financial zen

So I got a few answers in my educational quest on estate taxes. I talked to an accountant that said if the deceased had paid taxes all ready, than I have nothing to worry about unless it’s property that needs to be sold.

Of course, I used my google-fu to supplement this answer and the always informative bankrate.com has the answer:

*Ohio has no inheritance tax.

*Because federal tax law totally repealed the federal credit allowed for state death taxes for dates of death occurring on or after Jan. 1, 2005, the Ohio Additional Tax on estates is constructively repealed. This change is prospective and applies to decedents’ dates of death occurring on or after July 1, 2005.

So now, once the cash is “in hand” I need to constructively figure out how I’m going to leverage it towards investing it - and doubling it!

Jan (@ Queercents) wrote a great post that I think most people involved with personal finance forget about - those expensive decisions that are worth making - and they do exist! Sometimes you have to spend money to make money, and theses are where I feel it’s most true. I’m not necessarily duplicating her choices - but trying to keep them in the same line.

1. College - this is a no brainer. Some people can get by on their good looks, their luck, their parents, or their natural talents. Some of us need that piece of paper to get our foot in the door. I was lucky to know some people, and impress them with my skills, but I know that if I ever want to be where I want to be, I’ll need that piece of paper.
2. Living out of our comfort zone - This seems to be the story of my life. I moved out of my dad’s house before I was settled, I moved to the big city with just a job and a possible apartment room mate. From their I made it work - until I met a good friend that landed me an entry position at a good company. Then a guy I met there offered me a position at a great company - and here I am, working my butt off, trying to be father, husband, worker, student.
3. Lunch - I do business lunches. I eat with managers when I can, and co-workers, and people from other departments and businesses. I *never* say no to lunch with someone, unless I know the person isn’t worth my time (or if I’m extremely busy - I’ve never met someone that isn’t worth having lunch with at least once!). I don’t order the most expensive thing on the menu - I try to keep it cheap and healthy (even when we’re eating at Chipotle).
4. Traveling - Growing up, I’ve been to Canada, Disney World (with a friend), Florida (also with said friend), Virginia (family lived there), Tennessee (camping!), Washington (youth group), California (family again), Chicago (school), New York (friends), Colorado (family), Missouri (side trip) and the Bahamas (Honey moon). This year we’re planning on going to Niagara Falls (just because we’ve never been), New York City (to visit friends and celebrate a wedding) and Colorado (another wedding and vacation). All this, in budget!
5. Our Wedding - Okay, I can’t come up with a correlation here, but where our funds were involved, we didn’t skimp - but my wife found the best deals to be had. A local woman “who just happened to have gone to culinary school and loved making cakes” made us this gorgeous, three tier chocolate (with white icing) cake. UN-believable.

Let’s keep this going - what expenses have you made that are worth it?

A bird in your hand is worth two in the bush - do you understand that metaphor?

Essentially, it’s saying having something in your hands today is worth more than having it down the road - but we aren’t talking about that new car, television, or hot new gadget. We’re talking about cold, hard, cash. It makes sense, right? A dollar in your hands for your expense or savings make more sense than a dollar down the road - where that dollar isn’t giving interest or reducing debt (and the interest you owe).

To show the TVOM we have two useful questions:

1. What will an investment be worth after a period of time? This is the future value.
2. How much must be put away today to provide some dollar amount in the future? This is present value

These calculations are based on basic interest principles: The dollar amount, the rate of interest earned, and the amount of time the money is invested. One formula is the simple interest formula. We break it down as:

• i = prt where
• p = the principal set aside
• r = the rate of interest
• t = the time in years that the funds are left on deposit.

For Example:
If someone invested $1000 (like in an ING CD - contact me for a referral and $25!) for four years with 5.35% interest, they’d receive $214 in interest over the four years. This simple interest formula assumes that every year we withdraw the interest and only keep the $1000 invested. As a savvy investor (or saver!) we don’t really want to do this if we don’t want to. What we want to do is use compound interest. Gain interest on your interest.

If we take our original $1000 and think of the compound interest:
At the end of our first year - our $1000 will grow to $1053.⁵⁰ [$1000 + ($1000 * 0.0535)].
At the end of our second year - our $1053.⁵⁰ will grow to $1109.⁸⁶ [$1053.5 + ($1053.5 * 0.0535)].
At the end of our third year - our $1109.⁸⁶ will grow to $1169.²⁴ [$1109.86 + ($1109.86 * 0.0535)].
At the end of our fourth year - our $1169.²⁴ will grow to $1231.⁷⁹ [$1169.24 + ($1169.24 * 0.0535)].

So compoinding means we gain an extra $17.79 in interest. Doesn’t seem like much, does it? But when we increase the interest (such as, the average return on your investment portfolio, or your 401k) the amount increases more - and the larger the balance, the more interest generated, and the more money you end up with!

For most people, an understand of economics isn’t necessary. You’ve got your checking account under control - you’ve got your own online billpay, you don’t send checks to Nigerian princes, and you don’t link any accounts to deduct from your account, you’ve got your savings accounts under control (speaking of which, I have ING referrals available! Make free cash by having a deposit!), you contribute to your 401k, have a financial planner, you’ve got everything going for you. But maybe you’d like to understand it a little more.

This leads us into Economics!

Understanding economics is important in personal finance - not just because of investments (like your 401k) - but because you should understand the current economic environment so you can forecast the state of the economy, inflation, and interest rates for the future. Essentially, you’re keeping your eyes open for any changes in the market that could be detrimental to your financial situation - whether you consider yourself successful, or on your way. The state of the economy can turn your life upside down if you aren’t preparing for it.

If you lose your job, suddenly your steady income is gone. Did you prepare an emergency fund? Are your financial affairs in order? If there’s a recession, is your job secure enough to not worry about lay-offs? Can your hours be cut but it won’t affect you detrimentally in your finances? Many factors can come into play - but the amount of information involved, between inflation, recessions and expansions, can take volumes to fully understand! I’m going to work additional articles in covering these certain angles this week so we can benefit and further our Personal Finance knowledge.

My problem lies in reconciling my gross habits with my net income. -Errol Flynn

People are often confused with financial planning - they mix up three basic fundamental ideas, or combine them and create a skewed, warped version that makes financial planning a complicated ordeal. Financial success is meeting our plans and goals and reaching a certain milestone in our expectations of finance:
Security is reaching that point with your finances that you are comfortable with your money and savings that will cover your needs and your wants.
Wealth is having an abundance of money, investments, and resources. A fundamental truth is that in order to build wealth you must spend less than you earn. You must hold off on your current standard of living to reach a higher standard of living.
Happiness goes beyond making more money. It’s about being in a good position of your finances and bills - you are on the way of reaching your goals with well-established, healthy financial goals.

Of course, it seems every way we turn we encounter impediments to our financial success. The second your of legal credit-bearing age the offers start. When you reach college campuses you’re surrounded by companies wanting you to sign with them for credit card offers, loans for an over-priced computer, for a new car you don’t need. Money is thrown at the 18+ crowd by telling them how important it is to build credit, and also to give the appearance that you have wealth - get your Abercrombie and Fitch credit cards and dress for success! Give that illusion of richness by driving a brand new Acura! It doesn’t matter that you’re drowning in debt… does it?

OF COURSE IT DOES! It’s important that you establish your financial foundation - use your current and regular income to provide your basic lifestyle and savings. Once you’ve got your foundation, you can continue on your financial journey (where we will continue down the road).

“A failure to plan is a plan for failure”

I don’t know about you, but I fell into the interest of personal finance from getting into reading blogs. The more I read, the more it intrigued me. It reminded me of the past experiences and money mistakes. Perhaps most people are put off by their lack of understanding terms - meaning they need to improve their financial literacy (the knowledge of facts, concepts, principles, and technological tools that are fundamental to being smart about money). This leads to most people learning about personal financial planning and developing and implementing a coordinated and integrated long-range plans to achieve financial success.

In planning, we hold ourselves responsible for our own success, happiness, and establishment of our security and standard of living (in the present and the future). It’s a huge part of our life that many people ignore until it’s too late - and then they learn from their mistakes, but it costs them (potentially) thousands of dollars, or wrecks their credit rating (which can potentially effect your employment, your mortgage, your car purchase… every financial aspect of your life). It’s my goal as I continue my education to get a better understanding and establish a better budget and mind set - I don’t mean miserly, I don’t mean “living like no other today so you can live like no other tomorrow” - I mean being able to save up for vacations without putting it all on credit, buying a car with cash, and using credit card arbitrage to its full potential. It’s a difficult premise, but then again, life isn’t easy.

The Six Steps to Personal Finance Success

1. Financial planning, focusing on establishing and achieving long-term goals through planning and budgeting,
2. Money management, centering on minimizing income taxes and efficient utilization of cash and credit,
3. Managing expenditures, especially for “big ticket” items such as vehicles and housing,
4. Income and asset protection through insurance, so that hard-earned resources and assets are not placed at undue risk,
5. Investment planning, with its focus on selecting the appropriate investment vehicles based on the objectives at hand and the relative levels of investment risk, and
6. Retirement and estate planning, with the ultimate goal of being able to live off of one’s financial nest egg and plan for transfer of assets to heirs.

It’s never just a simple process - fortunately we have trained professionals to assist. Certified Financial Planners can help you plan with these six steps, and Certified Public Accountants can help you get your finances together and straightened out. Over the next few months I’m planning on elaborating on these six points - from an educational stand point, as I am not a CFP, CPA, or any other TLA.