Signs That You Are Living Beyond Your Means

With credit card companies literally crying to let you have as many credit cards as you want, buying something on credit anywhere is pretty easy. These two ideas or concepts sort of go hand in hand. This combined with a YOLO or “You Only Live Once” mentality could be your death knell and push you towards living beyond your means.

The consequences in the long run, however, could be disastrous. You could end up bankrupt or caught forever in a debt trap from which getting out is something easier said than done. The only thing worse than this is owing food and supplies to The Saviors in The Walking Dead or perhaps watching the cheating Patriots or Warriors win a championship but that is another topic.

The following signs clearly indicate that you are indeed living beyond your means:

  • Your Personal Credit Score is Low: Credit bureaus track your payment history, outstanding loan balances, and legal judgments, if any, against you. This information is used to compile your credit score that actually reflects your credit worthiness. The range is between 300 to 850. The higher the score, the better because lenders use it to gauge whether you’re worthy of a loan or not. In general, a credit score that’s below 600 implies that you are in debt and living beyond your means. You can check with any of the leading credit bureaus and get a copy of your credit report. This will tell you what these bureaus, financial institutions, and lenders think of you as a potential debtor.
  • Your savings are below 5%: If you are saving less than 5% of your net monthly income, you are probably living beyond your means. Pragmatic spenders desiring financial security after retirement usually put aside as much as they can every month to ensure that they never cross their spending limits.  A below 5% savings rate indicates that you could face the real danger of complete financial ruin in case an emergency like an illness or accident should happen to you (remember, you are not a politician, you cannot spend money you do not have and there not be any consequences). This also implies that you don’t even have the funds to pay necessary insurance deductibles. The safe limit of saving is at least 10% of your gross income.
  • Rising Balances on Credit Cards: Buying on credit is a typical thing done by spendthrifts and more often than not, leads to their financial ruin. Thus, if you’re paying only the minimum amount due on your credit card balances every month or sending just a small portion of the total principal balance, this is a clear indication that you are over your head. That’s why it makes sense to keep track of your credit card spending and keep aside the amount in cash so that the entire amount can be paid off as soon as the bill arrives.
  • Household Expenses Consume More Than 28% of Your Income: When you have your net monthly income figure in hand, calculate the percentage of it that goes towards paying off your house mortgage, property tax, and insurance. If it exceeds 28% of your gross monthly income, then it is also an indicator that you are in the red. 28% is the standard chosen because conservative lenders feel that this is the rate at which the average person can get by comfortably even after paying off their mortgages. You may, of course, cut other expenses and spend more on your house but again, that’s a dangerous move to make.
  • Spiraling & Out of Control Bills: Buying on credit and paying off in installments is a grand option to many. Pick up whatever you want without thinking whether you can afford it or not and get lured by the salesman who tells you that paying an extra $60 per month on your installment won’t hurt you. The fact of the matter is these bills gradually start adding up and you inch towards bankruptcy. Once your monthly income starts getting sliced and directed to pay for a lot of unnecessary installment purchases and services, it’s time you faced the fact that you are living beyond your means like the states of New York and California are but this is another issue.
  • Cut and Slash: Go through all your monthly bills with a hawk’s eye and decide on what is truly required for you and for your family. Any frivolous expense such as a premium 500-channel cable TV package or satellite radio bill can be simply dispensed with – cut the fat, you cannot afford this right now in your life! Cut back on mobile and land line costs, utility bills, and entertainment expenses (Rings 3 was not that good anyhow, neither was Logan, and Jurassic World was horrendous!), and you’ll find that you have eliminated useless expenses which can help you get back on track and give you some money to help you pay down your debt.

What is an emergency fund?

An emergency fund is essentially the money that you’ve been setting aside to take care of unexpected expenses arising out of unforeseen events in life such as when a politician like Barney Frank passes laws that devastates your home’s value. When this happens, and it did too many people on a colossal scale in and around 2008, you want to have some money set aside.

You can call this a rainy day fund too!

An emergency fund allows you to survive at least for a few months just in case you suddenly receive the pink slip (job growth will soon be picking up with lower taxes and less regulations but sometimes companies still lay people off regardless) or get into an accident that prevents you from earning for a substantial period of time.

It could also be a leaking roof or a major car breakdown that needs immediate attention. In other words, it’s like an insurance policy, where instead of paying premiums to your insurer, you’re setting aside some money to be used later should any of the following circumstances suddenly arise:

  • Emergency medical bills
  • Mortgage payments
  • Credit card bills
  • Pending taxes
  • Emergency home repairs (we have all seen Transformers 4; some robot called Lockdown may blow up your home!)
  • Unexpected car damage and repairs

The whole objective is not to borrow for these expenses thereby increasing your debts.

