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BY Dr. Penny Pincher | Wise Bread | MARCH 2016

During the past few years as a personal finance blogger and author, I have noticed that the most successful frugal people tend to follow a common set of habits. These same habits remind me of the traits that Stephen Covey detailed in his popular 1989 book, The 7 Habits of Highly Effective People. For this article, I kept the original seven habits, but updated them for achieving financial independence today.

What are the seven habits that allow some people to excel at being frugal?

1. Be Proactive

Frugal people are proactive about their money, taking action to monitor and control spending and maximize income. They find ways to spend less and reduce expenses — even if it requires effort and creative thinking. They direct most of the money they save from reduced expenses into savings and investments for long term goals.

Although the first thing that comes to mind with frugality is saving money, many frugal people maximize income through side hustles or by generating passive income in addition to controlling their spending. An extra dollar saved or an extra dollar earned both contribute favorably to the bottom line.

Frugal people know how much money they have coming in and how much is going out, often with great precision. This is accomplished by creating and following a budget and proactively monitoring spending. They focus on what they can control within their budget to achieve financial success.

2. Begin With the End in Mind

Why do frugal people work so hard to control spending and keep track of their money? Are they simply not interested in buying things? On the contrary, most frugal people are striving to reach financial independence so that they can travel or launch a second career or to have plenty of money to buy the things that matter to them. Frugal people are willing to worry about money now so they don’t need to worry about it later.

Surprisingly, many frugal people care more about their time than their money. Saving money buys financial independence, which buys time to do whatever you want. Frugal people want freedom to use their time as they wish and not be locked into working at a job until they reach old age.

Frugal people begin with the end in mind. The end they want to achieve is financial independence. With that end in mind, they make a plan to reach the goal and follow it every day. The sacrifices along the way are worth reaching the goal.

3. Put First Things First

What is the first thing you pay every month? Do you pay your mortgage first? Perhaps you pay your utility bill or car payment first. Frugal people pay something else first — themselves.

Paying yourself first means that you invest in your retirement fund or other savings accounts first, then you pay other bills using the money that is left. Most people pay their bills first, and then save or invest if there is any money left.

Frugal people realize that having money to invest is the most important priority, and they take care of that priority first. If there is not enough money left to pay the bills, then frugal people find ways to make their bills smaller so they can fully fund their investment goals.

4. Think Win-Win

Stephen Covey talked about win-win situations in terms of structuring deals where both parties involved get something beneficial. His point was that someone doesn’t have to lose in order to make a great deal — in fact, the best deals happen in win-win situations.

Looking at this habit in the context of frugal success, just because you spend less money doesn’t mean you have to benefit less or receive less value. In fact, frugal people find ways to spend less money and achieve greater benefit at the same time.

Frugal people find plenty of win-win situations for their money. For example, why do many of them prepare most of their meals at home instead of dining out? Of course, making food at home is cheaper than paying the bill at a restaurant, but eating at home is healthier as well. The benefit of making your own food goes beyond just saving money.

Buying a smaller house is less expensive than a larger house and it costs less for maintenance, insurance, heating/cooling, and lighting. In addition to the lower initial price and reduced ongoing costs, a smaller house also takes less time to clean and maintain, freeing up time for other activities.

Most win-win scenarios involve not just price, but value. Frugal people consider the overall value that a purchase would provide throughout its life, including hidden expenses and potential benefits. Frugal people are willing to spend money to get a good value, and they shop around and use coupons to get the best deal they can on the right item.

5. Seek First to Understand, Then to Be Understood

Most frugal people don’t start out being frugal. They start out as “normal” spenders and rack up credit card bills and student loans like most people. Over time, they come to understand that spending and debt are not the path to contentment. They realize that sometimes less really is more, at least when it comes to debt and spending.

Frugal people reach an understanding of how much stuff they need to be happy, which is often far less stuff than most people think they need to be happy. Frugal people make spending decisions in terms of needs and wants, while most people think primarily in terms of having more and better stuff than their friends and neighbors.

As far as being understood, most frugal people don’t seem to care much what “normal” people think of them. Frugal people understand that spending money to keep up with the Joneses, or anyone else, doesn’t make much sense and is certainly not the path to long term contentment.

6. Synergize

Synergy is the concept that sometimes, one plus one adds up to more than just two. How is this possible?

