and look for opportunities to lock in lower rates while we have them.
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  • Practice your new payments. Setting aside the additional amount you expect to pay after your move can accomplish two things: Add to your savings and get you used to higher expenses.
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  • Get creative! There are many ways to make that second purchase successful. An experienced team can help you find ways to get your offer accepted.
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  • Have patience. Buying a home can be stressful, especially when you already have a property. Patience and a sense of humor can go a long way toward making it a rewarding experience!

 
We love helping our clients navigate changes, like moving up. If you have questions about how to do this successfully, let us know.

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Common Investor Mistakes During Market Corrections

Common Investor Mistakes During Market Corrections

 

When it comes to investing, market corrections are inevitable. Since 1950, there have been 37 declines in the S&P 500 of 10% or more—or approximately one every two years. Enduring these corrections is the price we pay as long-term investors striving to meet our financial goals. How we act during these time periods is what separates the rookies from the professionals and can dramatically alter how successful we are in achieving those goals.

We all tend to have a higher risk tolerance when markets are performing well. During a review with our financial advisor in the comforts of a home or office, we can easily imagine a world where stocks might be 10% to 20% cheaper on paper and how that may impact our financial goals. However, when we think about future risks in the markets, we tend to underestimate how we will feel in the moment. We lose sight of what else is happening in the world that is causing the markets to decline and how that might impact us personally. This year is no different, and the laundry list of reasons is long:

  • The war in Ukraine is costly
  • Inflation is the highest in 40 years
  • The Federal Reserve is tightening monetary policy
  • The supply chain is a mess
  • Mortgage rates are rising at the same time housing prices are at all-time highs
  • The pandemic is not over
  • Market valuations are too expensive, and we are overdue for a reset

The bottom line is, there is always a reason for why we experience market volatility, and how that impacts us personally can create stress, fear, and anxiety. When we let our emotions take over, we naturally have an urge to do something about it. These emotional reactions can lead to mistakes that can reduce the probability of meeting our finance and investment goals. Below are common mistakes investors make during market corrections and steps we can take to help mitigate costly errors.

 

Mistake #1: Looking at the market daily

When headlines are scary, the daily moves in the stock market are volatile and unpredictable. Checking the market or your portfolio frequently will only heighten any fear and anxiety and may result in poor investing decisions. During difficult markets, it is important to remember that you have an entire team working for you at Merriman. We have designed your portfolio using decades of academic research to weather all types of market environments so you can have peace of mind. We are also here to take on any blame for when things do not go as planned. You should take advantage of the resources at Merriman and schedule a time with your advisor to help refocus on your long-term plan.

 

Mistake #2: Deviating from an investment plan or not having a plan at all

Another reason you have an advisor at Merriman is to create an investment plan that aligns with your goals, return expectations, and risk profile. The plan is a customized, long-term strategy meant to withstand multiple market cycles. If you have the urge to change your plan during a market correction, then have a conversation with your advisor and ask the following questions: Have my long-term goals changed? Am I still on track to meet those goals? If I deviate from my investment plan, how will that impact the probability of successfully meeting my goals? These questions will help reduce any reactionary emotions and shift your mindset back to the big picture.

 

Mistake #3: Trading more frequently or trying to time the bottom

Day trading and market timing strategies are automated systems that utilize algorithms and programmed rules designed to execute trades in milliseconds. This places the human day trader at a significant disadvantage. While the data supports that day trading or attempts to time the market are not additive to long-term returns, market corrections can be an excellent time to be a buyer.
However, it is vital to have an investment plan in place so you are prepared to execute in the moment. As an example, a rebalancing strategy is one method that is highly effective for long-term results. This removes emotions from the equation and allows for a disciplined plan of attack during market downturns.

 

While your feelings play a vital role in determining the right long-term strategy for you, we cannot let emotions dictate our investing decisions, particularly during market corrections. This can lead to short-term mistakes that, left unchecked, can have negative impacts on your retirement goals. A disciplined investing approach based on facts, not emotions, is the winning formula.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Let’s Talk About Living with Student Loans

Let’s Talk About Living with Student Loans

 

Let’s Talk About Living with Student Loans

I have more student loan debt than I care to admit. But it was my decision, and I own it.

 

There’s been a lot of chatter in the news lately about student loan debt. With the total U.S. student loan debt reaching $1.75 million (mine included), the calls to forgive student loan debt have reached a crescendo—as if, if we scream it loud enough, the debt will just disappear into the ether. Removing the prospect of a presidential magic wand making it go away, the real question now is this: how do you save for the future, pay down your debt, and live fully?

I often read news articles detailing the hardship new graduates face when they struggle to pay down their loans and subsidize their lifestyles. I see a lot of finger-pointing toward a rigged system, corporations underpaying, or the predatory nature of lending. This isn’t to dismiss legitimate concerns of these institutions, but too often, I see a lack of personal agency. Behind some news articles, you find the subject of the article owns a Mercedes or rents an apartment that their social status dictates they should have but not the one their wallet demands. Take a step back.

Can you answer “yes” to these questions?

  • I know exactly how much money I’ll have at the end of the month.
  • I do not live paycheck to paycheck.
  • I can pay my bills and still save for wish list items.

If you answered “no” to any of those questions, it’s time to look at your current lifestyle. There’s an emotional component to finance that we often overlook. For many of us, our relationship with money becomes a reflection of who we are as a person. No one proudly admits they spend $150 on brunch a month. And no one boasts about their tendency to avoid their bank accounts out of fear of what the balance will be. After college, I had a coming-to-Jesus moment when I decided that to live my life fully, I needed to be the one who dictated where each and every dollar went. Enter zero-based budgeting.

If you’re not familiar with it, zero-based budgeting requires you to assign each and every dollar of your paycheck to a job. By assigning each dollar, it exposes your spending habits and tallies all the dollars and cents that have a sneaking tendency to add up well beyond your expectation. You must decide, “Do I need to budget $100 on Uber rides? I’d rather apply it to something else more important.” There is a mental calculation and trade off that must occur for you to affirm how your money is spent. There are several apps you can find to assist with this, such as You Need a Budget (YNAB) and EveryDollar. Having done this myself for a while now, I have found significant savings that I use to apply toward next month’s bills, thus providing me a safe buffer should I run into emergency expenses. I cook meals at home, and now suddenly I have $150 to allocate how I want (hello, Hawaii fund!).

Here’s the point: budgeting every dollar sets you free. It sounds counter-intuitive, but it’s not. I’ve been able to tell every dollar what to do. I can set goals for myself, make trade-offs, and avoid incurring more debt. That constant fear of not knowing if I’ll make it to the next paycheck has vanished. It’s also worth noting that while it may feel difficult at first to adjust, your income is likely to increase as you pay down your loans. Luckily, your spending habits will stick even as you increase your wealth.

How do you save for the future, pay your debt, and live fully? You take control of your financial situation—warts and all.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Spring Document Cleaning

Spring Document Cleaning

It’s spring, which means it’s time for some spring cleaning—and this spring’s focus is paperwork. I don’t know about you, but I don’t love paperwork. I’ve spent years working toward zero paper, and I’m now finally down to a handful of documents. I’ll share some tips below so you can minimize your paperwork, too!

Document delivery

If you’re tired of getting statements for your accounts or bills in the mail, try signing up for e-delivery instead. This will help save time and energy opening and sorting mail and having to dispose of it as well. Don’t forget to proactively visit the proper websites to check those statements and pay those bills.

Document retention

We all know we need to hang onto certain tax, asset, and legal documentation, but sometimes the specifics can be tough to remember. Here’s a quick list of the most common situations where you’ll need to keep documentation. Please see this checklist for a detailed list.

Income tax returns

Keep at least three years of state and federal tax returns and supporting documentation on file. Supporting documentation includes records that prove any income, deductions (including medical expenses), or credits claimed (W-2, 1099, end-of-year statements from banks and investment accounts). Depending on the state (like CA), you may need to keep tax returns for longer than three years. If you think you forgot to report income and it’s more than 25% of your gross income, keep six years of tax returns. If you are claiming a loss for worthless securities or bad debt deduction, keep records for seven years.

Investment accounts or bank accounts

Consider keeping the most current statements on file and the end-of-year statement until you complete your tax return.

Retirement accounts

Consider keeping documentation on any contributions, withdrawals, and conversions. If you made non-deductible traditional IRA contributions, keep Form 8606 until the account is fully withdrawn to track cost basis.

Debt (student loans, mortgage)

Keep the loan documents until the loan is paid off. Once the loan is paid off, keep documentation proving that the loan has been paid in full.
Property (automobiles, real estate). Consider keeping any deeds, titles, settlement statements, or bills of sale until you sell the property. Keep documentation showing purchase-related fees that were capitalized until you sell the property.

Home improvements

Keep any receipts related to home improvements as they may be used to substantiate any adjustments to the cost basis for your property.
Insurance policies. Keep the most current policies on file.

Estate plan

Keep a copy of your Will, Trust(s), Powers of Attorney (General and Healthcare), Living Will or Healthcare Directive, and beneficiary designations on file, and store the originals in a safe place.

Document storage

To reduce your paperwork, try storing these must-keep documents on your secure personal computer. Of course, with this storage method, it’s important to back up your electronic files and have firewall protection.

Document disposal

Please remember to shred any documentation that contains sensitive personal information, such as your Social Security numbers or account numbers. A personal shredder should do the trick and will be less expensive in the long run if you’re disposing of documents each year.

Password organization

How are you currently storing and keeping track of your passwords? I recommend using a cloud-based password manager like LastPass where you can store all your passwords in one place and only need to remember the “master” password to access them. LastPass has a random password generator to help you create complex passwords that are more difficult to hack. LastPass also offers two-factor authentication and doesn’t allow your “master” password to be reset to keep your account secure.

Digitize your photos

Does your paperwork include old family photos you’ve been meaning to digitize? Try sending them to a digitizing service like Legacy Box where they’ll scan and save them to a thumb drive, DVD, or the cloud. Legacy Box works with tapes and films, too. While this service may seem pricey, it might be worth paying someone to digitize those photos as they are priceless memories and should be backed up sooner rather than later in case something happens to the physical copies.

Inform your family

Make sure your family knows where you keep your documents and what your “master” password is in case something happens to you. This is especially important for estate planning documents. Having these conversations ahead of time will help alleviate the stress on your loved ones of not knowing what to do or where to find things.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

To Exercise or Not to Exercise: What to Do When You Have Options in a Private Company

To Exercise or Not to Exercise: What to Do When You Have Options in a Private Company

 

Working for a startup or a smaller private company can be exciting. You may be creating cutting-edge technology or providing services or products that will fill a need within an industry. It also means you may have the opportunity to become a significant stakeholder in your company before a single share of stock has been sold to the public. If you’ve been granted options in a private company, you may be asking yourself, “Is the potential reward of exercising my options worth the risk?”

This answer is a complicated, nuanced one that will depend on each individual and the company’s circumstances. That being said, I’ve done my best to distill some of the most important lessons learned in helping clients navigate whether to exercise options in their company while it is still private.

 

Never invest more than you’re willing to lose.

Your company is doing great things and you strongly believe that you’re moving in the right direction. You wouldn’t have chosen to take the risk of working for this company if you didn’t believe so. The inconvenient truth is that so many bright, promising startups or private companies fail each year. A lot of this has nothing to do with the company itself but is simply the result of factors outside its control—like the general market conditions at the time the company was anticipating raising another round of funding.

Before your company goes public or has a liquidity event, there isn’t a readily available market for you to sell any of the shares you received when you exercised. Until your company has actually gone public, there is a reasonable risk the shares you hold from exercising could be worth nothing. Companies are also taking longer and longer to reach a point at which they are ready to go public or IPO. You must go in with an expectation that you could be waiting 10 or more years for the opportunity to sell your shares in the open market. If the possibility of losing 100% of your investment makes your palms sweat, you likely will want to wait until your company is actually public before you exercise your options.

 

Do take on an amount of risk appropriate for your situation.

It is important to understand the risks and the worst-case scenario of exercising options in a company that is not yet public. On the flipside, exercising options in a private company can have tremendous outcomes for those who were able to buy in at an earlier stage. Before deciding how much to exercise in your company while it is still private, first take a look at your list of financial goals and priorities:

  • Do you have a sufficient emergency fund of at least three to six months of expenses set aside in cash in a savings or checking account?
  • Are you maximizing savings into the retirement accounts available to you? Have you evaluated whether you’re on track to meet your target retirement date with your current rate of contributions?
  • Are you saving enough for other major goals like your kids’ future college expenses?

If you can say yes to all these questions and are willing to accept the risk, then by all means, allocate a certain portion of your income or savings toward exercising options in your company. It is almost always much less expensive to exercise options while your company is still private than after it has gone public. This is because the valuation (409a) while the company is private is usually much lower than the price at which the company will be valued once it is public. A significant increase in valuation will mean a much larger tax bill per option that is exercised.

 

Understand the tax consequences.

Options are complicated. The type of options you receive will dictate your exercise strategy and the resulting tax implications. You cannot simply look at the cost to exercise as your total cost to purchase shares in your company. It is important to be aware of your company’s most recent 409a valuation, which will determine the amount of income you are recognizing each time you exercise an option. You will be paying tax on income for shares you still cannot sell and may not have an open market for anytime soon. Exercising stock options without fully understanding the tax impact could mean receiving a surprise tax bill and not having enough cash set aside to cover it.

If you exercise Non-Qualified Stock Options (NSOs), your company will withhold 22% of the income recognized for federal taxes. This may or may not be enough to cover your total tax liability for the exercising depending on the amount and makeup of your other income. You’ll want to estimate the additional taxes you may owe due to the exercise of NSOs and make estimated tax payments or set aside enough funds to cover the tax liability when you file.

If you exercise Incentive Stock Options (ISOs), your company will not withhold any amount for federal taxes, and you will be expected to cover the entire tax liability through estimated tax payments. Incentive Stock Options can also create what is called Alternative Minimum Tax (AMT), which is complicated to calculate and track on an ongoing basis.

 

Ask for help.

There are certain projects in my home I’m willing to tackle and certain projects I’m more than happy to hand off to professionals. Paint the guest room? No problem. Rewire and update the electrical in my kitchen? You better believe I’m leaving that entirely up to the capable hands of a licensed electrician.

When we talk about options, and especially options in a private company, we are entering a territory where the DIY approach can fail you miserably. Employ the help of a finance or tax professional who has expertise and experience navigating private company stock option strategy. You don’t want to be in the position of wondering why you have tax bills that are much higher than what you were expecting or realize that failing to file a form by a certain deadline is going to cost you thousands of dollars in the future. A qualified professional can help you determine the appropriate amount of risk to take, given your current financial situation and goals, while providing peace of mind that there are no major tax surprises on the horizon.

Is your company the next Apple? I have no idea. What I do know is that the future rarely plays out exactly how you expect it will, for better or for worse. All we can do is make our best calculated bet with the information and resources we have at the time. After that, all that’s left to do is embrace the adventure.

 

 

Disclosure: The material is presented solely for information purposes only are not intended to provide specific advice or recommendations for any individual. The information presented here has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.

 

Considerations for Being Self-Employed Versus an Employee

Considerations for Being Self-Employed Versus an Employee

 

It’s no question that the pandemic has resulted in major shifts in the workforce. Whether it be the large-scale layoffs in March 2020 or the Great Resignation that more recently impacted personnel changes, we know that millions of Americans have left their jobs due to burn out and/or to pursue starting their own businesses in the hope of finding something that brings more personal fulfillment. In 2021, there were over 5 million new business applications submitted, which is an astonishing 55% jump from 2019.1

If the idea of starting up your own business has been on your mind, you have more than likely asked yourself if it’s the right thing to do financially—or at the very least are curious about all the differences between working for a company or being self-employed. We highlight the pros and cons for both options below.

 

Taxes

First and foremost, taxes are the greatest change when making the switch from employee to self-employed. Most employed individuals are familiar with various line items for federal and state taxes, Social Security, and Medicare amongst many other potential employer-provided benefits (more on those other benefits later). When you’re self-employed, you, of course, still pay federal and state taxes, but in place of the regular line items for Social Security and Medicare, the IRS adds a self-employment tax. Typically, the Social Security and Medicare amounts are figured by employers, but self-employed individuals (or their tax professionals) need to calculate out what their self-employment tax looks like. The self-employment tax rate is 15.3% which consists of two parts: 12.4% for Social Security and 2.9% for Medicare. And, just as employers do, you can deduct the employer portion of your self-employment tax to calculate your adjusted gross income.2

Sticking on the topic of deductions, self-employed individuals can deduct expenses for their business that can reduce taxable income. Things like phone bills, internet bills, home office expenses, business travel, and health insurance are all common examples of deductible items for the self-employed, and these are all things you can’t typically deduct as an employee. While finding deductions can sound fun, it also means a lot more work on the administrative side by tracking each of these items and having proper documentation to help you make sure you’re maximizing your deductions.

 

Savings

As an employee, you can maximize your pre-tax or Roth 401(k) contributions up to the IRS limit of $20,500 or $27,000 for those age 50 and above (2022). When you’re self-employed, you are eligible to make contributions to a solo 401(k) as both the employee and the employer. This means you can contribute up to $20,500 for your employee contribution then contribute up to 25% of your compensation on top of that for the employer match.

With regard to savings, one item that could be considered a small perk of being self-employed is having the freedom to choose which custodian you utilize for your retirement savings.

 

Benefits

Going back to the topic of benefits, employees are usually offered benefits through their employers, such as paid time off, health and life insurance, free/discounted fitness memberships, retirement plan matching or employee stock awards, donation matching, paid family leave, adoption assistance, and sometimes even retailer specific discounts. These benefits can certainly provide peace of mind beyond their monetary value for some and don’t exist when you’re self-employed.

 

Flexibility/Stability

One huge benefit of being self-employed is the amount of flexibility it provides. You can decide to work from home, a local café, or even beachside. You choose your own hours and aren’t limited to the amount of paid time off you’re allotted each year when you feel like taking a vacation. You’re also your own boss, so there’s no risk of having a supervisor managing you and potentially causing friction. On the flip side, there also aren’t any paid holidays or sick days. Without the oversight of a manager and being fully responsibility for the growth of your business, it takes a great amount of motivation and focus to be self-employed, which could also result in longer hours. There may be periods, especially in the early stages, where earnings may be lower or inconsistent, so making sure you’re prepared will be of utmost importance. Being okay with failure before finding success is a common theme amongst entrepreneurs, and remember that what you gain in freedom, you may also lose in security.

Being an employee typically means stable income; however, this also means your livelihood is dependent on your company’s success. The stability of working as an employee can be more than a steady source of income—it can also mean long-term career development and opportunities and more convenient access to building long-term professional relationships.

 

It’s quite clear that there are many considerations for anyone thinking about making career changes, but there’s no reason you should have to think things through on your own. It’s ultimately a personal choice, but we recommend getting in touch with your advisor or clicking here to connect with an advisor at Merriman to discuss what makes sense for you and your lifestyle.

 

 

Sources

1 https://www.today.com/video/american-workers-are-becoming-their-own-bosses-through-the-great-resignation-130454597857

2 https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

 

Disclosure: The material is presented solely for information purposes and is not intended as specific advice or recommendations for any individual. The information presented here has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.