Creating an Emergency Fund

The amount that should be kept as an emergency fund depends on your income and status; thus differing from person to person (you may not need as much money as Katy Perry who lives in her bubble land!). The thumb rule is to save about 3 to 6 months’ worth of funds that are required for all non-discretionary expenses. This fund will help you manage any financial crunch if you suddenly find yourself unemployed. With the aid of this fund, you should still be able to pay your household bills till you find employment again.

You may have to find a job though that is different than what you were doing before. You have to be able to pivot in life.

So how much money there should be in an emergency fund? It will vary. For instance, for a couple with kids, around six months of income is sufficient for an emergency fund. If you are single, have a mortgage, auto loan, and no school going children, you may only need three months since single people tend to be able to relocate easier and they do not have children to clothe and feed.

Automate the Process

One of the best methods for creating an emergency fund is a 401(k); buying a new Lexus is not part of this plan! Do not take financial advice from your neighbor unless they are credible! And if your neighbor is Charlie or Alan Harper, do not do what they say! If your employer offers you a 401(k) plan, sign up for it so that the money you earn is automatically funneled out of your paycheck into a separate account. These contributions are pre-tax and you will soon realize you do not have to sacrifice much to make this financial decision.

For instance, if your yearly earnings are $60,000, increasing your 401k contribution from 2% to 5% will reduce your weekly paycheck by $27. That is it! Also make sure to contribute enough to equal your employer’s “match,” because leaving “free money” on the table is unwise.

You can schedule when you want the money taken out of your pay check as well.

Also, a majority of 401(k) plans come with an auto-escalation feature. This enables you to automatically increase the savings rate by any amount of your choice, which is usually between 1 to 3% every year. For external accounts, create your personal semi-automatic-escalation system: keep a calendar alert that reminds you to spike up contributions by one percentage point or two on an annual basis, maybe every time you get a pay increase or on your birthday.

Pay yourself!

What to do After You Reach the Goal?

If you have accumulated the amount that is suitable for you, you can then pat yourself on the back. Now that you are in control of your finances, you can start investing. The point is, you need to keep on investing a part of your income and create another source of income from it. For instance, if you invest in stocks, every year you will earn some money in the form of dividends. But be careful, stock prices can go down.

You can read about the tech bubble during the turn of the century and know all about that!

In conclusion, having an emergency fund is having extra security. You might have life insurance coverage, health insurance, auto insurance, home insurance, dental insurance, and critical illness insurance to cover you in case you experience some sort of calamity. But none of these will help you if you lose your job. Well, just not as easily has having a 401(k) or a savings account with money saved away for a rainy day.

Life and critical illness insurance are for most people a waste of time and money but that is another topic!

Here are 9 States that will Save You Thousands if You Relocate

Is your state taxing you too much? If you live in California and New York, it is most likely a yes then, and certainly if you work in the private sector in either of those punishing states.

Here are nine states that will save you thousands of dollars in cost of living expenses if you are thinking of relocating. For each state, you will see an index list which means a normalized average cost of a given class of goods or services. 100 is the normalized average cost, or national average, and the lower the score the better. You can have a score higher than 100. For instance, if a state is 20% more expensive than the score of 100, that state would have a score of 120.

This information was derived from Wikipedia, USA Today, CheatSheet, and Investopedia.

Let’s begin!

Mississippi

This southern state is the most affordable state in the US which is 14 percent cheaper than the national average. Here are some facts:

  • Cost of living: 86
  • Housing index: 68.4
  • Grocery index: 94.1
  • Utilities index: 89.6
  • Health index: 89.9
  • Transportation index: 93.1
  • Miscellaneous: 93.2

The homes are 30 percent cheaper than the national average and we all know how expensive owning a house can be. The median value of a house is around $112,000 while the median rent is around $1,050. Transportation is 6.9 percent cheaper while groceries are 5.4 percent cheaper.

Apart from this, Mississippi is exempt from military, federal, and in-state pension burdens. People pay the least amount of property taxes. All retirement related income, including 401k and IRA earnings, is exempt.

On top of this, there are probably more murders in one weekend in Chicago than the entire state of Mississippi for the entire year.

Indiana

The rent is slightly cheaper in Indiana at $1,000 while the median cost of a house in the state is $139,000. Transportation in the country is 8.4 percent cheaper while groceries are 7.6 percent cheaper.

Here is a look at the index:

  • Cost of living: 87.9
  • Housing index: 75.8
  • Grocery index: 92.4
  • Utilities index: 91.1
  • Health index: 94.9
  • Transportation index: 91.6
  • Miscellaneous: 92.9

Michigan

The third spot goes to Michigan. It is particularly cheap when it comes to groceries at 10.4 percent lower than the average, however, housing is also comparatively cheap here. The median listed price is about $147,000 while the rent is $1,000. Michigan is also exempt from military, federal, and in-state pension burdens. Here is the index:

  • Cost of living: 88.2
  • Housing index: 77.1
  • Grocery index: 89.6
  • Utilities index: 95.5
  • Health index: 93.3
  • Transportation index: 97.6
  • Miscellaneous: 91

Just be careful about some parts of Detroit you go into. You may want to avoid them. The fantastic movies Four Brothers and 8 Mile have warned us about this.

