How We Understand Financial Freedom, and How We Actually Should

How We Understand Financial Freedom, and How We Actually Should

 

Financial freedom is especially important for young people, particularly students. They frequently overspend on online courses, products, clothing, and even essay review services like Best Writers Online.

As a result, they feel a sense of financial deficiency. To avoid this problem in the future, it is critical to learn how to properly manage one’s budget.

 

What Exactly Do You Mean by Financial Freedom?

What prevents most people from following their dreams? Money, only money! This represents a specific stage of life. Some may object, saying, “But money does not make you happy!”

And it is true. The primary mission of money is to provide people with safety and freedom. Also, it provides us with the opportunity to live our lives the way we wish. Indeed, it is difficult to argue the point that it is easier to be happy with money than with an empty wallet.

Financial freedom allows you to kill two birds with one stone: have enough resources for living and be happy at any stage of your life.

 

What Is Financial Freedom?

Financial freedom is defined as a state in which a person’s income received without active participation (passive income) significantly exceeds his expenses for maintaining the desired lifestyle.

 

Why Is Financial Freedom Important?

Being financially free means that you have the freedom to:

  • Choose your lifestyle;
  • Buy the things you want regardless of your regular salary;
  • Spend money on entertainment;
  • Invest in projects and the property estate sector;
  • Avoid credit loans;
  • Have access to free money whenever you need it.

Both children and adults must learn the fundamentals of financial freedom—the sooner, the better. Adults can take a long time to learn something new, putting off all their business until later.

The most effective option, of course, is to teach students, who are more intellectually flexible than adults and who have a greater understanding of why this is important than schoolchildren.

Students usually spend most of their time writing essays or scientific papers. However, financial literacy is a much more valuable issue that they will face once they become self-sufficient. As a result, it can be wise to delegate written work to the professionals of an essay review service such as Writing Judge in order to have more time to focus on learning the basics of financial freedom.

 

How Do You Achieve Financial Freedom?

How many of us have wished to be financially independent but concluded that it was out of our reach? We frequently blame our circumstances, other people, or even our bad luck.

However, with proper planning, anything is possible. Here are some pointers to get you started:

#1 – Time Is More Important Than Money

A person who has achieved financial independence begins to see boring meetings and routine work in a new light. He understands that his time has a higher value, and it is better to spend it on important activities. Things that must be done but are of no interest can always be delegated to someone else.

#2 – Always Have Sources of Additional Income

To be financially independent, you must find a passive source of income. Do not refer to an additional source of income as a part-time job; it could simply be another job.

In most cases, one can do it for free or for a small amount of money at first until he improves his skills in a specific field. Over time, this source of passive income can be even more profitable than the main job.

#3 – Make It Possible for Your Money to Grow

The traditional methods of saving money under a pillow or in a home safe are already out of date. Inflation quickly depletes these savings.

Financial crises often leave you wondering whether you should invest. There are various ways to generate passive income from assets, including stocks, alternative investments, and real estate. Simply select what is best for you.

There have never been better strategies to develop equity in the past. The miracle of compound interest will dramatically improve your savings. It may appear complicated, but everything is straightforward: if you constantly contribute, you will receive a proportion of the growing amount each year.

Open a brokerage or an individual investment account and learn how to invest on your own. There are numerous competent materials and courses available on the Internet that can be mastered for free. Create a managed portfolio and replenish it once a month. Or determine if it’s time to hire a financial advisor for guidance.

#4 – Be Deliberate in Your Actions

A person seeking financial freedom does not believe in lotteries and does not invest large sums simply because “everyone does it.” Follow your instincts rather than trends and popular opinion.

#5 – Income Should Be Carefully Spread Out

Invest in various areas to avoid losing everything to the next “black swan.” Even if some assets depreciate, the rest will serve as insurance.

#6 – Read Books on Finance

Read books about financial freedom and ways to achieve it—not to impress others but to expand your knowledge. One devotes a significant amount of time to earning money.

Understanding how money works make sense if you want to dispose of it competently. The wise man researches customer reviews before purchasing household appliances. The same thing applies to money. Learn from the best in this field.

#7 – Plan Ahead of Time for Potential Crises

The world has experienced financial turmoil over the last few decades, including the financial crisis of 2008 and the pandemic-induced recession. It is worthwhile to keep an eye out for signs of impending crises to strengthen your investments’ financial situation. This will also aid in the proper management of available funds.

#8 – Do Not Spend Money on Things That Are Not Necessary at the Time

Goods on sale, incomprehensible investments, and other unnecessary categories of expenses do not contribute to financial freedom. Give up impulsive spending.

#9 – Use Your Money to Help Others

Not everyone is a philanthropist. A small donation, on the other hand, is accessible to nearly everyone. When we help the rest of the world, we benefit ourselves. And this alters our relationship with money.

#10 – Manage Your Monthly Budget

The best way to ensure that all bills are paid and savings are replenished is to create and stick to a monthly budget. This is a common routine that aids in the achievement of financial objectives while discouraging unplanned spending.

It is not difficult to live a simple life. Many wealthy people developed the habit of living within their means before becoming wealthy. To do so, you must analyze costs on a regular basis and find reasonable ways to save without sacrificing your quality of life. For example, when you go shopping, don’t go to the city center where prices are higher; instead, head to a remote quarter where the cost of the same goods is much lower.

#11 – Automate All Your Payments

On payday, distribute funds depending on monthly needs. If you pay a loan, send payment as soon as you receive it. The same is true for savings: it is preferable to set aside a specific amount at the beginning of the month and then spend the remainder.

This also applies to utility bills, mobile communications, and the Internet. All essential payments can be set up in your bank application so you do not even have to send them manually. There will be no incentive to put something off until later.

#12 – Invest in Your Health

Invest in your health by seeing doctors, particularly dentists, on a regular basis. Many difficulties can be avoided by simply altering one’s way of living.

Outdoor walks, healthy eating, and exercise therapy help to prevent several common ailments, such as hypertension, gastritis, diabetes, and obesity. Remember that poor health can compel you to retire earlier than expected and earn a smaller monthly income.

 

Conclusion

Control revenue and spending, investigate investment opportunities, and begin accumulating money as soon as possible. Financial freedom is more than just a certain level of wealth. This is an opportunity to live debt-free, think strategically, and understand how to manage finances for the benefit of your family and others.

 

 

 

Written exclusively for Merriman.com by Lafond Wanda
Lafond Wanda is a professional content writer, copywriter, content strategist, and communications consultant. She started young with her writing career from being a high school writer to a university editor, and now she is a writer in professional writing platforms— her years of expertise have honed her skills to create compelling and results-driven content every single time.

 

 

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 it is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Happy New Year!

Happy New Year!

 

After a difficult 2020, many looked toward the new year through an optimistic lens. 2021 kept us all on our toes, with the continued pandemic and new strains, along with a turbulent market and rising inflation to name a few things.


While we don’t yet know what 2022 will bring for the economy, for markets, or for our own lives, there are still some things we can control.

 

As we welcome in a new year with hopeful expectations, let’s take a moment to recommit to those factors within our control:

 

Planning for Our Future

As we reflect on continued challenges this year, many are wondering what they can do to set themselves and their loved ones up for financial success. From getting creative with financial literacy for your little ones, to avoiding common pitfalls at early and mid-career points, to preparing for retirement and taking care of future generations, we see and help with it all. While we can’t predict what the future will hold, we can help you plan, prepare, and hold your hand through the transitions of life.

 

Building Better Financial Behaviors

Too often investors focus on markets and the latest fads when they should focus on themselves, their hopes, goals, and dreams. When we see the media focus on a trend, like we did with NFTs, cryptocurrencies, and inflation this year, it’s an important reminder to not be swayed from your investment philosophy. With the right amount of guidance and discipline, diversification can be the key to long-lasting financial freedom. 

 

May you and your family enjoy the warmth this season has to offer and a new year filled with hope, love and success!

 

 

 

 

 

 

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.

Overcoming Financial Fears

Overcoming Financial Fears

 

Early in my career, I had several instances of folks canceling their appointments with me last minute. Some were for emergencies with work or family, and some were for reasons such as “not being prepared to meet” or “not sure this is the avenue I want to take” or, in rare cases, saying nothing at all. It was easy to take that personally, but over the years I have come to realize that such cancelations or procrastination in general when meeting with a professional financial planner is often driven by fear.

Let me give you some context. When someone has a financial problem today, they often will hit the internet—Google, YouTube, a blogger whom they follow for answers. When answers are harder to come by, they might call a trusted friend or family member and ask for help. Getting even to this point takes time; the question may be put back on the shelf for another day. But let’s assume it is a big issue, like buying a new home and figuring out how to finance two homes for a time. This person will need answers, soon, and a professional advisor to help. From here, they may ask for a referral or hit up Google again for folks to call—but then it comes the call, scheduling, and SHOWING UP to the appointment. They have gone through five or more steps just to get to appointment day, and now they are ready to cancel.

Why? We live in a world where finances are not often discussed, even amongst our closest family. We have been taught that you don’t discuss it, and then we are bombarded for years with the Joneses’ owning the next big, expensive item. Facebook and Instagram have shown us the best of other people’s lives; and by comparison, we feel inadequate, even if our financial road has been relatively free of detours. This feeling can make it difficult to approach a professional and lay out our financial truth. But I am here to say that it doesn’t have to be.

As an advisor, I pride myself on being neutral. Your financial life up to today is what it is, and we cannot change those facts. If you have debt, feel like you should have saved more, are late to the game, or have gotten this far by sheer luck, it does not matter. In fact, it does not change who you are as a person. If you are asking for guidance, any great advisor will take the time to educate you on what they feel is best for your situation and will strive to make you feel at ease.

As you are searching for an advisor, look for someone who you feel you can trust. Meet with several if the first one isn’t right. In fact, check out our blog posts on what to look for in an advisor and the 10 reasons why clients hire us. Everyone has something in their financial past that they are not proud of, and airing that to a stranger can feel scary; but I promise that we are not the “financial confessional” I once had someone mention to me. We are here to help and would love to meet you.

 

 

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.

How Do Incentive Stock Options (ISOs) Impact Alternative Minimum Tax (AMT)?

How Do Incentive Stock Options (ISOs) Impact Alternative Minimum Tax (AMT)?

 

One of the most common areas where we see clients introduced to Alternative Minimum Tax is when Incentive Stock Options (ISOs) enter the financial picture.  To learn more about AMT and how it is calculated, so you can avoid a shock, check our blog post from last week.

ISOs can be a tremendous benefit to creating wealth, but they are often misunderstood and can pack a large surprise if not appropriately planned for.  Here are a few key terms to get us started:

  • Grant Date/Amount– Original date and number of shares awarded
  • Vesting Date– The date at which you are allowed to exercise your options
  • Exercise Price– Price paid for options, usually discounted from the current share price.
  • Bargain Element– Difference between exercise price and fair market value (FMV); drives potential AMT liability

ISO preferential tax treatment is attained when the shares are sold one year after exercise and two years after grant. When this criterion is met, the gains upon the sale will be considered long-term capital gains, as opposed to short-term gains which are taxed at current income rates.

 

Qualifying vs Disqualifying Disposition:

 

Qualifying Disposition
  • Exercise and sell one year after exercise and two years after grant – AMT liability in the year you exercise, and gains are considered long-term capital gains
  • Exercise and hold – AMT liability in the year you exercise but no additional immediate tax liability because the shares have yet to be sold

 

Disqualifying Disposition:
  • Exercise and sell within one calendar year – no AMT liability and gains are taxed as regular income
  • Exercise and sell within 12 months, across two calendar years – AMT liability in the year you exercise, and gains are taxed as regular income
  • Exercise and sell more than one year from exercise but less than two years from grant – AMT liability in the year you exercise, and gains are split between regular income rates for the bargain element and capital gains depending on holding period

 

The AMT tax liability mentioned in the scenarios above is determined based on the difference between the exercise price and the fair market value (FMV) of the shares on the date of exercise. AMT may result in a larger tax bill than a typical year without exercising options and thus will directly affect your household’s cash flow.  The good news is that when you end up paying AMT related exercising ISOs, you will likely receive an AMT tax credit, which can be used to offset your federal income tax bill in future years.  This is a great reason why involving a CPA to help keep track of all the moving pieces is highly recommended.

The 83(b) Election is an alternative approach to divesting company stock. If your company allows, you have 30 days from the grant date to notify the IRS and your company of the 83(b) election. This involves paying tax on the exercise price from the grant at regular income rates; there would be no AMT implication and depending on when you sell the shares, you would later realize short- or long-term capital gains. For shares which you expect to increase in value, this can provide a fantastic tax break. This is however considered a risky approach because the shares could lose value and you would have overpaid on taxes by making this election.

Please reach out to us if you would like to work through your specific situation.

 

 

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. 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.

 

How Do I Correct Excess Roth IRA Contributions?

