Make the Most of Your Money in Jefferson City and Central MO

Newly passed tax law could benefit many

Deep inside legislation passed in late 2019, is a provision that broadens the acceptable use of 529 college savings plan funds.

Background

529 savings plans are available to set aside after-tax funds to pay for college and K through 12 education expenses. As long as the funds are used to pay for qualified expenses, any earnings or interest in the savings plan are tax-free. Any unused earnings on funds are subject to a penalty and income tax.

The new rule

To help students financially after graduation, leftover money in a 529 plan may now be used to pay off student loans. There is a $10,000 lifetime limit for the 529 plan’s beneficiary and each of their siblings. For example, parents who have 4 kids can take a $10,000 distribution from the 529 plan to pay student loans for each of their children, for a total of $40,000.

Ideas to use this new rule

The graduation gift. If your student has access to low interest loans, you may wish to take out the loan now, in case your 529 plan funds are not enough to fund all four years of college. Then when your student graduates, you can use any excess to reduce the loan balances. What a graduation gift!

The planning tool. Suppose parents or grandparents have two students who can use 529 funds. Now you have two choices: pay down debt or transfer funds to another beneficiary. With this new rule you can keep excess funds in place from the first student. Then if need be the excess funds can be used to transfer to the other student who is a qualified beneficiary. When the students are done with school, any excess funds can be used to pay down loans for both students.

Flexibility. Many 529 plan holders would like to take advantage of using the funds to help pay for K through 12 expenses. With this extra use flexibility, it may make sense to use the funds early in your student’s education.

Given the recent changes in 529 college savings plans, it makes a lot of sense to explore your options and either consider setting up an account or developing a plan for best uses of the funds in your accounts.

Banks are a necessary tool to navigate our daily financial lives. Unfortunately, there are aggravating practices at many banks that drive us crazy or cost us money. Here are five tips to get more out of your bank and pay less.

Remove cash from the right place. Never use an ATM machine that is not in your bank's network. In-network cash withdrawals cost nothing at most banks, but withdrawals from someone else's machine may come with a $3 to $5 fee.

Action: Turn over your ATM or debit card and note the networks on the back of the card; or ask your bank about their network coverage. Only use ATMs within the network. Test a transaction to ensure no fee is included on your statement.

Notify your credit card issuer when traveling. Most credit card-issuing banks now automatically freeze your cards when a suspicious transaction occurs out of state. This freeze often includes foreign website transactions.

Action: Call your credit card issuer when you are going to be traveling. Also notify them if you wish to order an item from a foreign website. This can alleviate numerous headaches. While some banks may not block out-of-state transactions, you do not want to to have a transaction rejected while purchasing something on a trip.

Know your bank's overdraft rules. Non-sufficient funds (NSF) checks are not only embarrassing, they are expensive. Banks make millions on their overdraft fees and automatic loan features when you overdraw your account. Understand your bank's fees and how they apply your payments.

Action: Look for a bank that will allow you to link another account to your checking account without charging a fee. For instance, as a courtesy many credit unions allow you to link a savings account to your core checking account. Funds from your savings account are used should you inadvertently overdraw your checking account.

Always negotiate fees. If you are a long-standing customer with your bank or credit card company, call them to reduce or waive fees. Good examples of this are over-the-limit credit card fees or late payment fees. If you have multiple checking overdraft fees, negotiate to eliminate as many as possible.

Action: If you are late in paying your credit card or have an overdraft, fix the problem as soon as possible. Only after fixing the problem should you call to negotiate the fees. The bank customer service representative will see your quick action and be more likely to help reduce the fees.

Be willing to shop. Banks understand the power of inertia: They know it's a pain to change banks. But if you are willing to do so, you might be surprised to find better alternatives for less.

Action: Even interest on savings accounts varies widely from bank to bank. Use the internet to quickly see who is paying what in interest. Do the same for any loans, especially car loans, which vary widely.

To many, the holidays are the most wonderful time of the year and also the most difficult time for a budget. Why not save money this season by following some of these easy tips:

Holiday cards: Send a holiday postcard rather than a card or letter to reduce postage costs. You can even recycle old cards you have received by cutting the card in half and sending the front of the card as a postcard.

Wrapping paper: Get creative with the type of wrapping you use. For instance, use your children's artwork, or use the newspaper and other printed mailbox finds. