Jonathan Clements's Blog, page 378

Newsletter No. 39

SUPPOSE YOU were talking about money to your children or your favorite niece or nephew. What financial ideas would you emphasize? I took a stab at this question in HumbleDollar’s latest newsletter, where I listed what I consider the seven most important financial ideas.

The newsletter also includes our usual recap of the latest blogs published on HumbleDollar. Need to catch up on your reading? Spend some time perusing the list.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Just in Case,��No Kidding��and��Taking Us for Fools . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Seven Ideas

WHAT DO YOU consider the important financial ideas? No doubt we���d all come up with a different list���sometimes radically different���and what we deem important likely says a lot about how we handle our money.

For my own list, I think less about practical financial concepts���things like indexing and asset location���and more about the big ideas that should guide our financial decision-making. Here are seven of those ideas, all of which heavily influence how I manage my own money:

1. Compounding.��I love the notion of compounding and not because Albert Einstein described it as man���s greatest invention, which he almost certainly didn���t. Instead, I love it because it highlights that time can be as valuable as money���an inspiring notion for cash-strapped young adults who struggle to find $50 or $100 to invest. Time is the lever that can turn those modest sums into significant wealth.

Compounding works best when it isn���t hampered by high investment costs or set back by large losses. That���s why I���m a fan of building a globally diversified portfolio using low-cost index funds.

Compounding, of course, can also work against us. Imagine you racked up $5,000 in credit card debt during your college years. As I noted in a blog earlier this year, if you never paid down the balance and, indeed, the credit card company let you add the 20% annual interest to the account balance, you���d receive a credit card statement after 40 years showing more than $7.3 million owed.

2. Opportunity cost. Whenever we devote our dollars to one use, we���re giving up something else. Yet, in countless impulsive shopping moments, we don���t pause long enough to consider the tradeoff that���s involved and the opportunities that are forgone.

It isn���t simply that the shiny new iPhone can cost as much as a fun five-day road trip. If the choice is between consuming and saving, the $1,000 we spend today might mean giving up $4,000 or more in retirement spending.

3. Future self. Our lives are a constant tug-of-war between the demands of our often-whiny current self and the needs of our future self. All too often, our current self prevails, which is why we end up saving too little for retirement, the kids��� college and other long-term goals.

How can we bolster our future self, so he or she has a fighting chance? We might try a host of tricks: Sign up for automatic investment plans, so money is snatched from our paycheck and our bank account before we get a chance to spend it. Tell family and friends about the commitments we���ve made to improve our financial life, so fear of their disapproval strengthens our resolve. Visualize our future self by, say, writing down in detail what we plan to do with our retirement years, so future spending seems as enticing as today���s pleasures.

4. Human capital. Our income-earning ability is, I believe, the core notion around which we should organize our entire financial life. Those four decades of���we hope���fairly steady paychecks have four key financial implications.

First, they allow us to take on debt early in our adult life to buy homes, cars and college educations, knowing we have many years of income ahead of us to service those debts and get them paid off by retirement. Second, our paychecks provide us with the savings we need to sock away for retirement and other goals. Third, that steady income allows us to take the risk of investing heavily in stocks when we���re younger.

Finally, our human capital drives our insurance needs. If we don���t have significant savings to fall back on, we should protect our income-earning ability with disability insurance. If we have a family that depends on us financially, we likely also need life insurance.

5. Risk pooling. There are some financial risks that we simply can���t afford to shoulder ourselves, including the risk that our house will burn down, we���re sued, or we die prematurely and leave our family in the financial lurch. In these cases and others, the smart approach is to buy just enough insurance to ensure our family will be okay financially.

When we send off our premiums, they go into a pool of money that���s overseen by an insurance company and which is used to pay claimants. We should then cross our fingers and hope to get nothing back, because that���s a sign that life is good.

That said, there���s one form of insurance where we should pray to get paid: longevity insurance. When we contribute to Social Security or purchase income annuities that pay lifetime income, we effectively buy financial protection against the risk that we���ll live a surprisingly long time and outlast our assets. With these forms of insurance���unlike the other insurance policies we own���we should hope to collect vast sums in return for the ���premiums��� we paid.

6. Ownership.��We live in a world where folks increasingly own nothing: Homes, cars, music, furniture, textbooks, movies and clothes can all be rented. And in many instances, this make ample sense.

Still, nobody ever got rich by renting. Instead, the road to wealth involves owning. If we can see staying put for at least five to seven years, we ought to buy a house, not rent. If we plan to keep a car for more than three or four years, we���ll likely find it���s cheaper to buy rather than lease. And if our investment goals are 10 years away, we should become a part owner of corporations by purchasing stocks, rather than renting out our money to sellers of bonds and cash investments.

7. Enough.��We all get just one shot at making the journey from here to retirement���and we can���t afford to fail.

What could cause us to come up short? One major risk: Not knowing what counts as enough. If our goal is simply to accumulate more and more, there���s a danger we���ll take reckless risks as we strive for the biggest financial pile possible. A smarter approach: Temper our risk taking���by having a firm idea of what constitutes enough.

Latest Blogs

“You don’t need to be like Warren Buffett,” writes Dennis Friedman. “You just need to be like Neil Young, and keep it simple and easy.”
Where did Kristine Hayes get her house down payment? “I withdrew funds from my Roth. But I was careful to take out only the money I’d put in as contributions, so I wouldn’t have to pay penalties or taxes.”
Buy stocks or sell? Change careers or stay put? Traditional or Roth retirement accounts?��Try to avoid rash, all-or-nothing decisions, opines��Adam Grossman.
“Time has specific properties,” notes Dennis Quillen. “It is fixed in amount, but the ‘expiration date’ is unknown. It is highly��perishable. Once used, it cannot be reused.”
Got your own business? If you hire your kids, you could realize significant tax savings���and give them an early start on a lifetime of investment compounding, says Ross Menke.
“Women retire with two-thirds of the money men have, and receive less from Social Security and pensions,” writes Jiab Wasserman. “Women are 80% more likely to be��impoverished��in retirement.”
Worried you’ll lose your job if the economy weakens? Prep your finances by paying off 401(k) loans, funding Roth rather than traditional IRAs, setting up a home-equity line of credit���and keeping the old car for a few more years.
“Given employers��� unwillingness to provide significant retirement benefits and employees��� unwillingness to save, increasing Social Security benefits is arguably the least bad option,” argues Richard Quinn.
If you sell a losing investment to your daughter, you can’t claim the tax loss. But if your son-in-law purchases it, you keep the investment in the family���and you get your tax deduction, explains Julian Block.
Are you in the workforce and saving enough for retirement? Are you retired and spending prudently? “You don’t need to worry too much about everything else,” says Adam Grossman.
“My manager invited everyone on the team to a poker night at his house���except me, the only female,” recalls Jiab Wasserman. “He said the absence of women would make the guys feel freer to relax.”

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Just in Case,��No Kidding��and��Taking Us for Fools . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Three Questions

THE BLUE CHIP stocks in the S&P 500 ended today down almost 18% from their September all-time high. Smaller U.S. shares and foreign markets have had an even rougher time in 2018. To get their higher reward, stock market investors have to shoulder higher risk. Guess what? This is risk.

It’s also looking increasingly like a decent buying opportunity.��If this turns out to be a full-fledged bear market, history suggests the peak-to-trough decline will be around 35%, so we could have a long way to go. Still, for the first time durning the current selloff, I did some serious buying both today and yesterday, moving 2% of my portfolio from bonds to stocks. If the stock market keeps falling, I’ll be doing even more buying in the weeks and months ahead.

But wouldn’t it be wiser to sit in cash investments until the markets settle down? What about the risk that interest rates will head higher, which “everybody knows” will happen? Wouldn’t it be smarter to hold off buying until stocks finish falling? I tackle these three questions in my latest article for Creative Planning, where I sit on the investment committee and advisory board.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Just in Case,��No Kidding��and��Taking Us for Fools . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Not So Fast

THE GENDER PAY gap is quantifiable. But there are also other, subtler forms of workplace discrimination that are harder to quantify, but which women face every day.

When I was part of a five-person analyst team, my manager invited everyone on the team to a poker night at his house���except me, the only female. When I asked why I was left out, he said the absence of women would make the guys feel freer to relax.

Another manager threatened to fire me when I asked to take a longer lunch break to attend my son���s sixth birthday party at his daycare center. While the manager approved my request unwillingly, his exact words were, ���Next time, you will have to choose between being a mom and working here.���

My experience in the workplace is hardly unique. Women are more likely to be subjected to demeaning comments, have to provide more evidence of their competence, have their work contributions ignored and be seen as the ���different��� employee who makes others uncomfortable, while also getting less access to senior leaders.

Critics say the pay gap is due, in part, to women not asking for money as aggressively as men do. But even when women do, it���s often seen as arrogant, unfeminine and even ���bitchy.��� It���s also difficult for women to determine how much they are underpaid, as there���s little salary transparency in corporate America.

When I requested the salary range for my pay level, so I could know where I fell, both my manager and my manager���s manager informed me they didn���t have that information. My question was escalated to a human resources employee, who informed me I wasn���t privy to this information.

Over my career in financial services���where women typically earn 61% to 66% of what men do���I would occasionally ask for greater compensation or promotions after excellent performance reviews and after fulfilling the duties of a higher-level job. Some of the responses:

One of my male managers advised me to look for another job in another department, despite my top performance rating.
Another manager said that, despite excellent reviews, I���d have to continue proving to him and the rest of management that I could do the higher-level job for ���a few more years��� before they would give me the actual promotion.
When I asked for the promotion later, I was told that, although my manager totally agreed I���d been working hard, doing vice president-level work and deserved a promotion to that level, it would be better if I applied for the promotion by myself���rather than him promoting me���or, alternatively, apply for such a position at another company.

According to a 2018 survey of more than 64,000 workers by McKinsey & Co., performance perception bias helps explain early gaps in hiring and promotions, which then compound over a career. Research shows that we tend to overestimate men���s performance and underestimate women���s. Result: Men are often hired and promoted based on their potential, while women are often hired and promoted based on their track record.

During my career, I went through several corporate reorganizations, where I ended up training a new male manager, who often had no knowledge in the area to which he���d been promoted. For instance, when I worked as a strategy analyst, which requires a thorough understanding and familiarity with statistical analysis, the company promoted a male manager who knew nothing about strategy and struggled with statistical concepts. I had to tutor him. His exact words to me were ���please dumb down your presentation,��� so he could present it as his own in executive meetings. He was made manager of a complex analysis group at a top-three U.S. bank based solely on his ���potential.���

Of course, a large banking institution, like the one I worked for, must be seen publicly as doing what it can to promote women and minorities. I was among a group of high-performance employees identified to join a special one-year leadership pipeline program designed to help the careers of minority employees. Yet one of the main messages echoed throughout the program was not that the bank would promote upward more fairly and without regard to gender or race, but that we should be happy to move laterally.

Jiab Wasserman recently retired at age 53 from her job as a financial analyst at a large bank.�� She and her husband, a retired high school teacher, currently live in Granada, Spain, and blog about financial and other aspects of retirement���as well as about relocating to another country���at YourThirdLife.com . This is the second article in a three-part series about the obstacles women face in the workplace. The first part was�� Mind the Gap .

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Be Like Neil Young

ONE OF MY favorite musicians is singer and songwriter Neil Young, who has sold millions of records since the 1960s. Young was rated No. 17 by Rolling Stone on its list of 100 greatest guitarists. He was inducted into the Rock and Roll Hall of Fame twice: once as a solo artist in 1995 and as a member of Buffalo Springfield in 1997.

