To Roth or Not to Roth.... (Part 2)

We answered this question last week.  A Roth just allows you to pay taxes now instead of later.  So if your tax bracket now is higher than it will be in retirement then DO NOT make a Roth contribution.

The cliffhanger (too generous?) was - "But what about all that tax-free growth in a Roth? Surely, that's a better deal, right?"

Let's explore that.

Once you put money into a Roth, it grows tax-free forever.  You never ever pay taxes on that money again.   Surely paying taxes on a small amount now is better than paying taxes on a big amount later. 

It's as intuitive as a flashing Walk/Don't Walk sign.  Except it's not correct.

To prove I'm not taking crazy pills, here's some very simple (I promise) math:

You have $10,000 to put in a Roth 401k or a Traditional 401k.

TO ROTH:  To put it in the Roth, you must pay taxes on it first - let's say 20%.   So $8,000 actually goes into the Roth.  It doubles over the next 10 years and now you've got $16,000.

Simple. 

NOT TO ROTH:  If you put it in a Traditional 401k instead, you don't pay any taxes now.   So all $10,000 goes in.  It doubles in 10 years to $20,000.  But NOW you've got to pay your 20% in taxes….which….drum roll….leaves you with $16,000.

!?!?!?!?!   *mind explodes*

So full circle… the only consideration when deciding "To Roth or Not to Roth" is whether your tax bracket will be higher now or later. 

P.S. This does not apply when considering a non-deductible Traditional IRA vs. a Roth IRA.  For that one, talk to your guy/gal.   Don't have one?  Then contact us!

To Roth or Not to Roth...

….that is the question. We get asked this all the time by our members.

And we always answer with question:   Will your tax bracket in be higher now or in retirement?

If it’ll be higher now, then DON'T do a Roth.

If it’ll be higher in retirement, then DO do a Roth.

It's that simple.

A Roth (IRA or 401k) allows you to pay taxes now instead of later.  So pay your taxes whenever your tax bracket will be lowest.

if your tax bracket will be lower in the future, then pay your taxes then. Or if your taxes are lower now , then pay your taxes now by contributing to a Roth.

But wait a minute, what about the tax-free growth that comes with a Roth?  That's gotta be worth something, right? 

Nope.   Doesn't make a lick of difference.  And more on that next week… (I'm such a tease, aren't I?)

IRS Scams

The IRS will send you a letter first.

They will not email you.

They will not text you.

They will not message you over social media.

In rare instances, they may call.    But only after they send a letter.

The scumbags (the scammers, not the IRS) call and demand immediate payment for back taxes and threaten to get law enforcement involved if you don't comply. 

Speaking from experience, it's a little rattling until you come to your senses. 

And naturally, they target people around tax season. 

So be careful out there. 

And if you're looking for a laugh, have a little fun with them like this guy did.

Lifestyle Creep and His Lousy Wife

You know "Lifestyle Creep?"   He pretends he's your friend, but he's not.   And his wife's no better. 

They move into your basement and convince you that things you used to think of as a luxury (i.e. DoorDash) are now a necessity. (I mean what else are you going to do for dinner?)

On any given day, you can hear him saying "C'mon!  You're making all this money.  Time to reward yourself and live a little!   You deserve it."

And then you wake up one day and you realize you made a TON of money throughout your career and you've got nothing to show for it. 

Kick the Creeps to the curb.  Let ‘em move into your neighbor's basement. 

You're too smart to let your spending rise at the same rate as your income.

The solution is easy.  Just always save a percentage of your income.  

10% (at minimum) 
15% (better)
20% (you're setting an example) 
25% (total rockstar!)

Whatever your savings rate, maintain it throughout your career, and you'll ensure the Creeps don't suck up all that money you're making!

(Really) Last Minute Tax Deductions

Want to save a few more bucks on your 2018 taxes?

There's still a few things you can do to reduce your upcoming tax bill:

1. Top off your HSA. You have until 4/15 to make HSA contributions for last year. Anything you put in is a tax deduction regardless of how much money you make. The maximum for a family plan is $6900 for 2018.