How Do I Correct Excess Roth IRA Contributions?

 

Co-written by: Scott Christensen & Katherine Li

 

Contributing to a Roth IRA is a great way to receive tax benefits for retirement savers. If you already do or are planning to take advantage of this tax savings vehicle, it is important to familiarize yourself with the rules that govern these accounts. The IRS has put in place strict limits regarding the amount that individuals can contribute to their Roth IRAs, as well as income limits for determining who qualifies.

 

If you are a single tax filer, you must have Modified Adjusted Growth Income (MAGI) under $140,000 in order to contribute to your Roth IRA. The amount you can contribute to your Roth IRA begins to phase out starting at a MAGI of $125,000; if your MAGI is greater than $140,000, you can no longer contribute to the Roth IRA. For those who file as married filing jointly, your MAGI must be under $208,000 in order to contribute. The phaseout range in this case applies to those with a MAGI between $198,000 and $208,000. The maximum IRA contribution in either case is $6,000 for those under 50 and $7,000 for those 50 and older.

 

As a result of these strict limits, it is easy for taxpayers to overcontribute. So what happens when taxpayers contribute in excess of their contribution limit?

 

For every year that your excess contribution goes uncorrected, you must pay a 6% excise tax on the excess contribution. In order to avoid the 6% tax penalty, you must remove the excess contributions in addition to any earnings or losses on that excess contribution by the tax filing deadline in April. To determine your earnings on your excess contribution, you can use the net attributable income (NIA) formula.

 

Net income = Excess contribution x (Adjusted closing balance – Adjusted opening balance) / Adjusted opening balance

 

Note: If you find that you have losses on your excess contribution, you can subtract that loss from the amount of your excess contribution that you have to withdraw.

 

Reasons for Overcontribution

 

  • You’ve contributed more than the annual amount allowed.
    • Remember that the $6,000 and $7,000 dollar maximum applies to the combined total that you can contribute to your Traditional and Roth IRAs.
  • You’ve contributed more than your earned income.
  • Your income was too high to contribute to a Roth IRA.
    • Unfortunately, single tax filers who make $140,000 or more and those who are married filing jointly who make $208,000 or more are unable to contribute to a Roth IRA.
  • Required minimum distributions (RMDs) are rolled over.
    • RMDs cannot be rolled over to a Roth IRA.
      • If it is rolled over to a Roth IRA, the amount will be treated as an excess contribution.

 

Removal of Excess Prior to Tax Filing Deadline

 

If you find that you have overcontributed prior to filing your tax return and prior to the tax filing deadline, you can remove your excess contributions before the tax filing deadline (typically April 15) and avoid the 6% excise tax. However, your earnings from your excess contribution will be taxed as ordinary income. Additionally, those who are under 59 and a half will have to pay a 10% tax for early withdrawal on earnings from excess contributions.

  • Keep in mind that it is your earnings that are subject to an ordinary income and early withdrawal tax, not the amount of your excess contribution.

 

If you find that you have overcontributed after filing your tax return, you can still avoid the 6% excise tax if you are able to remove your excess contribution and earnings and file an amended tax return by the October extended deadline (typically October 15). 

 

Recharacterization 

 

Recharacterization involves transferring your excess contribution and any earnings from your Roth IRA to a Traditional IRA. In order to avoid the 6% excise tax, you would have to complete this transfer process within the same tax year. It is also important to note that you can’t contribute more than your total allowable maximum contribution. Thus, you must make sure that you can still contribute more to your Traditional IRA prior to proceeding with recharacterization.

 

Apply the Excess Contribution to Next Year

 

You can offset your excess contribution by lowering the amount of your contribution the following year by the excess amount. For example, say that you contributed $7,000 to your Roth IRA when the maximum amount that you could contribute was $6,000. The next year, you can offset this excess amount of $1,000 by limiting your contribution to $5,000. You are, however, still subject to the 6% excise tax due to the fact that you were unable to correct the excess amount by the tax filing deadline, but you won’t have to deal with withdrawals. 

 

Withdraw the Excess the Next Year

 

If you choose to withdraw the excess the following year, you will only have to remove the amount of your excess contribution, not any earnings. However, you will be subject to a 6% excise tax for each year that your excess remains in the IRA.

 

These rules can be confusing to navigate which is why we recommend involving your tax accountant or trusted advisor in these situations. We are happy to connect you with a Merriman advisor to discuss your situation.

 

 

Sources:

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf

https://www.nerdwallet.com/article/investing/excess-contribution-to-ira

https://investor.vanguard.com/ira/excess-contribution

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

 

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. 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.

 

Buying a Car: Does It Make Sense to Use Rideshare Instead?

Buying a Car: Does It Make Sense to Use Rideshare Instead?

 

The decision to buy a car today is different than it was a decade ago because of today’s rideshare options. If you’re in the market for a new car, there’s more to think about than shopping for the lowest price or best interest rate. Have you compared the cost of your car to the cost of using rideshare options? We have, and we’d like to share our thoughts.

Cost. Let’s compare some estimated costs of buying a car or using rideshare:

Using rideshare may cost about $7,500 less over a 10-year period—which is not a trivial amount. Keep in mind, this excludes other expenses people often pay when owning a car, such as parking fees or toll fares. For many people, owning a car is probably more expensive than our estimate. However, we’ve kept things simple here, so our cost estimates may differ from your actual costs for both owning a car and using rideshare. In addition to cost, there are other factors to consider.

Lifestyle. Your lifestyle probably also plays a part in your decision to own a car or use rideshare. Let’s meet two different couples who said just that and examine some aspects of their lifestyles:

Judy and Joe are both 35, have two kids ages 8 and 10, and a dog. They live in a house and have two cars parked in their garage.

Kim and Kyle are both 32, don’t have kids, and have two cats. They live in a condo and have two cars, which they both pay to park in their building’s garage.

Location. Location determines a big part of our lifestyles. If you live in a metropolitan area, you’ve probably spent a lot of time considering where you live, where you work, and what your commute is like. Wherever you live, do you commute to work by car? Is having your car a “must”? Here’s what Judy and Joe’s and Kim and Kyle’s locations look like:

Judy and Joe live in Redmond, and both commute to Seattle for work. Their morning commute consists of a 10-minute drive to their nearest park-and-ride, followed by a 40-minute bus ride into Seattle.

Kim and Kyle’s condo is located in downtown Seattle, and they both commute to work on foot. Their daily commute is about a 20-minute walk each way, but they’ll bus or Uber if it’s raining.

Judy and Joe agree that they only need one car to get to the park-and-ride while commuting to work. Kim and Kyle realize that they don’t need their cars in order to get to work and could save a lot of money if they downsize to one or none, especially considering they pay for parking in their building. These instances illustrate the importance of considering location when deciding between owning a car and using rideshare. Likewise, your activity choices also play an important role.

Activities. Activities and hobbies dictate a huge portion of our lifestyle choices. Do you have kids or do your favorite activities involve a lot of driving? If you love the outdoors, could you still get to those hikes you’ve been dying to do without a car? Some recreational activities may be limited when you don’t own a car, so it’s important to consider this when determining if utilizing rideshare options is not only economical but also practical. Here are some of the activities Judy and Joe and Kim and Kyle participate in:

Judy and Joe’s weeknights are spent shuttling kids to and from various sports practices. Once home, they typically enjoy a homecooked meal together. On the weekends, the kids generally compete in sporting events. Occasionally, they also get out of town for a family camping trip in the mountains.

Kim and Kyle spend their weeknights going to the gym. This is often followed by dinner at a friend’s house or a local restaurant. During the weekend, they like to hike, visit Kim’s family on Bainbridge Island, and kayak as often as Seattle’s weather permits.

Judy and Joe agree they likely still need two cars to get the kids to their conflicting practices. They’ve decided to experiment by driving only one of their cars for a couple weeks in conjunction with ridesharing as needed to see if life with one car would work for them. Kim and Kyle agree that they still need one car for their weekend trips and for hauling their kayaks around town. As we can see, our activity choices are also an important consideration in deciding whether to own a car or use rideshare.

Bottom line. Having a car for the sake of convenience may unnecessarily be costing you money. Using rideshare might save you money; however, it may be more practical for you to own a car if you’d like to maintain a certain lifestyle. We encourage you to evaluate your situation.

If you’d like to speak with a financial advisor about your current transportation situation, we can help you determine if it makes more sense for you to own a car or utilize the various rideshare options available today. Please reach out to us. We are here to help you!

 

Sources: 

*https://bettermoneyhabits.bankofamerica.com/en/auto/cost-of-owning-a-car

** https://www.zipcar.com/pricing

***https://www.ridester.com/uber-rates-cost/

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.