When I was in college in the early 1970s, I would often hear students strumming their guitars to his songs as I walked across campus. Young’s music is relatively simple to play. Some of his songs, such as his popular hit single “Heart of Gold,” are recommended for beginner guitar players. One song, “Love Is a Rose,” only has three guitar chords. As Willie Nelson once said, all you need for a good song are “three chords and the truth.”

The same thing can be said about money. To have a successful financial life, you only need a few well-known financial chords and the truth. These can be summarized by everyday sayings we���ve all heard over the years. Anyone can learn these principles, just as any aspiring guitar player can learn “Heart of Gold.”

What are the three financial chords?

“Money doesn’t grow on trees.”��There isn���t an endless supply of money. Your income is limited. Result: You need to keep your fixed expenses low and live within your means.

“The best things in life are free.”��You don’t have to spend money on material things to have a happy life. A quiet dinner with friends or family can be a wonderful, memorable event. Saving money and being happy aren���t mutually exclusive.

“Don’t put all your eggs in one basket.”��Asset allocation���how you divide your funds among stocks, bonds and cash���is a major determining factor in building wealth. A simple all-inclusive financial holding, such as a target-date fund, can be sufficient.

And what���s the truth? It can be summed up in two phrases.

“If it sounds too good to be true, it almost certainly is.”��Don’t be a victim of fraud, identity theft and imposter scam. Protect your Social Security number and other vital personal information. Practice these safeguards:

Register your phone number with the National Do Not Call Registry. This should prevent legitimate marketers from calling you. There are also apps available that will block robocalls.
Don’t pick up the phone unless you recognize the number.
Don’t say ���yes��� to an unsolicited sales call or email offer, and don���t give out personal information.
Don’t respond to purported calls from the IRS and other government agencies. They won’t call you unless you call them first.

“This isn’t rocket science.”��To have a secure financial future, you don’t need to go to school and learn the rule of 72, what standard deviation is or how to calculate the present value of an asset. You don’t need to be like Warren Buffett. You just need to be like Neil Young, and keep it simple and easy. If you practice these three basic financial chords and know the truth, your financial life will be a hit.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include First Impressions,��Family Inc.��and�� Creative Destruction . Follow Dennis on Twitter��@dmfrie.

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It’s All Relative

YOUR INVESTMENT holdings might include an asset that���s dropped in value since you bought it. Still, you have great hopes for the investment: While you���d like to sell and get the tax loss, you really hate to part with your old friend. Should you instead sell it to your spouse or your child?

You can usually claim losses on investments when you sell them. But IRS code section 267 generally disallows deductions for losses on sales to certain family members and other related parties. Under the loss disallowance rules, related parties include close relatives, such as a spouse, child, grandchild, parent, brother or sister, or a company in which you own more than 50% of the stock.

Good faith sales. The law authorizes the IRS to invoke the related-party rules even if you make the sale in ���good faith������that is, without intending to avoid taxes���or involuntarily, as when a family member forecloses on the mortgage he or she holds on your property. Those rules can also snag an indirect transaction, such as when you sell stock through a public stock exchange and a related party purchases stock in the same company.

An example: You buy 100 shares of DEF Company for $10,000 and later sell them to your sister for $8,000. You can���t deduct your $2,000 loss. Why do these restrictions exist? The goal is to stop tax avoidance through transactions that merely shuffle property back and forth within the same family.

Salvaging disallowed losses. In the above example, your disallowed loss becomes available to your sister in the event she realizes a profit on the sale of her DEF shares. Her profit escapes taxes up to the amount of your disallowed loss.

Her basis for the DEF shares is the $8,000 that she paid you. If she eventually sells them for $9,000, her gain of $1,000 sidesteps taxes because it���s offset by $1,000 of your disallowed loss. If the sales price is $11,000, making her gain $3,000, then she���s liable for taxes on only $1,000 of the gain���the $3,000 gain minus your $2,000 disallowed loss.

