Syed, Author at The Broke Professional

February is Failed Resolution Month

Make Goals Great Again!

Did you make a New Years resolution for 2019? Most likely it has failed by now. Not that I know you personally or anything. But research tells me so.

It’s estimated that 80% of New Year’s resolutions fail. When they fail can vary, but I would guess around February sounds right since it’s tough for most people to do anything new for a month. Myself included.

Most resolutions are usually health or money related. Not surprisingly, I will focus on how to meet money resolutions. Although health and money are related in many ways.

In any case, here is why I think most money resolutions fail and how we can make resolutions that stick.

SMRT. I mean SMART

Most of us know what SMART goals are. It refers to goals that are Specific, Measurable, Attainable, Realistic and Timely. We’ve all seen this acronym many times.

But as with most things money, knowledge isn’t everything. Execution is where people go wrong. Setting SMART goals is the key but I feel most people just gloss over it or aren’t specific enough.

A big reason why most people don’t adhere to the SMART goal philosophy is that their goals really aren’t attainable. An example is someone who makes a goal to earn $100,000 in 2019. While it’s better than a general goal of “make more money”, this goal still has some flaws.

If this person is used to making $50,000 a year, getting to $100,000 a year is going to be tough. You could break it up even further and say the goal is to make $8,333.33 a month. But if the first few months don’t go right, which is likely since the beginning is always the toughest, then they might abandon the goal.

So what’s the best way to use SMART goals for the New Year? You should still make them specific, measurable and have a timeline. But you need to make the first step ridiculously easy.

Momentum is the key

Let’s say someone made a goal to save 20% of their income in 2019. A worthy goal indeed. But if they are currently saving 5%, it will be pretty tough to crank up the savings rate by 15% and not feel shell shocked.

Make the first step easy. Save 1% more for January. That’s it. It sounds stupidly simple but this is where the battle will be won. By the end of January, they will be saving 6%. Do 1% more for February, and repeat until the end of the year.

The momentum will likely carry this person to their goal. Maybe one month they can save 2%. But June is a tough month and they can’t save any extra. There will be ups and downs but by working on finding ways to save just a little more each month this person will get a crash course in being financially savvy.

After the year is up, they might by at a 16% savings rate. Didn’t quite get to 20%. So is the goal a failure? Absolutely not! Because you can do the same process for the following year and easily get to a 25% savings rate.

All from the first initial easy 1% savings increase. Momentum is a real thing and putting too much pressure on yourself too quickly greatly decreases the chance of hitting your financial resolution

The Big Picture

As humans, we tend to overestimate what we can accomplish in a year. But we also greatly underestimate what we can accomplish in 5 years.

This is essentially the problem with goal setting. We set our sights too high to achieve a short term win. But if we take smaller steps and are okay with stretching our timeline just a little bit, momentum will help carry us to our goals.

Let’s not make February the month where goals come to die for The Broke Professional readers. Just recalibrate them and keep on moving forward.

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4 Reasons why an Emergency Fund is Crucial

The average person has many financial steps they need to take.  They need to make an income.  Preferably doing something that is not soul crushing.  They also need to make sure they are saving enough for retirement.  The government will not bail out the average American unfortunately.

If you have kids, college savings are important since tuition is rising rapidly.  And people also want to have a little fun with their money.  Imagine that.

With all these pressing concerns, the tried and true advice of having an emergency fund can become a second thought.  But it shouldn’t.  It should actually be the first thought and will provide the basis for every other financial goal you’re pushing for.

Here are four reasons why emergency funds are important.  I’m sure there are more than four reasons, but I just can’t think of any others at the moment:

Not having one can derail EVERYTHING: I mentioned retirement and saving for college.  Most people like making regular monthly contributions to these accounts to keep them well funded and growing.  But what if you get hit with a big medical bill?  What if the car’s transmission goes out?  What if the AC decides not to work?

Many people have to stop their monthly contributions to other plans in order to pay for such an emergency.  This means less growth and less money for you in the end.  Sometimes a lot less.  An emergency fund will allow you to keep on your financial path without skipping a beat.

Emergencies are inevitable:  Many people view emergency funds as just a “rainy day” fund in case something crazy happens in life.  The fact is, crazy things happen to EVERYONE at some point in their life.

It would be safe to say that everyone has had some type of financial obligation pop up that was not planned for.  Cars break down, people get sick and pipes burst.  Once you plan that an emergency will happen that will require some cash and fast, it makes it that much easier to save for that inevitable day.

