Getting married is an exciting and hectic time. Here are the financial steps you should be taking once you are "official."Read More
Blogs Written by PWR Advisors
Should I save to my pre-tax 401k at work or my Roth IRA? I cannot fully fund both.
Dear Super Saver,
To determine which account you should save to, calculate your tax rate today versus your projected rate in retirement. In general, Roth contributions are made with after-tax dollars and distributed tax-free. The 401k is the opposite - contributions are made with pre-tax dollars and distributions are taxed at ordinary income rates.
If you are in a higher tax bracket now than you will be in retirement, save to the pre-tax 401k. If you will be in a higher tax bracket in retirement, save to the Roth IRA.
There are other considerations:
Tax laws can change - We don't know for sure what tax rates will be in the future, therefore, some people prefer to save to both types of accounts to hedge this uncertainty and manage their tax bill in retirement.
Employer matching - If your employer offers a match on contributions, save at least enough to the 401k to receive that "free money".
Investment options - If your 401k options are limited and expensive, you may choose to invest in the Roth IRA for the ability to create a custom strategy.
Income phaseouts - You may make too much money to contribute to a Roth IRA. You can typically get around this with a backdoor Roth IRA, but saving to a 401k may still be the best option for high earners.
Flexibility - Roth IRA's and 401k's have different hardship provisions for accessing money earlier than generally allowed (age 59 1/2 with exceptions). Examples relate to education expenses, medical bills and a first time home purchase. Additionally, some 401k's allow you to take out a loan. While this isn't necessarily a good idea, it is an option that is not available to you with the Roth IRA.
Even though one savings vehicle may end up being a better choice for you mathematically, realistically, either is fine as long as you are saving enough. Have a fee-only, fiduciary Advisor develop a custom retirement plan to make sure you are on track.
FIRE stands for financially independent, retire early. The movement continues to grow, with retirees in their 20's through 40's. It has caught on because it is unexpected - we don't picture retirees being so young.Read More
To take control of your financial life, you have to be organized, and the most effective tool for this is a budget.
We created the PWR Cash Flow System to help our clients and readers get started with an easy-to-use solution to track their spending.
The excel file has three tabs shown at the bottom. We will walk through how to use the three tabs and what goals, terms, and data are needed for each sheet.
Step 1 - Create a Spending Plan
The goal of step one is to analyze your current income and expenses to create a budget you can stick with. This starts with knowing your actual current spending. If there are areas you can cut or categories you would like to spend more in, adjust them here to create your new monthly budget.
Frequency: In column D you will enter how often an expense occurs. If you only pay for your auto insurance every six months, you would enter 2 in frequency (2 times a year). If you buy groceries every month, you will enter 12. We have entered the most common frequency per category type to get you started - adjust these as necessary. *Note: If you get paid "bi-weekly" or "every two weeks," your frequency for salary income will be 26. If you are paid twice a month, it will be 24.
Income: Enter your monthly income. Include any take-home wages (minus taxes and other required deductions such as insurance), family contributions or other income sources that occur regularly on a monthly basis. Then, enter your periodic income. Periodic income happens occasionally during the year. If you have a side job or if you typically receive a bonus, list those amounts as well.
Expenses: We classify types of expenses as fixed and discretionary. A fixed expense is an expense that is static and recurring. Insurance premiums and rent or mortgage payments are examples. A discretionary expense is something that varies month-to-month or can be reduced if necessary.
To obtain your expenses, review your bank and credit card statements. It is best to have the average of the last three months. The easiest option is to review annual statements from credit cards and banks who will have already categorized your expenditures for the previous year. If you have access to only what you spent last month that is still a good start. Use the numbers you have access to for now and step 3 will give you more accurate information in the future.
Savings: Your savings consist of all income that is not used to pay for your expenses. Examples of savings include retirement savings at work, a brokerage account, an HSA account or a Roth IRA. If you have goals you want to save for, such as a house down payment or a vacation, add a line item for them and enter your annual savings goal into the budget column.
Spending Category Goals: The Goal % is an excellent way to know if you are spending too much on any one cash flow category. Review the goal % column, compared to where your current category %'s are. In your budget, reduce spending in areas that are over the goal % and reallocate to areas that are under the goal %. Most importantly make sure your cash flow has either a surplus or is neutral ($0 at the end of the month). If your cash flow is negative, set guidelines on where you will cut expenses in the budget column.
Budget: Once the annual total is calculated, you can manually create your budget by typing your revised total in the total budget column. If you do not update this column, it will be equal to the annual total column. If you want to spend more or less in a specific category, enter that dollar amount in the column associated. Example: You spend $1,000 a year on gifts, and you want to reduce that to $500 a year, type $500 into the budget column for that expense. You can update this at any time if your budget changes. Note that the budget column is an annual total.
Step 2 - Create a FLEX Plan
The third tab, creating a flex plan, is optional but helpful for people trying to reduce overall lifestyle spending while not feeling deprived. The flex plan lets you strategize ways to create a cash plan for sticking to FLEX expenses.
You will see a monthly and weekly total at the bottom of Step 2. Once the FLEX money is gone, you are done spending in those categories until the following month.
This can be set up in many ways. Traditionally this is a Cash Only method, like the envelope system, and you can take out weekly or monthly cash to pay your expenses. You can also set up a separate checking account that you fund with the weekly or monthly total and use a debit card only. Try it out and determine what works best for you.
Step 3 - Track Your Expenses Monthly
Now that you know what your current spending is and you have a budget set, stay on track by filling out step 3 monthly. Review your expenses to see your successes and pitfalls each month, then adjust your plan as needed.
If you are a PWR client, we can review this spending sheet with you and use it to build your financial plan and annual updates.
If you want help with building your budget and using this spreadsheet, reach out to us at email@example.com
The national average cost of a wedding is $33,391 (excluding the honeymoon), and in LA the average price is $44,142.
Planning a wedding is a rabbit hole of expenses that can quickly spiral, often leaving other financial goals by the wayside. If you don't set a clear path for how your wedding budget fits into your entire financial picture, it is easy to establish a larger wedding budget than your future life can afford. There is a perfect budget for everyone, but you have to determine what it is for you. Here is what to think about when setting your wedding budget.
Who is Paying
What is the total amount of monetary support you can count on receiving from others? Resources could include: * Parents * Family or Friends * Crowdfunding
Once you know how much help you will have from others, decide how much you want to spend yourself. Let these numbers guide your budget, don't start with how much you "want" to spend and realize your bank account and help from others doesn't cover it. "Bride and groom national average pay 41.1% of the budget and 10% of the 13,000 respondents paid for their entire wedding themselves." (Source: theknot.com)
Use a resource such as the knot.com wedding budget tool which gives the average percentage cost of each budget category. Set a realistic budget when you decide how much are you going to spend and stick to it.
Don't Forget to Factor In Future Goals
The most significant mistake we see when couples plan for their big day is they forget about their other financial goals. Make sure your budget doesn't overlook that there are other, equally important, things to spend your money on in the short and long term. * House purchase * Savings Goals, such as Retirement * Car purchase * Other Trips or Vacations
Having a long-term plan in place for all your financial goals helps you prioritize your expenses and shows how overspending on a goal will affect your ability to reach the others. Are you willing to sacrifice an annual vacation for the next five years to pay off your wedding? Or, delay a house purchase for three years to have a larger wedding budget?
Where to Splurge
What details are deemed significant and essential will be different for everyone and will determine where you should splurge. Write out a list of what is most important to you and your fiancé and dedicate more of your budget to splurging on those categories. This is where I would spend extra:
A Wedding Planner or Day-of Coordinator A wedding planner is someone who can control all the small details, organization, and makes sure everything runs smoothly. A wedding planner for the whole event will be costly, but you can also go with just a day of coordinator. A day-of coordinator will oversee all the activities of the wedding day from the vendors to the keeping the schedule on time. Investing in someone who will make sure all your memories of the day are positive is worth the expense for me.
Video and Photos Memories last a lifetime, but having them in visuals makes it convenient to pass down generations and keep the day easy to relive at any time. Don't go cheap here and end up with bad photos you don't want to look at. Videos and pictures that you will keep forever and that tell the story of the day should be ones you love. Spending the extra money on a good photographer and videographer for a lifelong keepsake is worth it.
Where to Cut
In-Season Wedding "In general, wedding season months begin in late spring and continue through early fall and are therefore the most expensive, with weddings peaking in June and September. Winter, on the other hand, is often much cheaper—unless it’s December, when you’ll find yourself competing with company holiday parties and other non-wedding events for those much-desired dates." (Source: brides.com) If you live in an area like San Diego, having an off-season wedding is doable because the weather isn't very volatile. Get quotes for off-season vs. in-season weddings at the venues you visit to see the difference in prices.
A Saturday Wedding "Having your wedding on a Friday or Sunday (as well as on any other midweek day) can make a big difference for your budget." (Source: theknot.com) Just remember you do not need to have your wedding on a Saturday, instead make sure your key attendees, like parents, grandparents, and the wedding party are all available on the day you choose if it is a weekday. As for the rest of your guests, they will understand, and if they can't come, that helps the next strategy.
Reducing the Guest List The guest list often can turn into a whose-who of family friends and extended family and can be one of the hardest places to cut because you don't want to hurt anyone's feelings. Set strict guidelines on the lineage of family members and the number of friends for the bride, groom, and parents to invite, for example, each set of parents can invite 10 friends. For further managing the guest list consider an adult's only party, condensing plus-ones, or using an A and B list strategy.
The Dress Going wedding dress shopping and having the perfect dress is one of the quintessential parts of a wedding but it can also be very costly. Today there are many low-cost online brands adding wedding dress lines for fractions of the cost of traditional wedding dress designers. You also have the option to rent a wedding dress or buy one that is used. If you do choose to buy your dress, you can sell it to another bride to recoup some of the money, if you are okay with letting it go. My mom's wedding dress is still in a box under her bed, making selling it seem like a better option these days.
Unusual Venues An unusual venue can be a great place to cut costs. Golf courses and reception halls do make it easy as they usually have everything on site and do many weddings a month, but a family member's backyard or a park can provide comfort and a fun atmosphere with a little more planning but at a fraction of the cost.
Bartering with Friends for Services Do you have a friend who is a great photographer or owns a flower shop? Utilize the resources around you to shop for great deals or ask to trade their service for something you know how to do. Offer a couple of hours of help building furniture or free childcare for friends or family who could provide some of your wedding needs at low or reduced costs.
For more ideas on where to cut and splurge, I found this article to be a great resource.
Read All the Fine Print
Make sure to read all contracts and vendor agreements thoroughly before signing. I had a friend who signed her wedding venue contract without thoroughly reading all of the fine print. The venue is stunning, she loved it, and they had the date she wanted, so she signed without thinking about all the details. Later when looking at catering and rentals providers, she found out that in the contract there is a clause that everything must be ordered through a small list of approved vendors. She was left with no room to negotiate or find lower cost options because the vendors on the list knew they were her only option. Make sure to look for other details in the contracts such as cancellation policies and fees or grace periods for canceling because of extreme circumstances.
Take a step back and look at the day as a whole. It is one day of your life. Keep this in mind when all the details start adding up to real dollars. Ask yourself, what small details will never be remembered? Most importantly, don't drain your savings accounts on one day. When deciding on a wedding budget, don't just think about how much you "want" to spend on this day, but how that dollar amount will affect your ability to reach your other goals like buying a home, saving for a new car or contributing to retirement savings. Set yourself up to have a spectacular wedding and also the financial ability to meet your other near-term goals by setting the perfect budget for you.
You can add a newlywed financial plan to your registry, read how here.
Visual Source: theknot.com
Dear Linda,I will be receiving an unexpected bonus shortly. I want to make sure I am smart with the money and have a plan in place for what I am going to do with it. Any ideas?
Sincerely, Lucky Lady
Dear Lucky Lady,
Your question is a common one we receive around this time of year as companies complete their prior-year reporting and issue bonuses. You are wise to create a strategy before spending the bonus. Without knowing the details of your situation, here are some general thoughts to help you get started.
1) Obtain a detailed tax projection from your tax preparer so you know how much of the bonus will be yours to keep after taxes. If your employer withholds less taxes than projected, reserve the balance so you have it available when it is due at tax time. You can also increase your W-4 withholding for the rest of the year. Withhold at least enough to avoid the underpayment tax penalty.
2) Pay off high-interest rate debt including credit cards, personal loans, or student loans. For example, some student loans charge close to a 7% interest rate. If you pay that loan off, it is as if you earned a risk-free rate of return of 7% on the money. However, if you plan to qualify for a student loan forgiveness program, you may not want to rush and pay it off. It will depend on your situation.
3) Build a cash emergency reserve. If you don't have this in place, reserve at least three months' worth of expenses in a high-interest rate savings account. You can reserve a larger amount if you are worried about losing your job, are expecting to move soon, or simply feel more comfortable holding a larger amount of cash. Realize that the interest rate on a savings account will not keep up with inflation over the long-term, so keep this account at the minimum balance required for your personal situation.
4) Increase your retirement savings at work. If your employer offers a retirement plan, you can save up to the IRS limit for 2018. For example, if you have a 401k or TSP, the limit is $18,500 if you are under 50 years old and $24,500 if you are over 50 years old.
Increase savings elsewhere. After you have implemented the first four suggestions, you may consider one or more of the following options:
- Save to a Roth IRA or Traditional IRA, if you qualify.
- Maximize your Health Savings Account (HSA), if you qualify.
- Consider after-tax 401k contributions, if available. After-tax 401k contributions are different than Roth contributions. There is no tax deduction on the savings, but the money will grow tax-deferred and can be rolled into a Roth IRA (without limitation) after you leave the company. Not every company offers this option.
- Save to a Brokerage account. There is no tax deduction on contributions to a brokerage account, but it is still a good option. Qualified retirement accounts (such as a 401k or TSP) are taxed differently than a brokerage account. When you have a mix of account types, you have more flexibility to utilize asset location strategies and manage your tax bill in retirement.
- Save to a donor-advised fund (DAF). A DAF is an investment account for charitable purposes. You invest as you would with any investment account and when you are ready to donate to a qualified charity, use the money from the DAF. Assuming you are eligible for charitable deductions, you will receive the deduction when you place money into the DAF, not when money is withdrawn. If you are charitably inclined and expect to be in a higher tax bracket now than in the future, take advantage of the tax deduction now while it provides a greater benefit to you.
- Save $10K to an I-Bond. I-Bonds are government bonds adjusted for inflation. You are allowed to buy $10K each calendar year per person.
- Fund other goals you may have. Confirm you have enough life and disability insurance, and if not, use the bonus to become adequately insured. If you are saving for a house, earmark some of the bonus for the down payment. If you are saving for a child's college education, consider a 529 plan.
Work with a fee-only, fiduciary advisor and tax preparer if you want a customized strategy that prioritizes your available options in detail.
They are still the best tool in your toolbox for college planning, but there have been some changes. Here is a quick re-cap. What are 529 plans?
They are investment vehicles that are named after the Internal Revenue Code that created them. They have helped many of our clients pay for college for their children as they offer tax advantages when used for qualified education expenses at eligible educational institutions.
What tax advantages do they offer?
When used appropriately, the money placed in the 529 account is allowed to grow and be distributed tax-free. Additionally, many states are now offering a state tax deduction for contributions into the account. Here is the most recent list. It is subject to change, so continue to check back annually for the most up to date information. You are not obligated to use your state's 529 plan. A common scenario is that your state does not offer a state tax deduction (or you don't pay state taxes at all), therefore you can open a 529 plan in any state of your choosing, as long as the plan doesn't have residency requirements. What is an "eligible educational institution"?
Any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education (1).
New to the tax law passed in 2017, up to $10,000 in 529 withdrawals are allowed (once per year) to pay for K-12 tuition. Qualifying schools include public, private, and religious schools. That being said, you should check with your 529 plan to make sure they are conforming to the new federal law.
What are the qualified education expenses that the money can be used for?
Tuition, mandatory fees, room and board (limited to the cost of school housing), books, computers and related computer equipment. What about financial aid?