If you decide that you can live without cable TV, you can save about $100 per month. Not only do you save $100 this month and every month thereafter, but you have significantly reduced the amount of money you need to retire by forgoing a recurring expense during your retirement years. You could retire years earlier due to the synergy of eliminating a recurring expense.

Another example of synergy is reducing clutter. If you minimize the amount of clutter you collect over time, you will require less space to store your stuff. You will be able to live in a smaller, less expensive house. With less clutter, you will be better able to find and use the items that you do have. Savings of time and money will accumulate over the years greatly exceeding the small amount of effort it takes to nip clutter in the bud. This is another example where a seemingly insignificant action can allow you to achieve your goals years earlier due to synergy.

7. Sharpen Your Saw

As you are reading this, you are sharpening your saw! If you have ever tried to cut something with a dull saw, you know that it takes a lot of work and a long time to get the job done. Keeping your saw sharp is time well spent.

Sharpening your saw means to continue learning and finding new inspiration to get the most from your money. Frugal people tend to seek out ideas on saving money from blogs, podcasts, books, and by talking with other frugal friends. Reading about the financial success and failures of others can provide inspiration to keep your goals firmly in mind and on track.

This article is from Dr. Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website.

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By Bill Bischoff

A 401(k) can be a glorious thing, but let’s not forget that these plans are regulated by government bureaucrats. That means they are rife with rules and regulations. Here are answers to some of the more common questions we get about 401(k)s.

How much can I contribute?

For 2016, the cap for salary-reduction contributions is generally $18,000. But that’s not the only limit. The total amount contributed by both you and your employer can’t exceed $53,000. If, however, you’ll be age 50 or older by the end of the year, the contribution limits are higher: $24,000 and $59,000 respectively. That said, if you’re a “highly compensated employee,” your contributions could be limited to lower numbers, regardless of your age. (See next question.)

I’ve been labeled a “highly compensated employee.” What does that mean?

According to the 2016 rule book, that means you make more than $120,000 a year. The IRS doesn’t want 401(k) plans to favor a company’s top brass. Consequently, employers must make annual assessments to ensure that their highly compensated employees (HCEs), like you, aren’t contributing a far greater percentage of their salaries to the 401(k) plan than the rank-and-file workers. So if the employees who earn less than $120,000 a year at your company are contributing to the 401(k) plan at a lower rate than HCEs like you, expect your contribution limits to be lowered.

Should I roll over my 401(k) from my old employer to my new employer’s program or into an IRA instead?

There aren’t a whole lot of reasons to roll your 401(k) into another 401(k) instead of rolling the funds into your own IRA. The main exception is if you want to be able to borrow from the account. Most 401(k) plans allow you to borrow from the account (potentially up to $50,000), while this is strictly forbidden for IRAs. More on this issue later.

Rolling your 401(k) into an IRA instead should give you significantly more control over the money. That’s because you can pretty much invest it how you see fit. After all, there are thousands of mutual funds out there, while the average 401(k) plan only offers a few investment options. Unless you feel strongly about having all your retirement account money in one place, a good strategy is to roll your old 401(k) into a self-directed IRA and then contribute as much as you can to the 401(k) at your new job. Even if the new plan is worse than your old one, you don’t want to forsake the benefit of pretax contributions and the company match.

No matter what, though, make sure you do a direct trustee-to-trustee transfer when rolling over your 401(k) account into another company plan. That way, you avoid automatic 20% withholding for federal income tax.

How long can a company legally hold onto contributions until they are deposited in my account?

Legally your employer must deposit your money no later than 15 business days after the end of the month. This means that it could take as long as six weeks from the time the money is withdrawn from your paycheck before it turns up in your 401(k). Think your employer is doing something fishy? You can file a complaint with the Department of Labor.

Can I borrow from my 401(k)?

Most plans do allow you to borrow from your 401(k). And it can be tempting. (After all, you’re borrowing from yourself.) You can generally borrow half your vested balance or $50,000, whichever is less. But think long and hard before tapping this nest egg. Employers often halt your match while a loan is outstanding. And if you get laid off, fired or leave the job for any other reason, chances are that that loan is going to be called in, and fast. What happens if you can’t repay the loan? You’ll owe income taxes plus a 10% early withdrawal penalty if you are under age 55.

At what age can I tap my 401(k)?

Generally speaking, you have to wait until age 59 1/2 to tap your account without getting hit with the 10% early-withdrawal penalty. But if you’re age 55 or older and you permanently leave your job, then you can begin tapping it immediately without owing the 10% penalty. This is called the “separated from service” exception. It doesn’t matter if you quit, retire or are fired. In fact, you could even begin working someplace else. But remember: Even when the 10% penalty doesn’t apply, you’ll still owe income taxes on your withdrawals.

What are hardship withdrawals?

Under certain circumstances, some companies will allow you to permanently withdraw money from your 401(k), even without leaving your company. But unless you really, really have to, it’s a bad idea. That’s because you’ll generally owe income taxes plus a 10% early withdrawal penalty if you are under age 59 1/2. A company can determine its own definition of “hardship,” but many use what are called the “safe harbor rules” which allow withdrawals for the following reasons:

To pay medical expenses
To cover the down payment or to avoid eviction or foreclosure on your primary residence
To pay college tuition
To cover funeral expenses for a family member

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By Michael DeSenne, April 18, 2016

Moving into a tiny home can be uniquely appealing to certain retirees who are seeking to downsize their lives in a big way. After all, compared with a traditional full-size house, a tiny home is more affordable to purchase, less expensive to live in and easier to maintain. Plus, the limited space compels you to declutter. Incidentally, there’s no rule that dictates just how tiny a tiny home needs to be. If you’re accustomed to more space and want to hang on to more stuff, spring for a tiny home with extra square footage.

For those thinking about — or willing to think about — living in a tiny home in retirement, here are some of the most important design features to consider:

Main-floor bedroom. Leave the lofts to those who are younger and nimbler. Not only does going up and down a ladder increase the risk of falls, but it also increases the strain on already achy joints. Tiny Home Builders, based in DeLand, Fla., lists a Tiny Retirement single-level floor plan that accommodates a full bed (or pull-out sofa), a kitchen, a bathroom and storage, all in less than 200 square feet.

A full bath. Ideally, it should come equipped with a raised toilet — typically a couple of inches taller than a standard toilet — for comfort and a walk-in shower for safety. The “Tiny Retirement” model has a 36-by-36-inch standing shower, the same width you’d find in a full-size home. Grab bars in the bathroom can cut the odds of slipping on wet floors. So, too, can slip-resistant flooring.

Easy-to-reach storage. Loft storage is fine for things you rarely need to retrieve, such as holiday decorations. If you require an occasional hand pulling down those items, ask a friend or family member to stop by. But closets and other storage areas that you access daily shouldn’t involve the use of a ladder (or awkward stooping or stretching, for that matter). A friend or family member won’t be around every time you need to reach clean socks or a spare roll of paper towels. Built-in drawers beneath beds and sofas are among the clever storage solutions found in tiny homes.

Accessibility. You might be active and healthy when you move into a tiny home, but age catches up with everyone. Build low to avoid steps, if possible. If not, consider a ramp for the entryway. Henry Moseley, president of Home Care Suites, in Tampa, Fla., says his company takes into account aging in place when it builds its small cottages. (Moseley prefers the term “cottage” because his small structures are built on permanent foundations in backyards, unlike portable tiny homes that can be hauled around by trailer.) Moseley says his small cottages, which start at 256 square feet, include wide doorways and low-threshold showers to accommodate wheelchairs.

Robo-advisor vs. human advisor

Generation X, Millennial

The financial advising industry has been buzzing about the emergence of robo-advisors for the past few years as web-based advising companies such as Betterment and Wealthfront have entered the industry. These online tools attempt to create and manage a client’s portfolio in a fast and inexpensive way.

One of the big appeals of robo-advising for clients is the straightforward and transparent pricing structures that are shown on many of the websites. For Millennials (born between 1980-1995), they may be enticed because the fee structure may be more realistic for a cohort without many assets. For skeptical Gen Xers (born between 1965-1979), the fee transparency that is offered by robo-advising may be attractive.

Although there are a few obvious perks to the robo-advisor model, there are undeniable advantages that human financial advisors bring to their clients. Tech-savvy Millennials may feel comfortable using an online tool to manage their money; however, there are certain Millennial attributes that make them ripe for a face-to-face financial advisor.

Gen Xers have an independent spirit and may have the confidence to use online financial tools, but they are in the thick of making very critical financial decisions. A true partner will be more helpful to them than an online tool as they manage the financial implications of their next stage of life.

Explaining the benefits of a financial advisor to a Millennial:

Robo-advisors won’t teach you the basics

In order for Millennials to invest in an independent format, they would first need to feel comfortable being in the driver’s seat of their finances. Study after study has shown that financial literacy is greatly lacking among the Millennial generation. Communicate the value you bring by providing explanations and context regarding what is happening with their money. Some of the financial jargon used on robo-advising websites may be enough to scare a Millennial off right away! Additionally, many Millennials are accustomed to mentor relationships. From close relationships to parents, to teachers to coaches, many Millennials expect to have some type of guidance from someone they trust. Financial advisors can capitalize on this need for basic information and mentorship.

Financial advisors customize the approach

Millennials grew up during a time of hyper-customization. Everything from their shoes to their yogurt toppings can be specialized just for them. Many Millennials have the same expectations with personal services. This is a place where human financial advisors shine. No one can create a more customizable experience than another person. By taking the time to get to know your Millennial client, you can customize the tools you use to communicate, the investment strategies you offer, and the advice you bring. An online option cannot offer the same kind of customization.

Explaining the benefits of a financial advisor to a Gen Xer:

Financial advisors can save you time

Gen Xers are in a hectic lifestage. They are climbing the corporate ladder or setting out on an entrepreneurial course as they enter their prime earning years. Robo-advising may save them some money, but it requires time they do not have. On top of everything else these Gen Xers have on their plates, taking on the responsibility of managing their own finances just may not be realistic. Talk to them about how you can save them time. With you, as the advisor taking the reins on investing, they can spend more time doing the things they love.

Robo-advisors can’t offer life guidance

Many Gen Xers are the parents of teenage children. They are dealing with complex financial questions surrounding paying down their mortgage, saving for college and, if there’s money left over, planning for retirement. Gen Xers don’t just need a financial tool, they need a human to ask the tough questions, understand their goals and come up with creative financial solutions. Robo-advising tools can’t ask critical life and financial questions such as: What kind of schools do you want your kids to attend? What would happen you were to become disabled? What do you want your legacy to be? These are the personal, intimate conversations that good advisors can lead clients through. Although these deep conversations aren’t the easiest, they can provide peace of mind to clients if they know that the big topics are covered. Conversations about money aren’t just about money. They are about the dream trip you want to take for your 10-year anniversary, the house on a lake and the ability to care for loved ones. It takes a great financial advisor to help turn these dreams into a reality.

Although Gen Xers and Millennials may have the ability to utilize online tools to manage money, an in-person financial advisor can add so much more as they navigate through the tumultuous waters of “growing up.” Focus on financial education, customization and personal conversations about long-term goals to help Millennials and Gen Xers understand the clear advantages of financial advisors.

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And the Executor Is

Tip: Generally,
children under the age of 18 cannot be executors.
Source: USA.gov, October 8, 2014.

In her will, American businesswoman Leona Helmsley left $12 million in a trust fund to her dog Trouble. Her four executors were responsible for seeing that her wishes were carried out. In the years after her death, they dealt with challenges from two disinherited grandchildren, oversaw scores of properties and hotels, negotiated settlements with disgruntled former employees, and managed a huge investment portfolio in a falling economy. What did they ask for in return? $100 million spit between them.¹

The executor to your will may not be as busy or as well compensated as Ms. Helmsley’s. Still, you’ll want to give thoughtful consideration to this important choice. How do you choose an executor? Can anyone do it? What makes an individual a good choice?

Many people choose a spouse, sibling, child, or close friend as executor. In most cases, the job is fairly straightforward. Still, you might give special consideration to someone who is well organized and capable of handling financial matters. Someone who is respected by your heirs and a good communicator also may help make the process run smoothly.

Above all, an executor should be someone trustworthy, since this person will have legal responsibility to manage your money, pay your debts (including taxes), and distribute your assets to your beneficiaries as stated in your will.

If your estate is large or you anticipate a significant amount of court time for your executor, you might think of naming a bank, lawyer, or financial professional. These individuals will typically charge a fee, which would be paid by the estate. In some families, singling out one child or sibling as executor could be construed as favoritism, so naming an outside party may be a good alternative.

Fast Fact:
Michael Jackson chose executors from outside his family to manage his estate.
Source: Fox News, June 21, 2014

Whenever possible, choose an executor who lives near you. Court appearances, property issues, even checking mail can be simplified by proximity. Also, some states place additional restrictions on executors who live out of state, so check the laws where you live.

Whomever you choose, discuss your decision with that person. Make sure the individual understands and accepts the obligation—and knows where you keep important records. Because the person may pre-decease you—or have a change of heart about executing your wishes—it’s always a good idea to name one or two alternative executors.

The period following the death of a loved one is a stressful time, and can be confusing for family members. Choosing the right executor can help ensure that the distribution of your assets may be done efficiently and with as little upheaval as possible.

What Will?

Take a look at some famous people who left without having a will in place.

Healthy Body, Healthy Pocketbook

Jimi Hendrix
Bob Marley
Sonny Bono
Pablo Picasso
Howard Hughes
Steve McNair
Abraham Lincoln

Source: Guardian Liberty Voice, February 19, 2014

1. New York Post, June 12, 2014

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

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By Tim Lemke on 8 February 2016

Saving for retirement can often feel like a drag, and many of us come up with excuses for avoiding it. After all, who wants to think about finances at age 70 when you’re decades away and enjoying life now?

But no matter what excuse you come up with, there’s no denying that putting as much money aside as you can — as early as you can — will help you maintain your lifestyle even after you stop working.

Here are some of the top excuses people use to avoid saving for retirement, and why they’re way off-base.

1. “I Have a Pension”

If your company is one of the few remaining organizations that offers a defined benefit plan, that’s great. But it should not be a reason to refrain from saving additional money for retirement. Having additional savings on top of your pension can make retirement that much sweeter. And pensions have been under assault in recent years, with companies and governments backing off of promises to retirees due to financial troubles. Protect against this uncertainty by opening an individual retirement account (otherwise known as an IRA).

2.”I’m Self-Employed” or “My Company Doesn’t Offer a Retirement Plan”

You may not have access to an employer-sponsored retirement plan, but that does not mean you can’t save a lot for retirement. Any individual can open a traditional IRA or Roth IRA and contribute up to $5,500 annually. With a traditional IRA, contributions are made from your pre-tax income. With a Roth IRA, you pay taxes up-front, so that you won’t have to pay them when you withdraw the money at retirement age. In addition, the federal government now offers a “myIRA” plan, which works like a Roth IRA and allows anyone to invest in treasury securities with no startup costs or fees.

3. “I Won’t Be at This Company for Very Long”

One of the key advantages to 401K plans offered by employers is that they are portable. This means that any money you contribute to a plan will follow you wherever you go. In some cases, contributions from your company need to “vest” for a certain amount of time before you get to keep the them, but usually only for a year or so. There’s no real downside to contributing to a company retirement plan, even if you don’t plan to be there for very long.

4. “The Expenses Are High”

It’s very true that many investment products, including mutual funds, have high costs tied to them. It’s annoying to buy funds and notice an expense ratio of more than 1%, thus reducing your potential profits. But fees are not a good enough reason to avoid investing, altogether. Over the long haul, your investments will easily rise in value and more than offset any costs. And if you direct your investments to low-cost mutual funds and ETFs, you’ll likely find the fees aren’t so objectionable. Look for mutual funds with expense ratios of less than 0.1%, and for those that trade without a commission.

5. “I Need to Fund My Kids’ College Education”

Putting money aside to pay for college is a wonderful idea, but it should not be done at the expense of your own retirement. Your kids can always work to pay for college or even take out loans, if necessary. But you can’t borrow for your own retirement, and you don’t want to find yourself working into old age because you didn’t save for yourself. In an ideal world, you can save for both college and your own retirement, but you should always think of your own retirement first.

6. “My 401K Plan Isn’t Very Good” or “My Company Doesn’t Match Contributions”

I’ll occasionally hear someone say that they won’t contribute to their retirement plan because it’s a bad one. No employer match, bad investment options, or high fees can kill any motivation to save. But contributing to even a bad 401K is better than not saving at all. And if you’re not thrilled with the offered 401K plan, you can take a look at traditional or Roth IRAs, or even stocks and mutual funds in taxable accounts. There are many bad retirement plans out there, but they are almost all better than nothing.

6. “I Don’t Understand Investing”

There’s no question that investing can be a very intimidating thing. It takes a while to grasp even the basics of how to invest, and the number of investment products can be bewildering. Don’t let fear hold you back from achieving your dreams in retirement. These days, there’s a lot of great free information about investing that can help you get started. And many discount brokerages, such as Fidelity, offer free advice if you have an account. Certified Financial Planners are also plentiful — and often reasonably priced — and can help you establish a plan to save for retirement and keep you on track.

7. “I Don’t Earn Enough”

It’s definitely hard to think about retirement when you’re having trouble making ends meet now. But it’s important to recognize setting aside even a modest amount of money each month can help you achieve financial freedom. Consider that even $25 a month into an index fund can grow to tens of thousands of dollars after 30 years.

8. “I’m Young — I Have Plenty of Time”

If you’re not saving for retirement when you’re young, you are costing your future self a lot of money. Thanks to the magic of compound interest and earnings, someone who begins saving in their early 20s can really see big gains over time. If you have $10,000 at age 20 and begin setting aside $200 a month until age 65, you’ll have nearly a million dollars, based on an average market return. But if you wait until age 35, you’ll end up with barely one-third of that.

9. “It’s Too Late for Me”

It’s true that the earlier you start investing, the more money you’ll likely end up with. But hope is not entirely lost for those who are approaching retirement age but have not saved. Even five to 10 years of aggressive saving and the right investments can result in a nice nest egg. Older people can take advantage of higher limits on contributions to retirement plans including IRAs and 401Ks.

10. “I’ll Get Social Security”

You’ve been contributing to Social Security all your life, but that doesn’t mean it guarantees a comfortable retirement. A typical Social Security benefit these days is about $1,300 a month. That’s enough to keep you from starving, but you won’t be able to do much else. Moreover, concerns over federal budget deficits suggest there is no guarantee of Social Security funds being available when you retire. For certain, there is constant talk by lawmakers of entitlement reform, which could mean to lower benefits or other changes.

What’s your excuse for not saving for retirement?

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As we prepare our tax returns this season, Heather Pelant shares how you can at the same time seek to build on your investment returns.

Somewhere between a root canal and a trip to Hawaii lies doing our taxes. However, I find this to be an opportune time to reflect across all your financials.

As of March 11 this income tax season, the IRS has already received over 74 million returns and doled out approximately $176 billion in tax refunds.

If you’re in this camp, good for you! For the rest of us, we’re knee-deep in gathering paperwork and filling out those tax forms. Schedule Ds, 5498s, 1099-DIVs, 1099-Rs — clearly, your taxes and investments are related.

It is worth a pause amid the frenetic tax season to remind ourselves of the connection between our taxes and our investments; and savvy investors pay attention to both.

To get you started, here are three connection points and actions to consider for tax season. First and most basic — contribute toward your future; second is to use potentially tax-friendly investments such as ETFs; and lastly, make sure that tax return doesn’t sit in cash for too long.

1. Contribute to your retirement accounts. Did you know that this year you can contribute to your IRA until April 18 for it to count toward 2015 deductions? The traditional Tax Day of April 15 is Emancipation Day, a holiday in the District of Columbia, so you get another full weekend to prepare and boost your traditional or ROTH IRA (be sure not to exceed the annual contribution limit).

Depending on your income, however, you may not be able to deduct IRA contributions if you also have a 401(k) at work. If so, set yourself up for 2016 and beyond by making sure you are contributing as much as you can toward your 401(k), up to the allowable limit. This not only lowers the amount of income tax deducted from each paycheck you earn now, it also maximizes any potential employer match. These tax-friendly actions can help you reduce the risk of not having enough retirement savings when you need it.

2. Look for tax-efficient investments. Many people don’t realize that the taxes you pay on the capital gains associated with trading inside an investment fund are costs that affect your total return, if you’re not invested in a tax-deferred retirement account. Consider switching some of your investments to exchange traded funds (ETFs). Because of their structure, ETFs typically pay out less in taxable capital gains than mutual funds. In fact, Morningstar data as of the end of 2015 indicates that only 7% of iShares ETFs paid capital gains distributions in 2015, compared to 58% of mutual funds.

3. Invest that refund. The average refund has been about $3,000. Certainly, there are many things you may want or need to do with that money, such as pay off expensive debt. But if you can, consider investing it in low-cost ETFs that serve the core of your portfolio and allows that money to work for you over time. If you’re saving for a short-term goal (over 6 months), a bond ETF may provide a better return for a little more risk than a bank savings or money market account.

And if you’re not expecting a refund this year, refer back to steps 1 and 2 for tax year 2016.

Sometimes the tax-man giveth

By taking just a bit of time to follow a few simple steps, tax season can be an opportunity to help prepare your assets to grow, and grow some more over time. While the tasks may never feel the same as a trip to Hawaii, being tax efficient could potentially add to your “Save-for-Vacation” fund. Aloha.

Heather Pelant is Head of BlackRock Personal Investing for BlackRock. She is a regular contributor to The Blog.

Do not fall into the fear trap.

It’s very easy to do. It’s actually perfectly natural. You see a scary event and the first instinct is to pull back and go into protection mode. But this is a trap. This initial instinct can hurt your long term portfolio and on a grander scale the economy as a whole. There is little doubt that in the next few hours/days we will hear from all major political leaders speaking of solidarity against extremism and in support of our friends in Europe. But since this is an election year we will also hear from candidates and their reps about how this could have been avoided if they were in charge and how we need to take drastic steps to protect ourselves in the future.

Do not fall into this trap

The markets are getting better at taking these terrible events with a much more calm approach. We as investors should follow that lead and not the fear mongering that comes from politicians. The last time we have had the isolationist drum beating this loud was the 20’s/30’s. And that ended really poorly on a lot of levels. The markets are never better by shutting doors. And as investors we need to reject that urge to run for cover when things get scary.

Oil is going to zero, completely a fear overreaction. The people who benefited were the ones who kept a level/logical head and were able to buy in cheap because of the fear.

A few years ago, the markets were going to zero because of financial firms. Again a fear overreaction. And those who were able to see past that reaped the rewards.

There are examples of this as far back as you want to go. Something scary happens, the masses get frightened and overreact negatively, things eventually bottom but most people don’t realize it til long after it happened.

The only difference is now we have politicians overreacting as well. And that can make it easier for people to jump on board. This is a dangerous series of events, one where logic and reason can quickly be overrun by emotions.

Don’t give in to the fear. As investors you need to look past it and see the greater picture and not just the latest headlines. Buy on the fear. (and then close your eyes since it will likely be bumpy)

Steven Dudash – President IHT Wealth

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By Anna B. Wroblewska, The Motley Fool

It is often the most boring and obvious lesson that is the most valuable — and the hardest to apply to real life. This is why we roll our eyes when we read things like “Set aside some of your income for savings” or “Stop eating processed food.” Surely there’s a better, sexier, more exciting answer somewhere!

Unfortunately, those boring and difficult-to-execute solutions tend to be the most effective. Cutting back on expenses and saving more, much like cutting back on calories and exercising more, may not be fun. A recent report demonstrates the value of such a boring approach. It’s not about ingenious portfolio allocation, incredible financial acumen, or even a high income.

It’s simple: consistency

The Employee Benefits Research Institute, a behemoth of retirement research, looked at millions of 401(k) participants who saved consistently from 2007 to 2012. The people who qualified to be in the “consistent savers” sample accounted for just 34% of the 2007 database. Yes, this was during the recession, when a lot of people lost their jobs or experienced some other form of financial distress, but the number of people interrupting their savings is nonetheless far too high.

For the minority of savers who kept at it, the benefits were substantial. By the end of the five-year period, the average consistent saver’s account balance was 67% higher than the overall average 2012 account balance.

The average account growth rate for consistent savers was almost 7% per year, including appreciation and new contributions. Younger savers, or those in their 20s, saw average account growth of over 40% per year (partly because contributions to a small account make a much bigger difference than contributions to a large one).

Put it in numbers. Say you save $5,000 in your retirement account every single year for 10 years, earning an average annual return of 8%. At the end of the decade, you’ll have $78,230. Now pretend you only contribute the $5,000 every other year — after all, you have other things to spend money on. Your ending balance? A paltry $37,600. Even if you only skip every third year, your ending balance would still be only $54,000. I don’t know about you, but I’d say the promise of $78,000 makes skipping a year seem like an incredibly bad idea.

It’s typical salt-of-the-earth advice: totally obvious as a hypothetical but incredibly wise once you actually follow it.

This isn’t exactly news

The importance of saving consistently might be painfully obvious, but sometimes it’s the obvious things that are the hardest to do. Between 401(k) loans or distributions, job transitions, and sheer procrastination, it’s easy to become wildly inconsistent in our savings habits.

And if we want the benefits of a consistent savings habit—that is, tens or hundreds of thousands of dollars more in retirement—we have to change.

How to be consistent

As a wildly inconsistent person performing this research, I have discovered three key conclusions.

First, automation is your friend—your best friend. It has never taken me more than five minutes to automate a financial transaction, and that includes the time I needed to change my 401(k) deferral with HR. Once something is automated, you pretty much never have to think about it again. The money just goes where it’s supposed to, and you never know the difference. It’s beautiful. It works. Whether you’re sending money to a savings account, your 401(k), or an IRA, just automate it.

Unfortunately, the second lesson is that even automated things have to be recalibrated once in a while. This is painful, because I, for one, hate revisiting things I’ve already addressed. Too bad. Pick a day and make it the day to increase your deferral, reroute some money to an IRA because you’ve maxed out your 401(k) contribution, or rebalance your portfolio because some of your investments are simply tearing it up. (Best advice I’ve seen: if you get a raise, increase the deferral by that amount. You’ll never miss it.) Put that date on the calendar and don’t miss it.

Note: If your 401(k) doesn’t have auto-escalation, schedule your day for December or January—i.e., before you fritter away your bonus and/or your New Year raise.

The third conclusion: You must ruthlessly keep investment fees to a minimum and be positively smug about avoiding lifestyle inflation with every raise. Be the self-controlled type who makes everyone say, “Whoa. You are totally going to be a millionaire.” (By the way, this kind of person is also considered highly attractive in romantic scenarios.)

Start soon enough and save enough every year—consistently—and someday you could even achieve millionaire status. And who doesn’t want to have the last laugh because they can afford a throwback purple Cadillac while others are stressing over the bills?

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The Fed Thinks Global

March 16, 2016 4:45 PM

By Zane Brown

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The central bank’s concern for developments overseas may have informed its decision, on March 16, to scale back rate-hike projections.

The U.S. Federal Reserve (Fed) has made a point of emphasizing that it will be “data dependent” in formulating any future policy moves. However, the Fed threw markets a curve on March 16 by citing recent turmoil in global markets, as it held the fed funds target rate steady at 0.25–0.50%—and scaled back projections for additional rate hikes in 2016 and beyond.

The communiqué released at the conclusion of the two-day meeting of the Fed’s policy-setting arm, the Federal Open Market Committee (FOMC), started in typical fashion, stating that U.S. economic activity was “expanding at a moderate pace”—but the words that followed came as a bit of a surprise—“despite the global economic and financial developments of recent months” [emphasis added]. The fact that the FOMC elevated global developments as a primary concern overshadowed its assessment that the labor market was strengthening and that inflation, though still low, had “picked up in recent months,” indicating progress toward its objectives of full employment and 2% inflation. The prominence of the Fed’s global concerns was especially striking, given the fact that commodity prices have recovered from their recent lows and that global markets have stabilized in recent weeks.

In the “dot-plot” projections released in conjunction with the FOMC statement (see Chart 1), policymakers reduced rate-hike expectations for 2016, to a total of two, 25 basis-point increases, from the four that were expected just this past December. The change brought the Fed into alignment with Wall Street expectations, as indicated by fed funds futures. The March 16^th update now puts the median projection for the fed funds rate at 0.9% by year-end, down from 1.4% in December, and the 2017 year-end projection at 1.9%, down from 2.4%. The 2018 year-end projection fell, from 3.3% to 3.0%.

Chart 1. Connecting the Dots on the Direction of Fed Policy
Federal Open Market Committee assessment of appropriate fed funds rate, 2016–onward (as of March 16, 2016)

Source: U.S. Federal Reserve. Each shaded circle indicates the value, rounded to the nearest one-quarter percentage point, of an FOMC member’s view.
Forecasts and projections are based on current market conditions and are subject to change without notice.
Projections should not be considered a guarantee.

The FOMC statement also was notable for a hawkish dissent by one of its members, Esther George, the Kansas City Federal Reserve Bank president, who voted against the Fed’s action and instead preferred a rate hike at the March meeting.

Financial markets reacted routinely: In the wake of the FOMC’s 2:00 p.m. ET announcement on March 16, Treasury yields increased, while stocks erased earlier losses to move higher. The dollar index weakened.

As we mentioned earlier, the Fed’s sudden dovish turn came despite substantial progress toward its stated objectives. Specifically, unemployment at 4.9% is within the Fed’s longer run estimate of 4.8–5.0%, and marginally above its December 2015 central tendency forecast of 4.6–4.8% for both 2016 and 2017. Core PCE inflation at 1.7% is close to the Fed’s 2.0% target, and if last year’s positive effects of oil-price and currency movements are transitory, headline inflation could advance soon as well. Perhaps the March statement reflects the Fed’s desire to get ahead of any future market troubles in China, Japan, Europe, and elsewhere. If so, policymakers have added an unstated third mandate—maintaining order in global financial markets—to their traditional employment and inflation charges.

Zane Brown is a Lord Abbett Partner and Fixed Income Strategist.