2. Top off your IRA…maybe. You have until 4/15 to make an IRA contribution for last year (up to $5500 per spouse). If one of the following describes your family, then it would be deductible:

a. You and your spouse are not eligible for a 401k (i.e. your companies don't offer one)

b. You are eligible for a 401k, but your spouse is not AND you made less than $189,000 last year

c. Your adjusted gross income is below $101,000 (married, filing jointly)

3. Top off your Roth IRA…maybe. This won't save you any taxes this year. But if you'll be in a higher tax bracket when you retire, then contributing now will save you taxes in 30 years. (Nothing like delayed gratification, eh?)

There's plenty of missteps you can make doing this on your own. So talk to your "guy" or "gal" before you do anything. And if you don't have one, email us - help@financialzen.com. We'll sort you out.

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

Do You Need an Estate Plan? (Part 2 of 2)

To recap last week, unless you want a judge deciding what happens to your kids (and your stuff) if you're gone, then you need an estate plan.

But where do you start? There's 3 steps:

1. Decide:

a. Who will take care of your kids?

b. Who will take care of the money for your kids?

c. What can they use your money for?

2. Talk: Discuss your decisions with those you've designated. Make sure they are up to the task.

3. Draft: Make your decisions official (and legal) by creating an estate plan with an estate attorney.

Pretty simple, right?

You'd think. Just wait until you try to do it. On average it takes our Financial Zen members 3-6 months to make the decisions and talk to their people.

We're not estate attorneys, but we quarterback our Financial Zen members through the process. So if you want some help getting pointed in the right direction, schedule a few minutes with us.

BONUS TIP: A will is NOT an estate plan. This is a common source of confusion. Even if you have a will, your kids (and your stuff) will go through probate court.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Do You Need an Estate Plan?

I don't know. Do you have a kid?

Yes? Then absolutely.

Why?

If you and your spouse get hit by a bus tomorrow, guess who decides who takes care of your little one?

Grandma? Your sister?

Nope. The State of California (or wherever you live).

There's something called the probate court. It's the court that decides what happens to your children (and stuff) if you're gone…

…unless you have an estate plan.

If you have an estate plan, then the probate court doesn't make any decisions for you. YOU decide what happens to your kids and stuff if you're gone.

So do you need an estate plan? Only if you don't want some judge making those decisions for you.

But where do you start? What decisions do you need to make? What do other people like us do?

…more on that next week.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Should You Pay Down Your Mortgage?

No.

There's only one reason to pay down your mortgage - you can afford that luxury.

Interest rates are still at historical lows. A 30-year fixed is at 4.125%. When you bake in the mortgage interest deduction, the rate is closer to 2.5%.

So when you pay down your mortgage, you are locking in a 2.5% rate of return.

Where will that money come from? From under your mattress or from your long-term money?

If you're doing it right, your long-term money should earn 7-10% (depending on if you're invested conservatively or aggressively).

What sounds better to you? A 2.5% return or a 10% return?

Now if you're so rich that your college and retirement (and vacation home?) buckets are already filled and you really don't need that extra 7.5%, then by all means chip away at the right side of your balance sheet.

But if you're like the rest of us, you probably can't afford to throw 7.5% out the window.

Of course there are exceptions to the rule, so talk to your financial advisor. But start with the premise that you want a nice, looong, low-interest mortgage that you don't pay down a penny faster than you have to.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Financial Life Hack: Get Two Credit Card Numbers

No, not two credit cards (well, maybe; see below) - two credit card numbers attached to your current account with Capital One or Chase or wherever.

Keep one at home and one in your wallet.

Attach Amazon, Netflix, Comcast, your Financial Zen subscription, etc. to the one you keep at home.

Now the next time you lose the card in your wallet you won't have to endure the pain of updating all your online accounts.

Brilliant, right?

Must give credit where it's due. When I lost my credit card 3 weeks ago, the Capital One rep shared this with me. So don't thank me, thank Cheryl!

Financial Zen Bonus Tip: If you're like me and buy 90% of your life on Amazon, get the Amazon Chase card. It pays 5% cash back, so it's like getting a 5% discount on your life.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Introducing Taylor Weirtz!

If you're already a client of The Financial Zen Group, you know our client service model is a well-oiled machine (based on your feedback, not my crossed fingers). With our current clients enjoying the fruits of our labor (and technology), it's time to grow.

Our 2019 goal is to double our client base from 33 to 66. Adding that many new clients will require a lot of work. An endeavor that a one-man show cannot achieve.

Taylor's been working behind the scenes for the last 12 months. She's been helping manage our weekly blog, ensuring that it goes out on time and looks pretty.

Moving forward, she'll take on a more active role preparing for and following up from our Quarterly appointments, drafting meeting notes and sending follow up emails. She'll also be managing your Financial Zen Monthly Reminders. And that's just the start.

With Taylor on board we can continue to service our clients at nosebleed high-levels, while adding time to my schedule to grow the business.

Taylor's been working in the financial planning industry since graduating in 2017, so she knows a thing or two about the business. She graduated from the University of Akron in 2017 with a Bachelor of Business Administration in International Business. She's a big-time traveler and like me, loves a good cup of coffee. If you want to say hi email her at client.service@financialzen.com .

P.S. If you're already in the Financial Zen Club and think your friends should join too, we're looking for young families. And since we don't charge our clients like other financial advisors, we don't care how much money they have or don't have. We only care that they want to make their family as financially healthy as possible.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Life's Too Short

A financial planner doesn't do anything you cannot figure out on your own with enough time and energy.

The opportunity cost, of course, is all the other things you could have done with that time and energy.

Time with the kids. Golfing. Learning guitar. Date night. Reading a book.

It's up to you. Personally I'd rather hire someone to do the stuff I don't love doing myself.

Life's too short.

Here's a link to the Seth Godin blog post that sparked this one… (if you don't read Seth, you should)

https://seths.blog/2019/01/opportunity-costs-just-went-up/

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

After Big Drops, Come Big Gains

Remember when the market tanked from September 17 to December 17?

It dropped 18% in 3 months. Eeek! Over the last 6 weeks, it's bounced back 9%.

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And that's why we never, ever, ever sell. Because after big drops, come big gains. 

 (Pro tip:  you'll only get the big gains if you're still invested.) 

 Let's look at a few recent ones.

 1/26/2018 - market dropped 10% in 3 weeks.   Bounced back 6% over the next two weeks. 

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6/8/2016 - market dropped 6% in 3 weeks.   Bounced back 9% over the next 3 weeks.

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9/17/14 - market dropped 7% in 4 weeks.  Bounced back 11% over the next 5 weeks

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And the granddaddy of them all….

 3/9/2009 - market dropped 57% in 5 months.   Bounced back 82% over the next 12 months.

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If you're silly enough to sell, then you'll most likely sell in a moment of extreme, irrational and emotional stress….like at the bottom.  

 And if you sell at the bottom, you will miss the sharp (and unpredictable) reversal back up.

 Ride it to the bottom.  Sell.  Lock in  your losses.  And then sit on the sidelines while the market returns. 

Better to not predict the future and stay invested through it all.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Thanks, Jack.

"Don't look for the needle in the haystack. Just buy the haystack."

- Jack Bogle

The founder of Vanguard Funds and the father of indexing passed away last week at the age of 89.

Jack Bogle influenced modern investment strategy more than anyone in history. He single-handedly created the demand for low-cost index funds.

It was 1975 and the investment community universally believed in stock picking - buying low and selling high. Jack disagreed.

He was part of a small (and unpopular) pocket of investment professionals who believed paying high fees for a portfolio manager to pick "winners" is a loser's game.

Instead, they believed in buying ALL the stocks and hitching your wagon to the forward progress of mankind in the form of corporate earnings.

So Jack created Vanguard Funds. His first index investment, aptly named - The First Index Investment Trust - tracked the S&P 500.

The investment community was unimpressed. And after a few slow years post-launch the fund was lovingly referred to as "Bogle's folly".

But Jack had the last laugh. Today Vanguard is the world's largest mutual fund company with $4.5 trillion in assets (Fidelity is a distant 2nd with only $1.97 trillion).

Jack didn't just create the world's biggest fund company. He revolutionized the way we invest.

Ask any personal finance guru (myself included) and they will tell you to invest your serious money in low-cost index funds. Leave the stock picking for your gambling….err…play account. That wasn't an option before Jack came along.

And he was selfless in his pursuit of helping us little people. He structured Vanguard as a mutual company meaning his customers owned the company, not faceless, absent shareholders. That allowed him to keep the fees low. But it also prevented him from making Zuckerberg/Gates/Bezos type wealth.

Our lives are either warnings or examples. And I'd say making real, positive changes for your fellow man at the expense of your own self-interest puts you in the “Examples Hall of Fame”.

Thanks, Jack. Rest in peace. Ya done good.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

You Got This

This week 60 Minutes featured an architect who went blind mid-career. Instead of finding a new career that wasn't visually demanding, he adjusted the way he architected. And 10 years later he is just as successful, and he says probably a better architect for it.

My best friend was in a snowboarding accident 9 years ago. One bad jump and he was paralyzed from the waist down. Instead of feeling sorry for himself and excusing himself into a life of timidity, he continued to travel the world - New Zealand and Japan most recently…on his own…in his wheelchair.

Steve was a senior in college when he started losing his coordination and slurring his speech. Soon after he was diagnosed with Lou Gehrig's disease. Instead of taking the backseat, Steven Hawking went on to become the most well-known physicist in history, writing A Brief History of Time and proving the existence of black holes.

I stand in awe of these three and people like them. You can't help but wonder "Do I have what it takes to keep moving forward if that happened to me?".

Here's the thing: you do. And that's not taking away anything from Chris, Keith or Steve. But what they tapped into is something that we all have within us.

For all our flaws, we humans have an astonishing ability to face and conquer challenges - both small and life-changing - head on.

The question is not if we have what it takes. We do.

The question is - will we use it?

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

SMART Goal Setting for 2019

It's week 2 of 2019, and I bet your resolutions are still going strong.

But will you be going strong on week 50?

Here are some tips to stick to your resolutions and achieve your S-M-A-R-T goals for 2019.

S - Specific - "Eating healthier" is not specific. Instead "eat lean protein, whole grains and fruit/vegetables at every meal."

M - Measurable - "Save more" is not measurable. Instead "save an extra $500 per month".
A - Attainable - "Shooting 72" is not attainable if you currently shoot over 100. Instead "shoot under 85".
R - Realistic - "Eating lean protein, whole grains and fruit/vegetables at every meal" is not realistic (gotcha!). Instead "eat lean protein, whole grains and fruit/vegetables at every meal except Sundays" (for the cheat meal of course).
T - Timely - "Lose weight" is not timely. Instead "lose 15 lbs by June 1st".

My SMART goals for this year are:

Professionally:

1. Work with 33 new young families by December 31st.

2. Hire our first full-time Associate Financial Planner by June 30th.

Personally:

1. Place 1st in the Masters Division of the INBA competition on May 26th.

2. Consistently shoot under 85 by December 31st.

What are your SMART goals for the year ahead?

Let me know and we can check in with each other on week 50!


DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Calm and Educated

Happy New Year! Hopefully 2019 is a better year for the markets.

It's been rough since October, and yet I haven't gotten a single frantic call about how the sky is falling.

In fact, I've received just the opposite - clients reaching out me telling me that they aren't worried because I taught them that market downturns are always temporary.

So if you're a client of The Financial Zen Group, pat yourself on the back for being the calm, educated few instead of the frantic, uneducated masses.

If you're NOT a client, then let me tell you why the last three months are NBD (or maybe even to your advantage).

If you are still in the accumulation phase of your life (i.e. more than 5 years from retiring), then market downturns are an amazing opportunity to buy investments at a discount. Even if you're not saving any more than what you're putting into your 401k, every dollar you put in is getting invested near the bottom.

If you are in the distribution phase of your life (i.e. retired), then market downturns are a nonevent. We know market downturns happen, which is why the money you need for groceries isn't invested in the market. Instead you should have 10-15 years of living expenses set aside in boring (but predictable) bonds. The money you have in the stock market is the money you need for groceries in 10-15 years. And there has never been a time in history (not even the Great Depression) where the markets were down for 15 years.

If you're a client, you knew all that.

If you're not a client, then welcome to the calm and educated club.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

One Last Present

The market's in the toilet, but the bowl is half-full!