Sales to ���nonrelated��� relatives.��The related party rules apply only to losses on sales of property to related parties such as your sister or son. Those restrictions don���t bar a deduction by you for a loss on the sale of the DEF shares to an in-law, such as a brother-in-law or daughter-in-law.

That brings me to an often-overlooked strategy. Let���s say your DEF shares have declined drastically and you wish to realize some of your paper loss without being out of the stock for an extended period. Under yet another set of restrictions, known as the wash-sale rule, your loss on a sale of the DEF shares is currently deductible only if the repurchase takes place more than 30 days before or after the sale.

What to do? To maneuver around these various rules and get your tax loss, while keeping the DEF shares in the family, just make a bona fide sale to an in-law. Instead of selling the stock on the open market, get a current quote and sell the stock at the market price to any in-law with whom you enjoy a good relationship. This will keep the benefit of a future upturn within the family���and you���ll have your deductible loss.

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Now or Later,��Good Old Days, Two’s a Crowd and Stepping Up. Information about his books is available at JulianBlockTaxExpert.com. Follow�� Julian on Twitter��@BlockJulian.

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Saving Ourselves

FRANKLIN ROOSEVELT said on Aug. 14, 1935, that the new Social Security program would provide ���some measure of protection to the average citizen��� against poverty-ridden old age.���

Nancy Altman, president of Social Security Works and chair of the Strengthen Social Security coalition, opined this year that ���after a lifetime of work Americans should have enough guaranteed Social Security to maintain their standard of living.���

Make no mistake: There���s a vast gap between Roosevelt���s notion of protecting against poverty and Altman���s goal of guaranteeing one���s standard of living. The latter implies 100% income replacement. How did we end up here?

Today, Social Security is designed to pay the average person about 40% of preretirement income and, for many people, it���s far less. At current benefit levels, the program won���t be able to pay 100% of promised benefits in 18 years or so. Yet some want Social Security expanded, so it pays even higher benefits, while others argue we should trim the program���s generosity to ensure its solvency.

There was a time when many Americans had a pension to rely on in old age. But it was never the majority and that number has declined for a host of reasons, including the decline of unions, complexities added by government regulations, funding problems, and fears among employers about the impact of this uncertain liability on their finances.

It���s hard to determine exactly how many of today���s workers have a traditional defined benefit pension, because the term ���retirement plan��� is used so loosely. But we do know there are great difference between public and private sector workers.

In the public sector, the traditional pension is the norm. Among state and local government workers, 85% of all workers and 93% of fulltime workers have access to a defined benefit pension. But in the private sector, pension coverage is put at just 15%.

Meanwhile, Social Security benefits represent about 33% of retirees’ income. Among Social Security beneficiaries, 48% of married couples and 69% of single individuals receive 50% or more of their income from Social Security. Even more alarming, 21% of married couples and about 44% of singles rely on Social Security for 90% or more of their income. That should not be the case. Few people can live on Social Security alone without significant belt-tightening.

Enough of the depressing statistics. What are we to do about it? We might assume that Americans would realize that a substantial part of retirement income depends on their own actions and do something about it. We might also assume employers would see the value in bolstering employee morale and loyalty by helping them to retire in comfort at a reasonable age, and want those retirees to have enough money to continue buying their goods and services. Apparently, neither are invalid assumptions.

Employers embraced 401(k) and similar plans largely for two reasons. First, costs were easy to predict and control for employers. Second, these plans seemed to make sense for a workforce that was more mobile, with few people staying with one employer long enough to qualify for a substantial defined benefit pension.

But the 401(k) experiment has proven to be a failure. Perhaps it isn���t the plans themselves that failed. Rather, the failure lies with workers��� unwillingness to accept long-term responsibility for their own retirement.

We can���and, I believe, likely will���eventually raise the basic Social Security benefit. But even a jump of 10% to 15% in benefits won���t solve the problem, and it will require significant additional taxes that���ll hamper the ability of many individuals to save.