Having a 529 plan will affect your child's financial aid package, but very minimally, and not enough to dissuade you from using a 529 plan altogether. Assets owned by the parents, such as a 529 plan, will reduce a student's aid package by 5.64%. So if the 529 account is $50,000, the financial aid reward will be reduced by $2,820. The tax benefits and earnings on the 529 account are likely going to outweigh that $2,820. This also assumes you are eligible for any aid at all, which many children are not. Compare this to a UTMA account (another vehicle used for college savings) which would reduce the aid package by 20% ($10,000) since it is an asset owned by the child. Grandparent-owned assets are not included at all in the financial aid calculation, but they do affect the FASFA form in the year following the distribution as we noted in one of our previous blog posts.
Who can save to them?
Anyone. You can open as many 529 plans as you want and name anyone as a beneficiary. The most common scenario we see is that the account owner is the parent and the beneficiary is the child.
What if my child doesn't go to college?
The money in the 529 plan has to be used as directed. If not, you will owe federal and state taxes on the earnings and an additional 10% penalty. You may also have to refund an amount to the state if you received a state tax deduction. There are a few ways to avoid this tax bill and headache:
- You can transfer the leftover funds to a qualified family member, such a sibling. You would simply change the beneficiary on the account.
- If your child receives a scholarship, you are allowed withdraw the amount of the scholarship without penalty (but you will still owe taxes on the earnings).
- If your child goes to a trade school or coding school, the school may still qualify! This is the list of the current institutions that are qualified and it includes some trade schools. If the school is not on the list, it is recommended you contact the school directly to confirm. As noted above, if they are eligible to participate in a student aid program run by the U.S. Department of Education, you can use your 529 money.
Contributions to 529 plans are considered gifts. Therefore you can contribute up to the annual IRS gifting limits ($15,000 per person or $30,000 per married couple filing jointly for 2018). There is also an exception for 529 plans where you can contribute a lump sum of 5 years worth of gifting ($150,000 per married couple filing jointly) but you cannot make any additional contributions for the following 4 years for that beneficiary.
Get another perspective
Read the fine print for the specific plan you are interested in. Rules in the financial and tax world are always changing, so make sure you review your financial strategy annually to make sure you are within present guidelines and benefit as much as possible with what is available to you.
Systematic savings is an easy yet powerful concept. It involves setting up an automatic deduction from one account to another at some frequency (weekly, monthly, yearly, etc).
Many of us already experience systematic savings with our paycheck. We have automatic deductions for retirement such as 401(k) or TSP plans. Federal taxes are also automatically deducted from our paycheck. The IRS knows that they are much more likely to get their money if they force you to pay as you go.
The benefits of systematic savings have been so well documented that the government passed a law in 2006 allowing businesses to auto-enroll employees into retirement savings plans. Once people are enrolled, they are much less likely to make a change. Instead, they learn how to adjust to a smaller amount in their paychecks, if they even notice.
We can apply the concept of automatic savings to other things. It doesn’t cost anything to open up a new savings account at my bank. Therefore, I set up separate accounts for various goals and save automatically for these goals each month.
The idea started when we got our dog, Fulton, a few years ago. We looked into pet insurance and, at the time, it didn’t seem to make sense for us. Insurance didn’t cover as much as we thought it would, so it seemed hard to justify the cost. That being said, we didn’t want to dip into our savings account in the event of a health emergency for him.
As an alternative, we decided to self-insure. Instead of paying pet insurance premiums every month, we automatically contribute the cost of a monthly insurance premium to a separate savings account. If we need money for a surgery or medication for our dog, we just take it out of that separate account without touching our other investments. And when our dog passes away, we will still have the savings account to do with it what we want. If we were paying premiums, we wouldn’t get that money back.
The negative side is that if your pet needs a $10,000 surgery, and you do not have even close to $10,000 in his savings account, you are going to have to come up with the money. If you had opted to pay insurance premiums, it may have been covered.
Systematic savings accounts will work for some people and maybe not for others. You have to consider your risk tolerance, self-discipline, and current emergency fund.
I have found the concept to be liberating. We have an account for future cars and car repairs. We also have a travel fund. You don’t stress over purchasing a gift or going out to dinner with friends when you know you are saving each month for things that are important to you, and you can enjoy the rest. Give it a try next time you find an expense that is throwing your monthly budget into a tailspin!