Arkansas

Arkansas is particularly cheap in the area of transportation and health bills. The median housing price is $150,000 while the rent is $1,000. Groceries are 7.3 percent cheaper while transportation is 10.9 percent. Here is the index:

  • Cost of living: 88.5
  • Housing index: 77.7
  • Grocery index: 92.7
  • Utilities index: 97.1
  • Health index: 87.8
  • Transportation index: 89.1
  • Miscellaneous: 92.8

Oklahoma

Consumers are paying up to 23 percent less for their houses here than the national average with the median home value being at $114,800 and average rent being $995.

Transportation when compared to the national average is 11.9 percent cheaper and groceries are seven percent. Experts on the other hand believe that the cost is going to increase in the near future (problem because this is an energy rich state). Here is the index:

  • Cost of living: 88.6
  • Housing index: 76.7
  • Grocery index: 93
  • Utilities index: 94.9
  • Health index: 93.6
  • Transportation index: 88.1
  • Miscellaneous: 94.1

As just mentioned, Oklahoma is going wild in oil shale which is bringing high paying and more jobs to this outstanding state. This means less money going to the Middle East and more money remains in America to do the same: allow us to have access to the energy we need. Unlike California and New York which have some of highest numbers of unemployment and people on welfare, Oklahoma does not shirk its responsibility by keeping its energy offline.

Idaho

While the prices of houses are on the rise, Idaho is still one of the cheapest states to live in with several categories that are less than 10 percent of the national average. Groceries are 14.6 percent cheaper while transportation is 6.1 percent. The median home value is $249,000. Here is the index:

  • Cost of living: 89.6
  • Housing index: 77.8
  • Grocery index: 85.4
  • Utilities index: 89.0
  • Health index: 101.9
  • Transportation index: 106.1
  • Miscellaneous: 94.8

Idaho is loaded with fresh crisp air as well. If you love the outdoors, it is hard to beat this state.

Tennessee

Tennessee, also known as the Volunteer State, has the lowest housing index in the country at 77.5. Transportation facilities and health care is also less costly compared to the national average. Groceries are 7.3 percent cheaper while transportation is 10.1 percent.

The median listing for house is $175,000 while the rent is $1,195. Local and state tax is about 7.6 percent which is the sixth lowest in the country. There is no income tax but only interest income and tax dividend.

  • Cost of living: 89.8
  • Housing index: 77.5
  • Grocery index: 92.7
  • Utilities index: 91.8
  • Health index: 90
  • Transportation index: 89.9
  • Miscellaneous: 97.5

Kansas

Kansas is another state where the median cost is about 10 percent below the national average making it a favorable destination for people looking to settle there. Media rent is about $1,050 while the houses are priced at $124,400. Groceries are 6.4 percent cheaper while transportation is 7.5 percent. Here is the index:

  • Cost of living: 90.4
  • Housing index: 77.4
  • Grocery index: 93.6
  • Utilities index: 97.3
  • Health index: 97.1
  • Transportation index: 92.5
  • Miscellaneous: 96.1

Yes, these states may not be as glamorous as living in San Francisco, LA, or New York but you will also not have to worry as much about seeing homeless people defecate in public which is what happens in San Francisco all the time. If you want to be accosted by a homeless person and smell urine all the time all the while spending massive amounts of money on living costs and taxes, San Francisco is your place.

San Francisco is also in the midst of a properties crimes epidemic. LA and NYC are violent, expensive, and chaotic. Perhaps nice places to visit once in a while but not to live. You may see someone get mugged or shot though. If that is the environment you want to live in while being mistreated by the tax policies in those cities, it is your decision.

How to Stop Living Paycheck to Paycheck and Start Saving

Are aware that around 38 million American households live paycheck to paycheck? And no, these are not low-income families. Families even with salaries above $100K per year are caught in this vicious lifecycle. The moment the paycheck arrives, most of it goes in settling the bills and couple of days of respite followed by a zero bank balance.

This is not impressive and it does help that electrical prices rose higher in the years from 2009 to 2016 which is another reason household income growth did not rise at all in those same years as well. Hopefully that changes in the next couple of years. This will mean less people will be living paycheck to paycheck.

So why even are wealthy people failing to save money or take control of their finances? Irrespective of the income bracket that you are in, there is always a way to save some portion of your income for investment and savings, you just need to start somewhere.

Prepare a Budget

The first and most vital aspect that needs to be done to improve your finances is to understand how you are spending your money. Start whenever you want, but religiously track every penny you spend for a month. Ideally, it should be the start of the month when all your bills are due.

This will help you in covering the entire month and track your expenses accurately. If you do not have time to do expense tracking at the micro level, smartphone apps can make this job easier. Remember, the first thing to do is to understand the root cause of the problem, which in this case are unchecked expenditures.

Find Expenses that You can Cut

Tracking your expenses will enable you to identify the expenses that you can do away with. For example, the expensive cable plan you have subscribed to can be trimmed down to a bare minimum (do you really Direct TV for instance?). Switch to online streaming service providers. Scourge the Internet for discount coupons while buying anything, you may be surprised how much money you can save this way.

Check your credit card bill for subscriptions and memberships you no longer use or do without (how often do you attend that gym; can you not exercise in your home or run around the block a few times?). There is no need to walk into Starbucks every day for that caffeine dose either. Stop or cut down going to fancy restaurants or restaurants at all. You can buy TGI Friday’s frozen food at supermarkets, for example. You would be surprised how making these small changes to your spending habits can help you save money.

Do you really need life insurance? You know that is one of the biggest scams in America. Well, unless you are afraid of dying broke and we here are trying to get you in a better financial place so that does not happen.

Moreover, the savings then can be channelized towards investments or savings. That is making those spending decisions compound for you. If you are a smoker, cut down on those cancer sticks (that is what they are!). Not only you will be healthier, but also save hundreds of dollars a year.

Do Side Gigs

The Internet has made it easier to find side gigs that pay well or pay something. There are numerous dedicated platforms out there which you can use to find gigs such a web design, online accounting work, virtual assisting, consulting, research work, and so on. If you are not proficient in any of these, try something simpler like dog walking. Your home is full of things you don’t need or do not use any longer. Sell these on Craigslist or eBay. Extra cash you earn this way can be utilized in a productive way.

Consolidate Debt

If your debts are unmanageable and that is one of the primary reasons you live paycheck to paycheck, it’s time to think about debt consolidation.

In debt consolidation, all your debts are paid off by a debt consolidation firm. Then you have a single payment to make towards your debt that is optimized based on your financial profile. Though it may be an extreme measure, nevertheless it’s a percipient and prudent strategy to get out of debt trap and start fresh.

Create an Emergency Fund 

Life is full of uncertainties and you should be prepared for anything that life throws yours way. Research indicates that you need at least six months of expenditures saved up just in case the you know what hits the fan. The emergency fund should be sufficient enough cover all your bills for six months should you be out of work or in bed due to an accident or an illness.

The emergency fund should be impenetrable so do not dip your hands into it (have more discipline than most politicians!). If your emergency fund is piled up high, simply channelize it towards other purposes that are vital, such as a nice mutual fund. And no, going out to Pizza Hut is not wise. Do not sink back into bad habits!

4 Habits to Achieve Financial Success

Every year, thousands of people make New Year resolutions to get their life back on track, financially, and every year many of them fail to honor these resolutions.

Today, in this post, you will learn about 4 killer habits that will help you achieve financial success.

Set Goals and Have a Plan

Here is a vital but overlooked question – where do you see yourself in the next five years? How much are you going to earn and what will your investment portfolio look like at the end of these five years? These are critical questions that need answering and successful people have a vision that covers this. Well, everyone accept Michael Kelso from That 70s Show!

This is where planning and setting goals come in. If you are planning your retirement, say after 30 years, divide this big goal into small five year goals that looks more achievable. Do not get overwhelmed. It is equally important to measure your goals periodically to understand where you stand and what needs to be done.

Whether you are saving for college, or planning your retirement, the process remains the same. Plan, set goals, and reassess every few years. Saving will be easier in a year or so when taxes are lower and the economy is shooting upward. This is not something that happened from 2009 to 2016 because of the Barney Frank and Alan Greenspan recession but this is another topic.

Setting and Sticking to a Budget

It doesn’t matter whether you are a millionaire or a struggler. A budget is something that we all need. There is a suitable reason why every financial adviser advices to have a budget.

Having a set budget will help you understand your goals and whether they are achievable or not, set parameters for your daily/monthly household expenses, calculate your savings, and understand how much can you invest.

A budget is only as good as you stick to it. If you set a budget and then fail to follow it, it is useless.

If you have never created a budget before, start with something simple. What are your basic necessities and how much you need to cover it? You are looking to answer this question – if I lose my job tomorrow, what are the expenses I have to bear to run my house?

You need to pay for rent, food, fuel, your kid/s school fees, but you do not really need to pay cable fees or watch movies on the weekend (well, unless it is Transformers, Sicario, Deepwater Horizon, Hacksaw Ridge, other movies of this caliber but let’s not digress too much). You can certainly cut out the restaurant eating!

Using this as a groundwork, you can slowly work on a budget that will help you understand how much can you save, and eventually invest. Create a budget, stick to it and as always, periodically evaluate it.

Savings and Compound Interest

When you start saving money from an early stage, you quickly discover the power of compound interest which is often underestimated. The going trend is that if you have a choice between saving money and following your passion, people are increasingly choosing to follow their passions.

Compound interest will help you grow your money faster because the interest is going to build up over time upon itself. The beauty of compounding shows when you have time, and the longer you take to start saving, the less time you have on your side. It is prudent that you do not procrastinate, and work on saving as much as you can.

Professional Help

Looking to make your financial journey a little less stressful, and a little more fun? You are looking for the right kind of financial expert, someone who can help you understand your situation and then guide you in the right direction. This will not only save you valuable time, but also help you get off to a decent start. Your goals will be much more achievable and your life will be that much less stressful.

Everyone needs help. Pro athletes have pro coaches who help them get in shape, motivate them when they are feeling low, and help them perform well at their game. You can use a coach too, someone who will help you navigate the ups and downs in your life financially. Why try to do this on your own? When your car has an electrical problem, do you try to fix that yourself? Probably not!

This is where a financial advisor comes in. He can act as an accountability partner of your life. His job is to offer help, advice, and support whenever and wherever you need it.

It is easy to let go of yourself, to forget your long term goals for immediate gratification, and indulge yourself in short term pleasures. A professional financial advisor will help you keep yourself in check, and make sure that you are working towards your goals and to help you realize what those goals are.

6 Practical Tips for Financial Success

Despite every single individual trying to attain financial freedom and stability, the subject is not yet taught in our schools. Thus, it is not uncommon for young people to be clueless about personal financial planning.

It is also not uncommon for a high school student to graduate in an American inner city and barely be able to read because of political correctness in public schools but this is another topic. See The Wire – the 5th season on this! That was junior high school students in Baltimore but the high schools are just as rough.

Moreover, if you are one of those people who are just stepping into this hyper-competitive, time-strapped world, or someone who has been working for a couple of years without any concrete financial goals, the following tips will come in handy.

Self-Control is the Key

Credit cards make it so easy to purchase anything on impulse. And if you are an impulsive buyer, like most Americans, you might be carrying a debt of $15,000 just on credit cards. Not good but this is not uncommon either!

Most of this can be avoided. Avoid eating at fancy restaurants, buying that expensive pair of jeans, or that new smartphone. Learn what delayed gratification is. Always save and purchase anything you wish with cash. Do not buy a couch you cannot afford and make monthly payments on it, for instance. You have to pay interest on that couch so handling your money this way is nonsensical. Pay in cash or do not buy. Go buy some cheap chairs for temporary use and save up to buy the couch.

Emergency Fund

One of the most neglected principles of personal financial planning is emergency funds. No matter the amount of debt you are carrying in the form of student loans, mortgage, credit cards, car loan or a personal loan, ensure you set a certain amount aside for emergencies.

Also, just forget that that the money exists. Treat it as a non-negotiable monthly expense, like your credit card bill. And use a high-interest saving account, money market account, or a CD for building up an emergency fund, or else inflation will erode the value of your savings.

Start Retirement Planning, NOW

If you have nothing saved for retirement, now is the time to start on that. Ideally, you should start your retirement planning the moment you start earning. The sooner you start investing in retirement products; the bigger your retirement kitty will be as long as you do not invest in Solyndra! Company-sponsored retirement plans are one of the most effective tools. Mutual funds, equities, and what not are other options to consider. Again, the mantra is to start early.

Keep the Tax Monster at Bay

Taxes seem to be omnipresent. Even before you get your first paycheck, learn how much of it will go into taxes or what will be your take-home pay. An increase in pay due to promotion or job hopping does not mean you will have extra disposable income like you are hoping. Trump will cut taxes but taxes will still be a part of our lives.

Furthermore, it might happen that you have moved from a low tax bracket to a higher tax bracket which increases your tax liabilities significantly making your increased pay not as impressive as you were hoping it would be.

You should also work with an accountant that can give you concrete tax advice or educate yourself on this topic if you do your taxes by yourself.

Never Ignore Health Insurance

A single emergency room visit can set you back by thousands of dollars, and without health insurance, it would be difficult to manage healthcare costs. Just like an emergency fund, it’s essential to have suitable health insurance for you, and if applicable, for you family too.

Yes, because of the ACA America’s health care picture is not impressive (it will hopefully get better in the years ahead but that is another topic) but you still need insurance regardless.

Also, unlike your wealth, your health will erode as your age progresses thus ensure you exercise regularly to keep yourself fit. As they say, “Health is wealth.”

Guard Your Assets

Guarding your wealth is as vital as acquiring it. A simple mistake can cost you your entire life’s savings. For instance, driving without car insurance and then you cause a wreck can be financially painful.

Similarly, if you rent your property, having renters insurance is of paramount importance. Any damage to the property due to burglary or fire will mean substantial losses to you. If you employ a financial planner, choose fee-only rather than commissioned based financial planner. It will help ensure that you will invest into financial products that are beneficial to you.

It is not difficult to plan your financial life, a little effort in educating yourself will reap rich dividends. Never invest in complex financial products if you do not understand them and if your name is Napoleon Dynamite, do not invest in anything! Protect yourself and your assets with the necessary insurance and avoid impulsive buying.