According to the��calculator from the Committee for a Responsible Federal Budget, to increase benefits by 15% for new beneficiaries only��would require increasing the payroll tax by six percentage points, bringing the total payroll tax to 18.2%. That���s still a far cry from ensuring all beneficiaries maintain their standard of living in retirement. But given employers��� unwillingness to provide significant retirement benefits and employees��� unwillingness to save out of their own pocket, increasing Social Security benefits���and hence the payroll tax���is arguably the least bad option.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Required Irritation,��We’re Stuffed��and��Clueless.��Follow Dick on Twitter��@QuinnsComments.

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What Matters Most

PABLO PICASSO was one of the most influential, prolific and financially successful artists of the 20th century. Yet, if you had visited his studio at the peak of his career, you might have guessed otherwise: It was a mess and his work schedule was, at best, leisurely.

On a normal day, Picasso would stay in bed all morning and only get to work around 2 p.m. When he did work, according to a biographer, he was surrounded by ���piles of miscellaneous junk��� and an array of animals. In addition to cats and dogs, a miniature monkey named Monina would sit on the artist’s shoulder, stealing his food and smoking his cigarettes.

Why am I talking about Picasso and his odd routine? It holds an important lesson for your personal finances. However unusual Picasso’s routine, the key point is that he��did indeed have��a routine and, because of that, nothing else really mattered. Presumably, Picasso knew how many hours were required to get done what he needed to get done. As a result, if he spent the rest of the day relaxing, it didn’t matter. The mess, the cats, the dogs, Monina���all that was irrelevant.

How does this apply to your finances? Often, folks will ask if I think they���re spending too much in one particular area. Perhaps it���s a seven-figure house, a six-figure car or some other luxury. My response is always the same: If you have a sound underlying structure to your financial routine, then���like Picasso���you don’t need to worry too much about everything else.

In practice, what does this look like? What do I mean by a sound underlying structure?

If you���re in your working years,��the most important thing is to have a savings plan that���ll meet your retirement goals and then reliably sock away that sum each year. While life is full of unknowns, there���s a fairly simple formula to calculate that savings number.

If you have access to a spreadsheet, such as Excel or Google Sheets, use the PMT function. Let���s say you currently have $250,000 saved and expect 5% annual investment returns. If you want to accumulate $1 million by the time you retire in 20 years, this is the formula to determine your annual savings goal:

=PMT(5%,20,-250000,1000000)

If you don’t have a spreadsheet handy, the answer is about $10,000 per year. While nothing is guaranteed, odds are that if you routinely save $10,000 a year, you���ll reach your goal.

This is where Picasso comes in: As long as you maintain that savings routine, nothing else really matters. If you want to buy that expensive car or send your children to a high-priced school, the only litmus test for whether you can ���afford it��� is to ask whether it would impact your ability to continue saving that $10,000 a year. Or, to put it another way, you could afford a lot of disarray in your finances, as long as you maintain this one piece of structure.

If you���re already retired, you can also apply Picasso’s approach. Here the math is a little different: You want to calculate the amount you could safely��withdraw��from your savings each year and still maintain your standard of living throughout retirement.

There���s a number of approaches you could use to estimate this number, including using a spreadsheet or simply adopting a 4% withdrawal rate. But the important point is this: You want to establish a withdrawal routine that���s sustainable. In other words, you want to structure a withdrawal routine that, in all likelihood, won’t result in you outliving your money. And then you need to stick to it. While it sounds like I’m stating the obvious, that last part is key.

If there’s one thing that seems to trip people up, it’s ���one time��� expenses. Everyone has these���a vacation, a new roof, a big tax bill���and often they’re hard to predict. But when designing a retirement withdrawal routine, you need to allow for them in your calculations. That may sound like a tedious task. But if you do that, you’ll likely sleep easier���and you may discover that your finances permit more spending than you expected.

Adam M. Grossman���s previous blogs��include Happy Compromises,��Pushing Prices,��Counting Down��and��Deadly Serious . Adam is the founder of�� Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He���s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter�� @AdamMGrossman .

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Just in Case

A YEAR AGO, I was worried about the stock market. Today, I���m concerned about the job market.

In December 2017, I penned an article entitled Best Investment 2018, which turned out to be surprisingly prescient. That wasn���t really my goal. At the time, I was simply pondering rich stock market valuations, tiny bond yields and the new tax law, with its higher standard deduction and limits on itemized deductions. Putting it all together, it struck me that paying down debt���even mortgage debt���seemed like an awfully smart move.

Since then, the S&P 500 has dipped modestly, while reported earnings per share are expected to climb 28% in 2018. The passage of time has done the work usually done by market declines: It���s helped to sharply improve stock market valuations.

A year ago, the S&P 500 companies were trading at 25 times their reported corporate profits for the prior 12 months. Today, that multiple is down to 19.9, based on earnings for the 12 months through 2018’s third quarter from S&P Global. A year from now, that price-earnings multiple could be as low as 17, assuming stocks continue to tread water and earnings come through as expected.

To be sure, stocks remain expensive by historical standards. But that isn���t especially alarming. After all, stocks have been overvalued for much of the past three decades, plus today’s lowly bond yields are hardly a compelling alternative.

And to be sure, 2018���s handsome earnings growth has been fueled by 2017���s corporate tax cut and by continued fat company profit margins. The onetime boost from cutting taxes won���t, of course, be repeated in 2019. But there doesn���t appear to be any immediate risk that the tax cuts will be reversed.

Does that mean the recent market turmoil has run its course? I have no clue. Forecasting short-term market performance is a mug���s game, because it necessitates predicting not just the news, but also how investors will react to that news.

Indeed, when it comes to stocks, I find myself firmly on the fence. On the one hand, we haven���t seen anything that looks like a market bottom. There���s been no revealing of financial excesses, no squeals of economic pain, no horrendous decline in stock prices, no relentless declarations of doom from the pundits. On the other hand, thanks to improved valuations, buying stocks today doesn���t seem nearly as perilous as it did a year ago.

That brings me to the question everybody seems to be asking: Will the economy weaken? The financial markets appear to think so. The stock and bond markets are suggesting that a recession could be in the offing. When I look around, I don���t see many signs of a U.S. economic slowdown. But it���s foolish to argue with the markets, which reflect the collective wisdom of all investors.

If the economy does indeed weaken, the big worry for many families won���t be the stock market. After all, only half of Americans even own stocks and stock funds. Instead, the top concern for most Americans will be the job market.

We���re now at 3.7% unemployment, down from 10% in October 2009. The Federal Reserve expects 2.5% real economic growth in 2019, with unemployment dropping even further, to 3.5%. Let���s hope the Fed is right.

But in case the folks there have it all wrong, there���s good news: You might have 12 months or more to prep your finances for rough times. How come? The stock market is a leading indicator: It starts falling before the economy contracts and it rallies before a recession is over. By contrast, unemployment is a lagging indicator: Companies are slow to shed workers when the economy turns sluggish, though they���re also slow to rehire when economic growth resumes.

Worried you could lose your job in the next economic downturn? The obvious move is to stockpile cash. While that���s prudent, it shouldn���t necessarily be your top priority. Here are seven other things to do now:

Get rid of credit card debt. No matter what happens to the economy, that���s a smart move. What if you later need cash because you got laid off? While not advisable, you can always ���reborrow��� from your credit cards.
Pay off 401(k) loans. If you lose your job, any 401(k) loans must be repaid right away. Don���t have the necessary cash? The unpaid loan becomes a taxable distribution, triggering income taxes and tax penalties.
Keep funding the 401(k), especially if it comes with a matching employer contribution that vests immediately. Even if a bout of unemployment forces you to dip into your retirement account, you���ll likely come out ahead, because the matching contribution you collect could be worth more than any tax penalty you pay. On top of that, you may be able to delay any retirement account withdrawals until the next tax year, when your lack of income puts you in a lower tax bracket.
Fund a Roth rather than a tax-deductible IRA. If you need cash, you can withdraw the dollars you contributed to your Roth with no taxes or penalties owed. Taxes only become an issue if you touch the account���s investment earnings.
Set up a home-equity line of credit. This could provide another source of cash, should you find yourself out of work. One warning: If we get a deep recession, some banks may respond by cutting the size of credit lines, including those already established.
Calculate your fixed living costs, so you know the minimum sum you need to make it through each month. While you���re at it, ponder whether there���s any way to cut those fixed costs. If you don’t have a paycheck coming in, you want to do everything possible to limit the dollars going out.
Think hard before taking on new financial obligations. For instance, you might keep your current car for a few more years. If your job is at risk, this probably isn’t the best time to take on a car loan or use your spare cash to buy a new vehicle. What if you still have money owed on the last car you purchased? If the interest rate is above, say, 4%, you might make extra payments to get the loan paid off sooner.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include No Kidding,��Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

The post Just in Case appeared first on HumbleDollar.

Starting Young

I BEGAN WORKING for my father at age 12. He and his brothers run a sign manufacturing business that was co-founded in 1947 by my grandfather. The first few years, I cleaned pickup trucks, swept floors and took out the trash. When I got my driver���s license in high school, I started running errands for the business���better known as a gopher. As a finance major in college, I was able to work my way into the office, completing invoices, writing work orders and balancing the general ledger by hand. The lessons learned as I progressed through different jobs at the business are still valuable to me today.

Got your own business? The opportunity to employ your children is among the many potential benefits���and it isn���t just about developing a work ethic and teaching your kids to earn a dollar. There���s also the possibility of significant tax savings and the chance to get your children started as investors at a young age.

For this strategy to pass muster with the IRS, your children need to perform an actual service to the business and need to be paid a reasonable wage. Most likely, your kids have skills that you can leverage to modernize your business. Social media and online marketing come to mind. Other tasks include administrative or custodial work. Be sure to look up job or hourly rates for their position and document your findings. This will help in the event of an audit.

Intrigued? Use this five-step process to pay your kids for their services, maximize tax benefits and teach valuable investment lessons:

Hire your children to work for you and pay them a fair wage. Ideally, they earn $12,000 or more in a calendar year.
Your children each take 2018���s standard deduction of $12,000 when filing their taxes. This should reduce their taxable income to $0, unless they earn more than the standard deduction. In 2019, the standard deduction rises to $12,200.
The $12,000 or so of tax-free earnings will eventually be sent to two accounts: a Roth IRA and a 529 college savings plan.
In 2018, each child can contribute up to a $5,500 to a Roth IRA, which then grows tax-free. In 2019, the maximum contribution rises to $6,000.
The remaining money will be gifted back to you, so you can make a contribution to their 529 plan. The 529 grows tax-deferred and withdrawals are tax-free when used for qualified higher education expenses.

As an added benefit, the $12,000 or so in wages you pay each child are tax-deductible to the business. This means that you personally avoid having to pay any corporate or income taxes on these dollars.

Your children will be exempt from paying Social Security and Medicare payroll taxes if your business is a sole proprietorship and if they’re under age 18. They are also exempt from payroll taxes if the business is a partnership and the only partners are the children���s parents.

What happens if your business is incorporated? Your children will need to pay payroll taxes like any other employee. But the benefits far outweigh the taxes owed.

Starting in 2018, the Child Tax Credit was increased to $2,000. You can claim the credit on your return, assuming your children continue to meet the requirements to be considered a dependent. If your child earns enough to provide half of their own support, they no longer qualify.

The tax savings for you are nice, but the early start to investing for your children is even better. Take the Roth IRA. Suppose they make contributions of $6,000 a year for six consecutive years. Result? After 45 years, they���d each have $350,000, assuming a 5% inflation-adjusted annual return.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include Money Date Night, That Extra Step and Keeping It Going. Follow Ross on Twitter @RossVMenke.

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