Avoid credit card debt:  Credit card debt is one of the worst debts out there.  But it is so very easy to get into it.  You can’t go to a grocery or department store without being asked to sign up for a card.

Because credit cards are so easy to get, some argue that you should use credit as your emergency fund.  It’s easy to get and many people can get cards with limits of at least $5,000 easily enough.

But the problem is that even if you have every intention of paying the bill off in full, life can come at you fast.  You may be okay paying the minimum payment until you can get some more money.  Once you start down that very slippery slope, it can be very tough to recover.

Avoiding credit card debt is probably the one thing that will give people the best chance to have a great financial life.  And having an emergency fund full of cash will let you do just that.

Peace of mind:  We all talk about wanting financial peace or financial freedom.  Whatever your definition of that is, the fact is that having a solid emergency fund will help you get there.

When you hear an unfamiliar sound coming from your car or you notice a leak from the water heater, you will of course try to fix the problem but in the back of your mind you will know that there is enough cash to cover it.  There is no panic that needs to be experienced.

At the end of the day, peace of mind is one of the signs of someone who is financially free or on the path to get there.

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Valuable Above the Line Deductions

Make off with the deductions you deserve

Not sure if you heard, but a new tax law went into effect for 2018. I wrote about some of the major changes here.

One of the goals of the new tax plan was to make the tax filing process easier and simpler. While the jury is still out on that, one thing we can count on is that more people will be taking the standard deduction instead of being able to itemize their deductions.

The main reason for this is the limitation on the State and Local Tax (SALT) deduction to $10,000. The SALT taxes comprise of a number of different types of taxes, but the main one that will affect most people is property tax.

This is especially a huge blow for those living in expensive cities such as San Francisco or New York, where property taxes alone can be $20,000, way over the $10,000 limit.

So with the hard limit placed on SALT and the doubling of the standard deduction, fewer people will be able to itemize their deductions. That’s definitely a bummer, but all is not lost.

Above the Line deductions to the rescue!

Walk the Line

Deductions taken above the line have always been valuable. The “line” refers to your Adjusted Gross Income (AGI). Many tax breaks and credits are calculated based on your AGI.

And most of them start phasing out if your AGI is too high. That’s why above the line deductions are so powerful. Not only do they reduce the income that you’re going to be taxed on, they can also make you eligible for even more tax perks.

For example, the American Opportunity Tax Credit is a nice credit for tuition and other education costs. You can get up to $2,500 off your tax bill. That’s powerful.

But if you’re a married couple in 2019 and your AGI is above $180,000, you cannot claim the credit. A big loss.

Another good example is a Roth IRA. They are awesome accounts that allow you to save tax free money for retirement. But if you’re a married couple that makes more than $203,000 in 2019, you can’t contribute to a Roth. Another big loss.

I hope you can see the importance of keeping your AGI as low as you can. Since most taxpayers will be using the standard deduction under the new tax law, above the line deductions become all the more valuable in reducing your tax bill.

Low Hanging Fruit

Here is the actual list of above the line deductions taken directly from tax form 1040:

These are the big juicy deductions to focus on. What jumps out to me is that there are two no brainer deductions that most people can take advantage of.

Health Savings Account deduction. HSA’s are one of the best accounts out there. And if you have a high deductible health plan, which many people do, you can contribute to one. You can reduce your AGI by contributing to one, and any investment growth is tax free as well.

If you’re employed, you can simply get the contributions taken out of your paycheck. Easy enough. If you’re self employed, just report your contributions on that line 25 to get your above the line deduction.

-IRA contribution. This is another nice deduction you can use to reduce your AGI. It’s important to note this deduction refers to Traditional IRA’s. Roth IRA contributions are not tax deductible.

For 2019, you can contribute a maximum of $6,000 to an IRA. This will beef up your retirement savings while reducing your taxable income. A true win-win.

If you’re employed and are offered access to a 401k, you can still contribute to your own Traditional IRA, but there are income limits. If your tax filing status is single and your income is more than $74,000, your contributions are not tax deductible. $123,000 is the limit if married.

But no need to fret. The contribution limit of a 401k plan in 2019 is $19,000. More than triple that of an IRA. That’s income that is not reported on your W2, effectively lowering your AGI. Take full advantage of this if you can.

Student loan debt is not something you want to keep around too long, but it’s nice you can get an above the line deduction for the interest paid. In fact, if you have some low interest loans (below 4% in my book) that don’t keep you up at night, it can make sense to keep some of it around.

The reason being that compound interest from investing is most powerful when you’re young. If you invest early and often while keeping low interest student debt that will give you a little deduction anyway, it can be a nice wealth boost. Just a thought.

If you’re self employed, you have a few more opportunities to get deductions. You can deduct your health insurance premiums and part of the self employment tax.

I’ve been paying COBRA premiums since I recently became self employed. COBRA is much more expensive than what I was paying for health insurance as an employee, so it’s nice that I will be able to deduct that on my tax return.

Take what you can get

Paying more taxes than you should isn’t patriotic. The government lets us take deductions for a reason, so take advantage of them. The two big ones everyone should try to take advantage of are HSA and Traditional IRA contributions.

Almost everyone should be able to contribute to these. And they have the compound effect of increasing your retirement savings and reducing your AGI, possibly opening the door for even more tax credits. Can’t think of a more slam dunk way to increase your wealth.

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The Most Effective Way to Avoid Burnout

Burnout doesn’t really have an official definition. But it can be characterized by bouts of depression, hopelessness and feeling flat from being stressed out at work.

Anyone can experience burnout, but it is pretty common among high income professionals such as doctors, lawyers and dentists.

Doctors are especially prone to feeling burnout out from work. Depending on the specialty, the rate of burnout can be anywhere from 30-40%. This is a popular article by a surgeon in Australia about the particular reasons physicians are feeling stressed and burnt out. Pretty fascinating read.

Burnout is real. So how do we address it? There are a number of ways including increasing morale and decreasing administrative tasks so professionals can actually focus on their job.

But this being a personal finance blog, I’m going to propose a financial way to help deal with burnout. And it’s pretty simple: Make enough money and have a plan for it.

Money = freedom

There are lots of ways people deal with burnout. And most of them involve escaping to something else like alcohol, food, television or medication. All valid ways to deal with stress and burnout.

Valid, but not very effective. In the end, burnout is largely due to lack of control. You can’t control your hours, your co-workers, the weather etc.

Most people also can’t usually control how much money they make. While money isn’t everything, I feel it plays a huge role in the potential for burnout.

Let’s say a doctor is being forced to work hard 80+ hours a week with very little sleep. His salary is $50,000/year. I guarantee you that doctor will start looking for the exits real soon.

How about he magically gets a raise to $500,000? He will definitely stick around that job longer despite the hard work. But he may start looking elsewhere after it just gets to be too much.

Now how about he gets a raise to $5 million? That will be the most loyal doctor you will ever see and burnout will be the farthest thing from his mind.

While this is an extreme example, it does show that if financial security is there, the risk of burnout will decrease. But we all can’t just pull a lever and make more money appear. Increasing income is a long term process that takes some trial and error. But for someone who is staring burnout in the face, time is one luxury that they don’t have.

So the focus should shift to what you can control. Specifically, how you spend your money and your overall financial plan.

Focus on what you can control

People who are stressed usually spend money to make themselves feel better. But it’s only temporary, and then you have less money. Which makes you more stressed.

So the first thing I would recommend is to find your biggest spending leak and plug it. Whether it’s eating out, drinking out or shopping, you need to cut the spending or risk facing burnout.

If you successfully do that, you will have some extra money every month. Now comes the important part: Make a plan for that money. You don’t need a full on financial plan that has retirement projections for multiple scenarios. That will come when you have more time and money.

Just make a simple goal for that money. For example, if you have an extra $200 every month, set up an automated savings plan into a Roth IRA. Or if you need some more in your emergency fund, send the money there every month.

The important thing is to do it and make it automatic. This will be a nice first step to financial independence and allow you to take back some control in your life. Which will eventually help minimize your chances of burnout at work.

Once you’re able to save more money, and hopefully make more as well, you can continue to take some more control by adding more money to your existing plan. Or you can make new goals such as saving for travel, a home or even working a little bit less.

Now that’s real control.

Burnout is Real, but not Inevitable

I have to admit, working in a corporate environment is tough. While I have thankfully never gotten to the point where I just want to walk off the job, I have experienced stressful situations which can make me wonder what I’m doing with my life.

But money can be a good motivator. And if you have a plan for your money that will eventually lead to financial independence, you will be able to tolerate a lot.

Obviously, if you are in an overly stressful and toxic environment which is affecting your health and well being, you should find an exit plan. But having a solid financial foundation will let you make the best decision for yourself and your career.

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Dancing is Not a Good Investment Strategy

If your investment strategy was a dancer

1/11/2019:  I thought this would be a great time to re-post this, since many people are starting to dance with their investments!  There has been some ups and downs in the stock market the last month or so, and it’s making people do weird things.  

I’ve heard many people say that they are stopping their retirement account contributions or moving some of their stock positions into bonds or money market accounts.  Don’t do these stupid dance moves! 

Making investment decisions for retirement money based on a few weeks activity is almost guaranteeing that you will retire with less money.  Just keep contributing and rebalance as you have been, and you will come out on the other side smelling like a rose.

Investing is a patient man’s game.  This applies to almost any type of investing including real estate and stocks.  In general, if you’re investing for the long term (more than 10 years), the best strategy is to have a great plan and stick to it.

Unfortunately, many impatient men (and women) are investors.  This means many plans never make it past the first big market drop.  That’s usually when panic sets in and investors do something short sighted.

A 2015 study proves exactly this.  The study shows that we are our own worst enemy when it comes to investing.  And no other reason even comes close.

Let me set the stage by showing you the study results and what we can learn from them.

People are Not Good at Investing

I recently wrote why many investors are their own worst enemy when it comes to their investment performance.  While the subject of this post is similar, after reading the results of the aforementioned study I felt a separate post was needed.

The study was conducted in 2015, and at the time the S&P 500 Index had a 30-year annualized gain of 10.53%.  That means that every year for the last 30 years, the S&P gained an average of 10.53% per year.  Some years were way more and some years were way less (think 2008).  But on average, a nice 10% return every year.

What this means is that an investor who simply held an S&P 500 index fund for the last 30 years should have returned 10.53% minus fees.  Let us say this investor had some crazy fees which brought the return down to 8%.  Paying high fees is annoying, but 8% is still not a bad overall return.

According to the study, the average investor didn’t do this well.  In fact, they did a lot worse.  The study found that the average investor returned 1.65%!

1.65%!!!???  They might as well have put all that money into an online savings account and saved themselves the stress of investing.

This means that the average investor is probably not using index funds.  And if they are, they are using the wrong ones or are just going in and out of investments way too much.  I think the latter is the culprit for most investors.

Dancing In and Out of Investments

“Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” -Warren Buffet in his 2012 letter to Berkshire Hathaway shareholders

(The basic game is investing and Charlie refers to Charlie Munger, Buffet’s partner at BH.)

As Mr Buffett explains in this quote, “dancing” in and out of investments is very risky.  I firmly believe this is why the average investor does not even come close to the returns of the S&P 500.

But why does going in and out of investments produce such poor returns?  Shouldn’t we always be looking to get out of our investments when things get bad and find some better places to put our money?

The answer is yes, we should be looking for better places to invest.  But the best place to invest is usually in an index fund that follows the overall market.  And it’s almost impossible to find another group of investments that does better than the overall market on a consistent basis.

And by dancing in and out of investments, most people are actually buying high and selling low.  We should always try to buy low and sell high!  People usually panic and sell investments when things get bad (sell low), and then they try to buy into investments that everybody is saying is “safe” (buy high).

A great example is the recent Brexit vote that will lead to the UK withdrawing from the European Union.  It was expected that the stock market would fall after the vote was yes, and it did just that.  The day after the vote was final, the S&P 500 dropped 66 points, which was about a 3% loss.  Not a huge drop, but pretty decent.

But if you turned on any form of financial news, you would think the Four Horsemen were arriving.  Predictions that the international markets will be in turmoil for years was the theme of the day.  The S&P actually did fall about 1% more the next day, which lead to more doom and gloom.

But about 10 days after the Brexit vote, the S&P 500 was right back to where it was before.  And as of now, 2 months after the vote, the S&P 500 is about 3% higher than it was pre-Brexit!

The Big Takeaway

What this all means is that if you were one of those investors who panicked and sold some stocks after Brexit and then bought more stocks when the market rebounded, you were dancing in and out of the market which means you were selling high and buying low.

And this is why the average investor averages returns a little over 1%.  As the study showed, just owning an S&P 500 index fund for the last 30 years and not doing anything with it would get you a 10% return.

The best course of action for investors who don’t want to make stock picking their full time job is to formulate an index fund strategy that is appropriate to your investing timeline.  Pick the funds.  Rebalance the funds every year so they don’t get too out of wack.  And then leave it alone.

You will be a better investor than the majority of America.

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Don’t Laugh at the Latte Factor

If you need this every day, then you don’t value money.

Some personal finance concepts will live on forever. Pay Yourself First is one of them. Debt Snowball is another one. And of course from uncle Dave Ramsey himself, “Live like no one else so you can live like no one else.”

But the one I want to talk about today is the Latte Factor. It’s a term that has been in the personal finance lexicon for over a decade now, but it is still somehow a polarizing subject.

David Bach first officially introduced the Latte Factor in his book The Automatic Millionaire. This was actually the first personal finance book I ever read and sparked my interest in the subject. A really good book for people at any stage in their finances.

In the book he talked about the ability to give up spending money on something and redirecting that money into savings. The example he gave was of giving up your daily latte. Thus, the Latte Factor.

The numbers are actually pretty amazing. Say you spend $4 every day on a delicious latte. (I worked at Starbucks for years so I know there are many people who do this.) Now instead of spending $4 every day on a drink, take that money and put it into an investment account.

Here’s what happens. If you put that daily $4 into a retirement account that gives you a modest 6% return, you will have $1,547.60 in one year. Not bad at all!

But if you keep doing it, the numbers get crazy. After 5 years, you’ll have $8,723.97. 10 years? $20,398.60. How about we jump to 40 years? How about you have $239,509.62! Just from giving up your little $4 addiction, you can rack up thousands of dollars pretty fast.

So why do so many people have a problem with the Latte Factor?

Overly Sensitive Coffee Lovers

Like I mentioned before, I worked at Starbucks during high school and college. It was at a new store in the mall and from the day it opened, it was packed every day. To say Americans are addicted to coffee is an understatement.

I would see the same people come in day after day for an expensive coffee and a pastry. This would easily be $7 a day. And this was 15 years ago. Starbucks is more expensive and this country is more addicted to sugary coffee and snacks.

So there certainly is a large part of the population that spends close to $10 a day at expensive coffee houses. (By the way, a daily $10 habit can turn into almost $600,000 after 40 years at a 6% growth rate).

And after reading criticisms about the Latte Factor, most people just seem to be mad at the idea of taking away their lattes. They say if you enjoy your lattes and they make you happy, keep them! Don’t let some cold financial guru tell you to stop your habit.

These people are not looking at the big picture. It’s not just lattes that are a candidate for the chopping block (which they should be since most lattes have unholy amounts of sugar). It’s anything you buy that isn’t essential and doesn’t bring you happiness.

Let’s make a list: cigarettes, alcohol, donuts, expensive cell phone plans, expensive car loans, fancy groceries, fancy shaving cream, movie theater food, airplane food, soda, bank fees, non-library books, barely used gym memberships, and so on.

Long enough list for you? Most people have many little expenses like this. Imagine cutting just half of them out and putting it towards your investment plan? I hate the saying, but you’d definitely be living your best life!

Conclusion

If drinking an over-caffeinated beverage spiked with sugar every day really makes you happy, don’t let David Bach or anyone else say you can’t have it. Just realize that you love lattes and high blood sugar more than money and continue to feed the addiction.

But try to look outside yourself and find out what non essential expenses you can cut or minimize. Once you can do this, funnel that savings right into your investment accounts and watch your wealth grow year after year with the additional latte flavored rocket fuel.

And with today’s technology, it’s easier than ever. When you pass by the coffee shop and have the urge to scarf down that overpriced scone, just pull out your smartphone.

Simply sign into your investment account, transfer that $5 from your checking account, and walk away with a smile knowing you are fueling your wealth and some billionaire CEO.

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Unforgivable Financial Sins

Committing these financial sins is like lighting your money on fire.

Most major religions have the concept of sin.  From my understanding of my own religion and other major world religions, sins are detestable actions that take you further away from the Divine.  Some sins have the double whammy effect of harming your soul and potentially messing up your life on Earth too.  Infidelity or drug use, for example.

Even those who don’t subscribe to a particular religion believe there are some acts that just should not be done.  Murder, theft and oppression come to mind.

I would love to go more into this, but I’ll save that for the theology blog.

I wanted to discuss some financial “sins” that can take you away from the “divine” (financial freedom) and can destroy your life.  While some financial sins can potentially affect your afterlife (think embezzlement and money laundering), the sins discussed here will be more of the mortal world variety.

Committing these sins can derail your finances and can sometimes be a gateway to even more financially devastating actions.  In no particular order, here are some of the more blasphemous things you can do to your finances:

Raiding tax deferred retirement accounts early

Retirement accounts such as 401(k)’s and IRA’s are the backbone of a solid retirement plan.  You contribute into these accounts during your younger working years so that you can hopefully enjoy a stable retirement down the road.

The government has put some restrictions on these accounts so people won’t just withdraw money from them as they please.  A common retirement account is the Traditional IRA.  According to the IRS (no relation to IRA), if you withdraw funds from a Traditional IRA before age 59.5 you will have to include the withdrawal amount in your taxable income along with paying a 10% penalty.

That’s a hefty fine for putting your hand in the retirement cookie jar.  If you are in the 22% federal tax bracket and you withdraw $100,000 from your IRA, you lose $22,000 of it from taxes.  Add the 10% penalty and your $100,000 withdrawal becomes $68,000!!

Think of withdrawing early from your retirement account as robbing an old man version of yourself.  That seems cruel.  You’re also sort of robbing your current self too with the huge tax hit.

So unless you’re in dire straits, don’t consider withdrawing from retirement accounts.  Your older self will thank you.

Carrying credit card debt

There used to be a time when credit cards didn’t exist.  People used to pay for things with cash and for the most part didn’t get into monstrous debt.

Nowadays, credit is easy to get which makes it much easier to get into debt.  Funny how that works.

In 2017, the average household credit card debt was a little over $6,000.  That is a bad enough number, but there are a lot of households that have no credit card debt.  So the ones that do have debt probably have much more debt than $6,000.

The sinful nature of credit card debt has to do with their super high interest rates.  Rates can vary widely, about 7% on the low end and 25% on the high end.  These types of rates will make it almost impossible to make any money investing.  Those high credit card interest rates will wipe out any potential investment gains.

Thankfully there are a lot of options to help you jump start your debt repayment.  You can do a balance transfer to a card that has a 0% promotional rate.  Just make sure to pay it all off before the promo rate ends.

Many companies, such as Lightstream and SoFi, also offer personal loans with much lower rates than a credit card would offer.  You can use these funds to pay off the credit card debt and work on paying back the much lower interest loan.

Buying a home when you can’t afford it

The American Dream of owning a home is alive and swell.  For whatever reason, people don’t think they’ve “made it” unless they own a home.  Which is dangerous because there are lots of people who should be renting instead of owning due to the current state of their finances.

Owning your own home can be downright expensive, especially if you stretched your home buying budget a little too much.  Not only do you have the monthly principal mortgage payment, you also have interest to pay to the bank (rates are rising!), property taxes to pay to the state and homeowners insurance to the insurance company.

Then you need to factor in maintenance costs.  Even if you buy a brand new home, things will break down and light bulbs will need to be changed.  And everything has a shelf life and will eventually need repair or replacement.  That includes the dishwasher, water heater, air conditioner and everything else that keeps your home comfortable.

If all of these potential costs make your head spin, maybe you should reconsider buying a home.  Paying rent is a simple monthly expense with no maintenance costs or strings attached.

The sinful part of buying a home you can’t afford is that it handicaps any other financial or personal goals you may have.  It gets much harder to find money to invest or travel if everything is tied up in the house.

These are three big financial sins that should be avoided by all.  One thing I’ve learned in life is if you can avoid the big sins and make small consistent virtuous decisions along the way, you will be just fine.

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Major Upgrade for IRA’s in 2019

We can pack a little more into our nests now.

The humble Individual Retirement Arrangement, known in most sane circles as the IRA, is getting a level up in 2019.  IRA’s should be a big part of everyone’s retirement plan, whether you’re self employed or working for another company.

People who make too much money according to the IRS can’t take advantage of some of the tax savings that IRA’s offer.  Let’s forget about those people for now and let them swim in their vault of gold coins.  (But there is even a change there so read on Scrooge McDucks).

For the rest of America, IRA’s are a great place to save for retirement because they can reduce your tax bill. They also provide flexibility to choose your own investments which may not be available in a company 401(k) plan. 

Let’s see what’s in store for IRA’s in 2019:

Raise the Limits!

IRA’s have limits on how much you can contribute each year.  This is a bummer for us but makes sense from the government’s point of view.  If there were no contribution limits, people would be putting their entire salary into an IRA and not paying taxes on it for decades.  Those potholes would never get fixed and bombs would never get made!

So while there are limits in place to ensure the federal and state government’s get their piece of the pie, the limits are increased from time to time.

And 2019 is one of those times.  

For tax year 2019, individuals can contribute up to $6,000 into their IRA, up $500 from 2018.  This applies for Traditional and Roth, or a combination of the two.  The total contribution between all the accounts has to be $6,000 though.  The catch-up contribution limit will be the same, $1,000 extra allowed contribution for those 50 years and older.

There are a number of rules governing the tax deductible status of IRA contributions.  If you and your spouse don’t have a retirement plan at work or are self employed, then each of you can contribute $6,000.  Giving you a potential joint contribution of $12,000 for the year.  Not bad at all!

It’s also worth mentioning that 401(k) plan contribution limits have increased as well.  The new contribution limit is $19,000, up $500 from 2018.

There are many people who may not be able to contribute the maximum amount to an IRA.  Don’t let that deter you from contributing at all.  Set a monthly contribution for what you can afford to contribute.  Try to find ways to increase your income or decrease expenses to raise that contribution amount over time.

Phase in.  Phase out.

Just as there are rules governing HOW MUCH you can contribute to an IRA, there are also rules governing WHO can get the tax benefits of an IRA.  And these limits have changed for the better as well.

These “phase out” limits are different for Traditional and Roth IRA’s.  In general, contributions to a Traditional IRA are tax deductible in the year you contribute.  But you will owe taxes when you take the money out in the future.

Roth IRA contributions are not tax deductible in the contribution year but you will avoid paying taxes on future withdrawals.  So it’s a decision between getting a tax break now with a Traditional IRA or a tax break later with a Roth IRA.

If your income is too high on your tax return, you won’t be eligible for these tax benefits.  People with high incomes are taxed at higher rates, so this is another way for the government to make sure wealthy people don’t hide too much of their money and avoid paying taxes.

The good news is these phase out limits have slightly increased from last year, so more people will be eligible to contribute to IRA’s.  For the sake of simplicity, I’m only going to refer to the limits for those who are married filing jointly.  To see the info for all other tax statuses, click here.

For Traditional IRA contributions, the income limits differ if you or your spouse have access to a retirement plan through an employer.

If you DO have access to a retirement plan, the income limit to get a full deduction is $103,000 or less.  If you DO NOT have access to a retirement plan but your spouse does, the income limit is $193,000.  When neither spouse has access to a retirement plan, there is no income limit.

Roth IRA income limits are more straightforward.  If your income is $193,000 or less, then you can get the full tax deduction.  This is up $4,000 from 2018. 

So if you happen to fall within these new income limits, rejoice!  You get to save some taxes.

 It’s important to know about these IRA upgrades, but it’s even more important to take action.  If you were already maxing out your IRA contribution for 2018, all you have to do is add $41.67 to your contribution per month to max it out in 2019.

If you’re not quite at the point of being able to max out your IRA, just try to increase your contribution as time goes on and your income increases.  

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How to Lose Friends and Scare Away People

red stapler

Many people have read the popular book How to Win Friends and Influence People by Dale Carnegie.  This book came out way back in the 1930’s but is still read by many today.  This book can teach you how to effectively network and connect with people to form meaningful relationships, in both your personal and business interactions.

It’s one of those books that teach you new things every time you read it.

But this post is not about all that syrupy good stuff.  This post is about the exact opposite. I will share a guide that will make sure you stay unhappy and stuck in your dead end job for a very long time, or even lose your job altogether.

It outlines the steps you need to take to ensure that you can effectively alienate both your family and friends while being scorned by co-workers at the same time.  It’s a rare skill to be able to lose friends AND scare away people, but I’ll show you how it’s done.  (This is all sarcasm by the way. Well most of it)

1.  Be late.  For everything.  It is said that time stops for no one.  It’s time to prove them wrong.  There are many places and people that expect you to be on time.  Your boss and your clients.  Mom and dad.  Your spouse.  Even your kids may expect you to be on time so they’re not stranded in front of school in 20 degree weather.

What gives them the right?  Take your time wherever you go and in whatever you do.  Deadlines and panicked phone calls from your children can wait.  You have more important things to do.  Time is a limited resource, so keep as much of it for yourself as you can.  (Reality: Pick your kids up if needed.  Don’t make your wife wait.  Ever.)

2.  Networking is for dweebs.  Who has time to network when there are so many shows to watch on Netflix?  You love your current job, but not that much, so talking to others in your field and keeping current on your skills should be the last thing on your mind.

Besides, who wants to be one of those guys that’s always shaking hands with people and smiling?  Not this guy.  (Reality:  Yes, you should make sincere and strong relationships with those people in your industry who make more than you or know more than you.)

3.  ALWAYS pass the buck.  Don’t be the “go to” guy in your workplace.  People will be asking you to do all kinds of stuff that you frankly don’t feel like doing.

If a client asks you to do an urgent project, first try to convince them that it’s not really that urgent, and if that doesn’t work, ask them to give the project to what’s his name down the hall.  (Reality: Try to be indispensable to your clients and supervisors.  They’ll greatly appreciate it because they’ll have to do less work.)

4.  Read a lot less.  There is this perception out there that successful people read a lot.  While this may be true, it certainly doesn’t sound like fun.  Reading hundreds of pages of material relevant to your field will take the excitement out of everything else in life.

If you know so much about your area of expertise, where are you going to get the rush of possibly making a bad decision?  Leave the reading to the librarians.  (Reality: Keep current on your field by reading relevant blogs or journals.  You’ll at least know when your field will become obsolete.)

5.  React to EVERYTHING.  All those people you work with and those clients you serve are out to get you.  Whether it’s your bobbleheads, awesome desk chair or even your red Swingline stapler, the world wants to see you pay and take your things.

This is why it is very important to react to every little thing.  And react HARD.  Throw objects, swear loudly, storm out of the room and, ideally, all three at the same time.  Every little sideways glance and convoluted comment that could be about you needs to be addressed.  These people will not stop until you’re out on the street.  (Reality:  People don’t have time to worry about you so don’t go crazy about everything.  They’re too busy worrying about themselves.)

These are my top 5 ways of being an anti-Dale Carnegie.  I’m sure there are many, many other ways I could think of to lead you down the path of the social pariah, but all this typing is hurting my fingers.  If you would like to share your own ways of losing friends and scaring away people, please feel free to share in the comments.

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Is the Market Going to Crash Soon? Who Cares!!??

Update: Well that was a timely post.  Last week, the week of October 8 2018, saw the S&P 500 drop a little over 4%.  While not exactly bear market territory, the pundits are already out in force declaring the end of the bull market and to move your investments into “safe” stocks, such as ones that pay high dividends.  

If you’re investing for the long term, don’t do such a thing.  This past week could very well have been just a blip on the market and the rise could continue for 6 more months.  Or it very well could be the beginning of a bear market.  Either way, if you have a sound investment strategy that takes these ups and downs into account, just stay the course.  

But if the market volatility and decrease in your net worth is making you want to sell a bunch of your investment,s you might need to re-think your overall investment strategy.  Or just hold on for the ride!  

Read this post again.  You’ll thank me later.

This is going to be a quick public service announcement post.

Lately, I’ve been hearing a lot of talk in the media about how the market crash is coming and we need to panic.  The cover of the latest issue of Fortune magazine had a guy with a sign saying “The End is Near”.

I know these types of story lines and images are made to sell ad space and make publishers lots of money.  But here are two indisputable truths when it comes to long term investing:

The stock market WILL go down.

Most people, especially the financial media, look at a stock market decline as an abnormal event that requires you to make some snap investment decisions.  The fact is, market declines are expected and should be assumed when you make your investment plan.  Here is a chart of the historical performance of the S&P 500:

The starting value of the S&P was 250 in 1930.  The most recent valuation had the index at 2800.  That’s more than a 1,000% return.  Not too shabby.  But as you can see in the chart, there were many dips along the way.  It was a very bumpy ride and will most likely continue to be bumpy.

Corrections and recessions are to be expected.  Investors should not be surprised when they occur.

Indisputable truth #2:

For long term investors, market drops SHOULD NOT change behavior.

When there is a market drop or recession, you will see the pundits talk about where to “shelter” your investments.  The safety of bonds will be talked and written about.  And you will see people panic and do very stupid things with their money.  Especially with their retirement accounts.

Market drops should be expected during your investment journey.  If you’re investing in a 401K or IRA which you can’t touch until age 60, there is no reason a recession should spook you when you’re age 40.  If anything, a market drop might compel you to increase your contributions since stocks will be cheaper.

As long as you make a sound investment plan that takes market drops into account, your retirement accounts should be able to weather any recessions, which last 2 years on average.  Stay the course and keep contributing to increase your shares.

No, the end is not near after all.

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