Follow these six principles to come closer to enjoying a stress free financial life.

Why are Mutual Funds better than Stocks for Low-Risk Appetite Investors?

Investing a certain portion of your earnings enables you to build wealth over a period of time. Though the investment market is full of investment products, stocks and mutual funds are most widely known and preferred by retail and small time investors.

However, considering the fact that stocks are extremely volatile, you should consider investing in mutual funds rather than investing directly in stocks. Here are few reasons you should consider investing in mutual funds rather than in stocks if you have a low-risk appetite.

No Need to Pick Stocks

Picking the right stock at the right price is one of the critically important factors that determine its success. In the case of mutual funds, a fund manager does this for you. If you are investing directly in stocks, you have to keep track of them, ensure you sell them at the right time and make appropriate allocation in different sectors. This is time-consuming and knowledge intensive exercise. And even if your stock does well, such as Apple or Ford for instance, the stock price could still go down if their future guidance is not right.

That is very frustrating!

Many instances have been found amongst Baby Boomers who invested their money into stocks and never tracked them. Most companies in which money was invested no longer exist. A mutual fund manager, on the other hand, keeps track of all the assets in mutual fund avoiding such situations.

Do not worry, your mutual fund manager will not be Napoleon Dynamite. This person will be a professional and not keep tater tots in his pant’s pockets! That type of behavior does not inspire confidence!

Distributed Costs

As an individual investor, you pay brokerage charges for buying and selling the stocks, which might be in the range of 0.5-1%. However, a mutual fund or the Asset Management Company that manages the mutual fund, due to economies of scale, pays a minuscule brokerage for trading the stocks. The management fee is all inclusive thus your overall costs of churning the portfolio are barely noticeable.

Low-Cost Investing

If you buy and sell stocks within a year, you will be liable to pay short-term capital gains tax which might wipe out profits. Of course, the same situation may be applicable in the case of mutual funds, but there is a difference. For instance, you might have to sell the stock within a short span to book the profits.

So apart from brokerage for trading stocks, you will also end up paying short-term capital gains tax and even with Trump getting the job done and doing things that are long overdue, such as cutting taxes, you still have some taxes to pay. Any time you can save money via taxes is something you should take serious.

A mutual fund, on the other hand, will incur just the trading charges (which are very low), and since your money stays invested in the asset management company, you do not have to pay any capital gains tax. Only if you exit the mutual fund within a year, you will have to pay capital gains tax on the profits made.

Optimized Asset Allocation

A concrete portfolio consists of 25-30 stocks spanning different industries. This requires a significant amount of time and stamina. You should be checking your stocks every day as well; you really do not have to do that with a mutual fund since they own a hundred companies or so and so a mutual fund is not as volatile since the risk is not tied up with one stock but many of them. You may not be in a position to invest that amount of money or time into this craft.

Moreover, it requires in-depth knowledge of stocks to pick the right ones. As you buy units of mutual funds depending on your budget, every unit is equally diversified. This significantly reduces the risk to your portfolio.

However, as the underlying asset for equity-based mutual funds is equities, if the entire market declines, your investment too will decline. A balanced mutual fund which has a mix of stocks and bonds, however, will offer better protection against market volatility as already mentioned. If you are extremely averse to risk, it is also possible to invest in debt mutual funds that offer low but assured returns.

As indicated earlier, you can lose your entire investment in a single stock. That rarely happens in the case of mutual funds since your mutual fund manager is looking after these companies making changes to the asset allocation as per the market conditions and new laws being voted into existence or even ending. He or she will not make the terrible investment decision we saw the main characters make in Horrible Bosses II. Not impressive!

Mutual funds moreover are tightly governed by the SEC. Thus, if you are new to investing, have low risk appetite, and are patient with your investments, mutual fund is the best investment vehicle that suits your profile. It does not mean you should not invest in stocks directly. Do that only if you have the market know-how, can dedicate time towards it, and do not mind taking losses.

4 Finance Tips for New Homeowners

Here is an interesting fact. According to recent research, about 40% of Americans do not own their own homes, but the remaining 60% are enjoying the benefits of ownership. However, there is also a downside of owning your own home which is the cost of an acquisition. It is not only the down payment that you have to manage; there are other expenses that you will have to pay for.

Here are some tips for you if you are a new homeowner:

Always have a budget

It is a known fact that your monthly mortgage payment will always differ, if only ever so slightly, from your rent payment. Most tenants feel that they only have to adjust their budget slightly when they choose to buy but they couldn’t be more wrong. Most buyers, when they are home hunting, they usually go for a home that is larger and more spacious than the one they are currently living in. This increases their cost of living.

They forget to factor in other expenses such as heating and electricity expenses, maintenance cost and so on. Now you have a lawn which needs time and money to maintain and since you are the owner, this is your responsibility. You do not want to end up with a lawn that looks like Dick Harper’s (Jim Carrey) in Fun with Dick and Jane. You also do not want your lawn to be repossessed!

What you need to do is to budget for all the potential expenses that you will have to bear so you know what it would be like to own a home. Then you can keep track of these costs and be able to evaluate the situation. This will help you come up with a budget to work with it, and help you understand the actual cost of relocating and actually owning a home.

Repairs and maintenance

As long as there are homes, there will be repairs and maintenance. There is no escaping this fact and the sooner you account for it, the better it will be. While most home owners do consider the cost of repairs and maintenance, they often underestimate it.

A suitable rule of thumb is that you are going to spend anywhere between one to four percent of your home’s value on repairs and maintenance every year. So for example, if you own a home that is worth $400,000, you must be prepared to spend anywhere from $4,000 to $16,000 every year to maintain it.

There are also these unexpected financial hits that will smack you every once in a while. For example, getting a new roof or replacing your heating or cooling system. This is why you should have some money saved. An appropriate rule of thumb is to save up to six months of expenses in advance.

Rising property taxes

Property taxes are determined based on local taxes and the assessed value of your home. Take these factors into account before you decide to buy that 2,000-square-foot house, for instance.

At the time of buying a new home, you will be notified of your new tax liability, but it is important that you understand this – property taxes have a cruel tendency to shoot for the north side of your graph which means that it is going to increase in the future. It doesn’t matter whether the value of your home has decreased, property tax might still see an increase.

For example, in the year 2000, about $247 billion was collected in property taxes, and by the time 2010 was here, the number doubled to $476 billion. This happened irrespective of the property bubble burst the US markets saw in the later years of that decade which was caused by Barney Frank but that is another topic.

Depending on the locality that you are residing in, you might have to reassess your property tax every few years. Once again, you will have to make some room in your budget for these hikes. Well, unless you vote for someone who lowers your taxes!

Escrow system

It is possible to merge your property tax and insurance into your mortgage payments using the escrow system. If you are unsure, here is how it works.

The lender will charge you a fixed amount every month which will be above your mortgage payment amount. The access money will be put in an escrow account and this will be used to pay your property taxes as well as homeowners’ insurance amount.

This is not true for all mortgages and you will have to talk to an expert to understand your particular situation. Some will just ask you to pay the exact mortgage amount while being responsible for property taxes and insurance.

If you belong to the second category, once again, you will have to budget accordingly. An average US homeowner spends about $2,127 in property taxes per year. It varies from state to state.

So now that you know how vital a budget is, and the different types of expenses that you will have to deal with once you buy your new home, you can plan accordingly.

Just do not mess up like Dick Harper did! And don’t rob convenience stores!

A New Retirement Plan that Works like a Pension Plan

Americans are known to spend more money than they should (America is trillions in debt and many Americans have thousands in credit card debt) and unlike Asians (the Japanese are known for their thriftiness, for instance), do not believe in saving money for their future. Although, not everyone thinks alike, this is a common and growing issue in the country.

A Growing Issue

According to a study, more than 40 million households in the US do not have any assets for their retirement. This accounts for 45 percent of the total population, a disturbing number. The research was conducted and the report was published by the National Institute on Retirement Security. About 20 million of these households have someone in the age group of 45-65 who is running the house. It is also estimated that many if not most Americans leave behind up to $65,000 in debt when they die.

Those who are saving money for their retirement are not sure if the amount saved will help them get through retirement. 401(k) accounts are self-regulated which means that if you are not competent at handling taxes and know a thing or two about investing, your future is in trouble.

Longevity Income Annuities

Government pension plans provide security even after you retire, and so do some pension plans offered by ubiquitous companies. If you are not part of any of these, there is still a way for you.

In the year 2014, the Treasury Department paved the way for an initiative regarding 401(k) retirement savings plans. Too bad no one has paved the way to prevent any more Jurassic World movies from coming out, that movie was horrendous!

Some tax laws were changed and some restrictions were removed, but the Treasury Department was successful in converting funds that were lying in the retirement savings plans to LIAs (Longevity Income Annuities). This new plan offers lifetime guarantee which is good news for all those who are not or unable to save anything for their retirement and old age.

If you understand deferred annuities then you understand LIAs. They have been active for more than three years now, but picked up steam only recently. It is possible that the treasury department will force it to become part of the target funds in a 401(k).

How LIAs Work

This is how they work and can help you when you need them the most:

You have a retirement savings account with a balance of $100,000. When you turn 65, you use $10,000 to buy a LIA. Now under this situation, according to a report published by National Bureau of Economic Research paper:

“Even in the current low-interest-rate environment, a deferred single-life annuity purchased at age 65 for a male costing $10,000 can generate an annual benefit flow from age 85 onward of $4,830 ($3,866 for a female) per year for life,”

This means guaranteed income which can come pretty handy when the situation presents itself, for example, old age. You have to bet that you are going to live a long life (unless we do something about Iran and North Korea but that is another topic!), long enough to take advantage of this pension plan. In that sense, it can be called a hedge. So what happens when you die early?