If you haven't done so already, don't forget to harvest your tax losses (only do this in your taxable accounts, not your 401ks or IRAs).

When I wrote about it in August here, here and here, I had no idea what a tremendous opportunity we would have to actually put it to work.

If you're a client of The Financial Zen Group, then we've already done this for you.

If you're not (and why on earth wouldn't you be?) then you need to do it yourself.

Sell your losses to realize the loss and immediately buy something similar (i.e. sell your Vanguard S&P 500 fund and immediately buy the iShares S&P 500 fund).

For every dollar of tax losses you realize, you will save at least 15 cents in taxes (and possibly up to 50 cents).

Just don't forget to buy back something similar, otherwise you'll miss out on all the fun when the market takes off again.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

My Favorite Christmas Present

The best Christmas present I get every year is not fancy.

It's not something I put on my Christmas list.

It's made of paper.

It costs about 99 cents.

It's just a card. But not a Hallmark card or one of those glossy photo postcards of your friend's kids.

It's homemade. That changes it from an extra decoration for just one season to something that gets pulled out and put up every Christmas.

Did I mention it costs 99 cents to make?

We tend use money as an expression of love and affection. Parents give money to their adult children who don't need it (or worse, actually do). New parents buy the most expensive stroller because baby deserves the best. Soon-to-be-husbands extend themselves beyond their means to purchase a slightly bigger diamond (note: does not apply to CFPs).

We've all committed some version of "I love you, so here's some money".

But the most memorable expressions of love and affection aren't financial.

Slaving over a hot oven to make dozens of Christmas cookies (Thanks, Mom!).

Flying 18 hours across the country and Pacific Ocean to get to your best friend's wedding (Thanks, Christian!).

Or making a beautiful, thoughtful, homemade Christmas card every year (Thanks, Nancy!).

So while you're running around town finishing your Christmas shopping, remember - the best gift you could give might just be your time and energy.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

The Miracle on 34th and Wall Street

Every movie ever made has the same basic beginning, middle and end.

In the first 10 minutes, our hero is blissfully ignorant of the trouble that awaits before… her son is kidnapped…. his love leaves him… people declare Santa Claus is nuts.

For the next hour and 50 minutes, you watch our hero attempt and fail to…. track down the kidnappers… win back the girl… prove that he really is Santa Claus.

Then in the climactic last 20 minutes, our hero emerges battered but victorious. Cut to the last scene as our hero…. hugs her child…. embraces his lost love…. dumps thousands of letters addressed to Santa Claus on the judge's bench.

As the moviegoer, we're safely along for the ride. The dramatic 110 minutes in the middle doesn’t scare us. We know how the movie will end. We've seen other movies just like it a bazillion times before.

Most of us haven't seen a bazillion movies about the markets though. So when the market tanks, we might panic and walk out of the theater before the climactic happy ending. If only we knew how it would end….

Did you know the market is down 5% three times per year on average?

Did you know the market is down 10% once a year on average?

Did you know the market is down 20% every 3-5 years on average?

And yet, over the last 100 years, the average annual return is 10%. Connect those dots, and you'll see that despite all the drama in the middle, it always ends well.

You just have to sit in the theater long enough to get to the climactic, happy ending.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Your Monkey Brain and THAT Guy

Our monkey brain gets really excited during the holidays. And like that one guy at the office holiday party, he's not thinking about the violent hangover that awaits.

But with 4 easy steps you can trick your monkey brain into enjoying the holidays, while your grown-up mind sticks to a budget and enjoys a spending-hangover-free January.

Step 1) Write down all the people on your gift list (don't forget your financial planner! I kid, I kid).

Step 2) Next to each name write how much you want to spend on them.

Step 3) Go to the bank and withdraw your entire holiday budget.

Step 4) Go shopping. If you're going to stores, pay in cash. If you're shopping online, remove whatever you spend and put it in a separate pile to pay off your credit card next month.

"Budget" is a four-letter word. Even the most disciplined of us hate budgets.

So don't will yourself to stick to a budget. Your monkey brain won't let you. It's an exercise in futility.

Instead, trick yourself into sticking to a budget. Your monkey brain will be too busy enjoying the holidays to notice.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation