Jonathan Clements's Blog, page 430

Self-Tithing

WHEN MY SISTER GRADUATED from physicians’ assistant school earlier this year, I gave her a journal, the pretty, unmarked, paper-substantive kind that every female loves. Inside, I wrote five things that I wish I’d known, or am glad I knew, when I got my bachelor’s in 2006. Here was the first:

I’m gonna call it self-tithing. Ya know: Basically, what Mom and Dad taught us to give to the church, I’m telling you to give to yourself. Save 10% to 20% of every paycheck, and you’ll be surprised how fast it grows. (Just don’t tell Mom.)

Among the many things that I’ve needed to “learn my way through” since college, there are some I’ve done well. Among them: Living the advice I gave my sister. I can still remember how paltry 10% of my first paycheck felt—and how ineffective I felt “saving” that amount of nothing. What’s $28,000 a year, minus income and payroll taxes, divided into two payments per month during each of 12 months? I’ll answer my own question: So paltry that I’ve misremembered the exact tiny amount.

I was living in Washington, DC, at the time, renting a room about the size of my current bathroom. My Goodwill carpet didn’t fully cover the cement floor and a $299 Ikea mattress seemed an incredibly irresponsible splurge. Let’s just say the itty-bitty living space matched my savings.

Back then, I often stole dinner from my employer’s kitchen. Expired chili is actually better than you’d think. This was back in the day before addressing the employee experience with grass-fed beef was a thing. All that to say, at the time, saving did not feel normal or natural.

“I don’t have the budget,” I remember arguing with myself. “I can barely afford rent!”

“I know, I know,” I self-responded. “But starting the habit later will be that much harder.”

Somehow, I listened to myself. Or maybe more accurately, I listened to parents-in-my-head who’d taught me to tithe and save. Since then, I’ve mostly saved 20%, mostly for myself and 501(c)(3) giving.

I shared these things with my love-you-like-a-sister over a Nashville dinner, while sipping real champagne bubbles and sitting face to face.

Set up an automatic transfer. Like literally. Have your employer funnel a portion of every paycheck—before you see it—to an entirely separate account. Live your life like the money’s not there.

Like much good advice, I knew following it isn’t easy. So I also told her how the approach could eventually pay off. In my case, saving up to 20% positioned me to buy and remodel a condo in incredible and incredibly expensive Silicon Valley. I relish the sensation of self-sourcing my own security and home. The place isn’t huge. It isn’t brand new. But as a first-time homeowner, I couldn’t see it as more lovely.

Caitlin Roberson, author of 30 Ways to Happy, lives and works in Silicon Valley, where she helps top tech executives change the world through business storytelling. Caitlin obsessively lifts weights and attends hip-hop dance classes, so she can tithe in Napa, guilt-free. You can learn more about her at CaitlinRoberson.com and follow her on Instagram @CRobRobber.

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Giving: 10 Questions to Ask

HAVEN’T GIVEN MUCH THOUGHT to estate planning and charitable giving? Here are 10 questions to jumpstart your thinking:

Can you afford to give away money now? You shouldn’t gift large sums to your children or charity unless you’re confident you have enough for your own retirement. There’s no limit on gifts to charity, though your annual tax deduction may be capped. For gifts to family members, you might take advantage of the annual gift-tax exclusion, currently $14,000.
Do you have the right beneficiaries listed on your retirement accounts and life insurance? Your individual retirement account and employer’s retirement plan might hold the bulk of your savings, so it’s crucial these accounts pass to the right folks.
At the end of your life, who do you want to make medical decisions on your behalf and how far would you like doctors to go in attempting to prolong your life? You should codify these wishes in a health care power of attorney and living will.
Do you have a will? According to a 2016 Gallup survey, just 44% of U.S. adults have one.
Are you worrying unnecessarily about federal estate taxes? Thanks to today’s $5.49 million estate tax exclusion, IRS statistics suggest just one out of every 530 deaths will likely trigger federal estate taxes. Indeed, you should review your estate plan if it was designed to avoid federal estate taxes—but was drawn up before the sharp increase in the federal estate tax exclusion since 2001, when the exclusion stood at just $675,000.
Does your state impose an estate or inheritance tax? A variety of websites keep a comprehensive list, including McGuireWoods.com and Nolo.com.
Should you keep your Roth IRA for your heirs? That pool of tax-free money could make a great bequest. During your lifetime, you might also help your children or other young family members fund a Roth, assuming they have earned income. With decades of compounding ahead of them, even small sums invested today could grow to become significant wealth.
Are the charities you support well-run? Investigate them by heading to sites such as CharityNavigator.org and GuideStar.org. A crucial question: Of the dollars you donate, what percentage ends up in the hands of the people you’re hoping to help?
Could you save even more on taxes by donating appreciated assets—or, if you’re over age 70½, giving away part of your annual required minimum distribution?
Have you talked to your adult children about your estate? You should discuss how much they will likely inherit, how you would like the money used, where key documents are located and what your wishes are regarding life-prolonging medical procedures.

This is the 10th blog in a series. Be sure to check out the earlier articles.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Hunting for Happiness

I HAVE NEVER BEEN under the illusion that happiness was a simple matter of more money and more material goods. But I did question where happiness could be found.

When I was young, I saw poverty at its most extreme in newly formed Bangladesh, where my family lived for four years during the 1970s. People struggled each day to stay alive and were lucky to find food and shelter.

As an adult traveling through Mexico, I have seen similar poverty. For these families, each day must be as grim as the last and presumably more money would buy happiness. But not every family I’ve met has been so impoverished. These families, who had the basic necessities of life, seem happy with what they have—and just as happy as those I see around me in the suburbs of Washington, DC. They don’t need the material goods that so many of us in the U.S. pursue in hopes of finding happiness. Instead, their happiness seems to lie in having family around them, all under one roof.

It’s a lesson that influences how I lead my own life. During my travels through Mexico with friends, we eat at roadside restaurants. You can tell which are the best, because you see more locals congregating. The food is as good as, if not better than, what you might find in a nearby restaurant that’s more upscale. We also typically stay at basic hotels, where our room might consist of nothing more than a bed with a ceiling light and fan. The bathroom facilities are outdoors.

On my most recent trip, we opted for a hotel that was slightly more luxurious (keep in mind, that’s relative). As I took a walk along the beach early one morning, I wondered if this would improve or diminish the level of happiness I got from the experience. It didn’t. That’s not to say that staying in a five-star hotel or eating at a similarly rated restaurant won’t be a happy experience. It probably will be.

What it says is that you don’t need to spend extra to find happiness. For me, it isn’t the fancy hotels and restaurants, but rather my relationship with my fellow travelers. That’s where I find happiness. It’s the experiences along the way which bring us together. It’s the time with friends and family, the laughter and conversation, not the dollars we spend.

Nicholas Clements is one of Jonathan’s older brothers. He is retired and lives just outside Washington, DC. His previous blogs include Help Wanted, On Our Own and Growing Up (Part III) . Follow him on Twitter @MDScaper .

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Top 10 Blogs: Third Quarter

OVER THE PAST THREE MONTHS, readers flocked to our series of blogs on 10 questions to ask. What else caught their eye? Many of the other top 10 blogs focused on investment issues, perhaps reflecting a summer of stock market nervousness, even as share prices edged higher.

Retirement: 10 Questions to Ask
Fooled You
Measure for Measure
Happiness: 10 Questions to Ask
Looking Bad
Protection Money
Safety Net: 10 Questions to Ask
Stocking Up
Savings: 10 Questions to Ask
Growing Up (Part II)

What have been the most popular blogs so far this year? Check out yesterday’s post and you’ll see the top 10 for 2017’s first nine months.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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This Week/Oct. 1-7

CONSIDER A ROTH CONVERSION. You should have a good idea of your taxable income for the current year. Is it less than normal, so you’ll end up in a lower tax bracket? To take advantage, consider converting part of your traditional IRA to a Roth, where the money will grow tax-free thereafter. One warning: Make sure you have the necessary cash to pay the resulting tax bill.

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Top 10 Blogs: 2017

WHAT CATCHES READERS’ ATTENTION? I’m often surprised. Below are HumbleDollar’s 10 best read blogs through 2017’s first nine months:

Retirement: 10 Questions to Ask
Fooled You
Ten Commandments
Courtside Seat
Next to Nothing
The Good, the Bad and the Ugly
Nothing Better
Measure for Measure
Did I Say That?
Site Seeing (Part I)

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Science? Yeah, Right

I HEAR SO MANY compelling investment arguments. That U.S. stocks are destined to generate lackluster returns because valuations are so rich. That there’s no need to own foreign stocks because you get enough international exposure with U.S. multinationals. That interest rates have nowhere to go but up.

And yet U.S. stocks keep clocking gains, U.S. and foreign shares often generate radically different annual results, and interest rates show no signs of heading significantly higher. Year after year, the markets make a mockery of articulate financial experts and their well-reasoned recommendations.

My advice: Whenever you hear a convincing forecast, read about a winning investment strategy or receive financial advice, keep four notions in mind.

First, the language of Wall Street is numbers and numbers suggest precision. But this is not a precise business. If a financial planner says you need to save 12% of your income each year for retirement, the right number could turn out to be 9%—or perhaps 15%. There’s nothing wrong with making financial projections, but you need to revisit them often and fine-tune them along the way.

Second, financial markets deliver an endless stream of misleading short-term feedback. In any given year, a few fortunate fools who bet big will notch huge gains, while those who prudently pursue low-cost, diversified investment strategies might lose money. But over the long run, the prudent investors will likely end up far richer, while the fools are relieved of their wealth with the same startling speed it was acquired.

Third, managing money is not a science, but a social science. There are people involved, and that makes matters messy. Sometimes, investors behave like a crazed mob. Witness 1999, when they drove tech stocks to ridiculous heights, and 2006, when they did the same for home prices.

Fortunately, people also learn from the past. There are clear-cut examples, like the widespread adoption of indexing and broad diversification, and the much stronger focus on holding down costs. Eventually, the list of clear-cut examples may also include smart beta factors like the momentum effect, the small-stock effect and the value effect. These factors might continue to outperform over the long haul—and I’m hoping they will, because my own portfolio is tilted toward small and value. But now that these factor have been so well-publicized and so widely adopted, the performance edge will likely be smaller, and perhaps so small that it’s largely or entirely devoured by the extra investment costs involved.

Fourth, markets are driven by news—and news, by definition, isn’t known ahead of time. Maybe the news that’s still to come will prompt us to collectively decide that the world is a safer place, justifying higher valuations, or maybe we’ll grow more fearful and valuations will come crashing down. Who knows? I sure don’t—and I don’t think anybody else does, either.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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September’s Update

NOTICE ANYTHING DIFFERENT? HumbleDollar’s home page has had a modest makeover. Along with the latest three blogs, our weekly action item and the daily insight that’s stripped across the top of the page, the home page now includes a preview of the most recent monthly newsletter and a look at one of the 500 or so sections that make up our comprehensive online money guide.

After the Equifax data breach, I posted a blog about protecting your financial life—and then followed it up by revamping the money guide’s sections devoted to identity theft and how to fend off the various risks involved. Want a refresher course? Start here, and also read the two sections that follow.

Meanwhile, I continue to update various statistics throughout the site, including the latest numbers on the abysmal performance of most actively managed mutual funds and a look at our borrowing habits.

The federal government recently released information on America’s expenditures in 2016, also prompting me to update the money guide. How does the typical American family divvy up its dollars? It seems we spend an average $4,600 a year on eating out, $1,000 on gambling, $800 on tobacco and $1,100 on booze that we drink at home—and another $700 on booze when we’re eating out.

It’s amusing to compare these figures, which are from the Commerce Department’s Bureau of Economic Analysis (BEA) and reflect top-down economic data, with the data collected by the Labor Department’s Bureau of Labor Statistics (BLS), which is based on surveying households. One example: While the BEA data shows that Americans spent $800 on tobacco in 2016, households tell the BLS they spent closer to $300. Similarly, it seems we’re unwilling to admit how much we truly spend on booze and eating out, so those numbers in the BLS data are also much lower.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Unending Pain

SOME OF MY CLIENTS are political junkies; others don’t follow politics. Either way, they’re mostly aware that the Affordable Care Act, a.k.a. Obamacare, overhauled the rules for medical insurance. But lots of them are unaware that ACA’s overhaul also significantly changed some tax laws—and those changes adversely affected their pocketbooks.

I remind my clients that ACA included a provision that increased Medicare taxes for employees with high incomes. Similarly, it increased self-employment taxes for freelancers with high incomes.

The ACA introduced an additional Medicare tax of 0.9%. Who gets dinged for this surtax? It hits joint filers with wages above $250,000 ($125,000 for married couples filing separate returns) and single filers over $200,000. It also hits individuals with self-employment income above these thresholds. Moreover, once your modified adjusted gross income (same as adjusted gross income for most individuals, except expatriates) reaches these levels, a 3.8% surtax applies to some of your investment income.

Yesterday, Senate Republicans abandoned their latest effort to replace Obamacare. But what if the ACA was repealed and the 0.9% and 3.8% surtaxes went away? While high-income individuals would pay less in income taxes on their earnings and investment income, they’d find that Medicare taxes, unlike Social Security payroll taxes, would still take a piece of every $1 they earn.

ACA left unchanged employees’ existing liability for payroll taxes, officially known as FICA taxes. (FICA is short for Federal Insurance Contribution Act.) Longstanding rules require employers to withhold FICA taxes from amounts paid to their employees as wages, salaries and other forms of compensation. ACA made no change in the requirement that employers, too, must ante up. They have to match the payroll taxes that they subtract from their employees’ compensation.

Different rules, which have been on the books for eons, remain applicable when individuals are their own bosses and operate as sole proprietors, in partnership with others or as independent contractors. While freelancers sidestep FICA taxes, they’re liable for self-employment taxes. Think of them as FICA taxes for the self-employed.

How does a kinder and gentler IRS deal with individuals who are both employees and moonlight as freelancers? The agency will nick them for both FICA and self-employment taxes.

FICA taxes consist of two components with different rates. First, the rate is 6.2% for the Social Security benefits portion, up to a limit of $127,200 for 2017. Once you hit $127,200 in earnings for the year, withholding from your paycheck for Social Security payroll taxes ends. Spoiler alert: The annual cap is indexed, meaning it’s adjusted for inflation and will increase for 2018.

The other FICA rate is 1.45% for the Medicare fund, the federal medical insurance program for the elderly. There’s no ceiling on the amount of wages subject to the 1.45% rate, meaning employees with earnings above $127,200 must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay and the like. Workers surrender $14.50 to Medicare taxes for each $1,000 of compensation.

As with FICA taxes, ACA left intact the key rules for self-employment taxes. They’re still imposed at a rate of 15.3% on net earnings (receipts minus expenses). This is twice the 7.65% usually paid by employees, because self-employed persons pay both the employer and employee halves.

Like FICA taxes, self-employment taxes consist of two components with different rates. The rate is 12.4% for the Social Security benefits portion, up to a limit of $127,200 for 2017.

The other self-employment rate is 2.9% for the Medicare fund. There’s no ceiling on the amount of net earnings subject to the 2.9% rate, meaning self-employed persons with earnings above $127,200 pay Medicare taxes on every dollar of their earnings. They forfeit $29 to Medicare taxes for each $1,000 they earn.

Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Moving On and Late? That’ll Cost You 50%. This article is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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Driving Down Costs

LIKE MOST PEOPLE, owning a car is my second largest monthly expense, right after housing. But unlike a lot of people, I also strive to be a super-saver, loosely defined as folks who max out their retirement accounts each year. That means I’m constantly looking for ways to cut my transportation costs.

Four years ago, when I found myself needing to buy a car, I settled on a gently used Honda CRV. Even though it was nearly six years old when I purchased it, the car had just 32,000 miles on it. I knew Hondas had a reputation for being dependable and the CRV is among a handful of models known for making it to 200,000 miles without too many problems. For me, buying a used car was a no-brainer. Knowing new cars depreciate at a rapid rate—by some estimates losing as much as 60% of their value in the first five years—I decided a used vehicle was the wiser choice.

I paid cash for my car—and thereby avoided finance charges—by using the proceeds from an insurance settlement. At the time I purchased my car, I also invested $15,000 of my own money in a conservatively invested mutual fund. It’s an account I’ve designated to be used for another car purchase in the future, once my CRV is finally destined for the junkyard. After just four years, that account has grown to more than $18,000, easily keeping pace with inflation and rising vehicle costs.

To maximize the life of my car, I make sure to service it on a regular basis, taking it in for scheduled oil changes and other routine maintenance a couple of times a year. I also thoroughly clean it, inside and out, every few weeks. These steps not only keep it running smoothly, but also help me maintain a sense of pride in ownership.

I make sure both my car and me are adequately insured, to protect myself financially from a lawsuit. Maintaining a clean driving record and opting for high deductibles keep my insurance rates reasonable. I also purchase an annual AAA membership to provide me with peace of mind.

I buy most of my gasoline from Costco, since it almost always has the cheapest prices. I also use a credit card that provides me with 4% cashback on gas purchases. Occasionally, I’ll fill up at a grocery-store chain, using the multiple 10-cent-per-gallon discounts I’ve earned from purchasing groceries.

Of course, living in a city means I could opt for public transportation, rather than car ownership. But for me, the cost-benefit analysis heavily favors the car. If I relied on the local bus and train system, my daily commute would take 77 minutes each way. By car, it’s usually less than 30 minutes. And because my job requires me to run frequent errands, car ownership is pretty much a necessity.

My no-frills, no-nonsense approach to car ownership is in line with my other financial values. By keeping transportation costs at a reasonable level, I’m able to maximize my retirement savings—and make my super-saver dreams a reality.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include Getting Sued and College, Then and Now .

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