AARP

Olivia S. Mitchell, Wharton School of the University of Pennsylvania professor, says that LIAs are available to investors but they are not part of defined contribution plans. This is not to say that the concept has not been considered. There have been talks making them part of target-date suite of funds and even employers are looking for alternatives.

401(k) plans do not have lifetime income streams and annuities as a standard feature. If an individual who is already passed his or her prime is not sure how long they will live, he or she might underestimate their chances of living a longer life than the asset. Some people are simply unable to understand advance or even basic financial concepts. Retirement is a one-time event and people often underestimate it.

This is not to say that LIAs cannot be accessed easily simply because they are not part of defined-contribution plans. There is a plan called AARP that has been actively offering lifetime income program to its members since 2006. There is also a cash refund initiative where if you die before your total payments are equivalent to your annuity purchase price, the person you have nominated as the beneficiary will receive the difference amount.

LIA is not the right option for you if you are in poor health in which case, you should not sign up for deferred annuities. People who are very rich may also not require LIA. This is a plan for a specific class of people. Kind of like the movie Star Wars: The Force Awakens was for a specific class of people, people who enjoy movies with no impressive characters, weak writing, and subpar action scenes but this is another subject!

5 Tax Deductions that some Americans Surprisingly Ignore

The American tax system is vastly complicated and covers literally thousands of scenarios for just those paying personal income tax. There are several avenues by which you can save money on when you are paying your taxes. Some of these tax deductions are well familiar to most, such as the one for mortgage interest. There are several others which are not so well known. Here are 5 of them:

State sales and income taxes

On the question of itemizing deductions, a taxpayer can generally either deduct the amounts they paid towards their state and local sales taxes or their state and local income taxes. Look at the financial information related to both and choose the one that offers the highest deduction.

This is unless you are one of those people who really enjoys paying taxes and not even John Kerry likes doing that even though he votes for higher taxes he keeps his yacht in another state so he can avoid some sort of ridiculous boat tax that he probably voted for himself! What tax increase did he ever vote no for? Well, this is another topic!

In most cases, the state and local income taxes would offer more scope for deduction. However, in states like Florida and Texas which do not have income taxes at state and local level (which is why their economies are doing very well compared to states like California and New York), the sales tax deduction would be a better bet. This is particularly true of people who made large purchases during the tax year.

Child care credit

Citizens with children can avail automatic deductions for their dependent children. Having said that, there are several more deductions which can be claimed when a person utilizes childcare services for their kids. If a child is below the age of 13 or in effect, is disabled, a taxpayer can qualify to deduct up to 35 percent of all of his qualifying childcare related expenses up to a figure of $3,000 for one child and up to $6,000 for two or more children.

In order to qualify,

  • The parent should have been working during the tax year
  • The parent should be the custodial parent and the childcare provider cannot be the other parent
  • Child care should have been used so that the parent could work

Note: While summer camps are also counted, overnight camps are not.

Losses on gambling

Gambling works both ways, as far as the view of the IRS goes. It is true that gains in gambling are hit severely by the IRS in terms of the person in question having to pay up almost immediately whenever they win large, be it from a card game, slot machine, or a sports book. See Ocean’s 13! They helped a man win huge at the airport in a slot machine! At the same time, it is also true that all losses on gambling are considered tax deductible.

Las Vegas or Atlantic City regulars would be well advised to keep close track of their gambling related expenditures. This can help to reduce the tax pay-outs to be made on their gambling related winnings. The gambling related losses are generally claimed under miscellaneous deductions.

Medical and dental costs

Medical and dental costs can also be itemized for deductions once they reach a specific level. If the taxpayer is over 65, the level would be set to 7.5 percent or 10 percent of adjusted gross income, whichever is of higher value. So, the actual deduction would apply only for any expenses that are incurred above this level. What this means, for instance, is that a taxpayer who earned $65,000 in a particular tax year would be allowed to deduct any medical expenses that exceed 10 percent of her income, which means any expenses exceeding $6,500 incurred during that tax year.

This deduction greatly aids those who suffered from a debilitating illness during a tax year and also includes travel expenses for reaching the doctor or a hospital.

Education costs

Education costs also can be claimed as a deduction on your taxes. Any amount spent on educational expenses such as fees up to an amount of $2,500 per student is considered tax deductible. Under this, not only the cost of classes, but also the cost of textbooks and other costs associated with course material is considered.

Once a person graduates from college and continues to repay their educational loans, student loan interest deduction can be written off up to $2,500 per student. This can be taken advantage of by those who are single and who have graduated so long as their income is less than $80,000 per year. In the case of married grads, the combined income needs to be less than $160,000 per year.

Save that money! Uncle Sam takes more than enough!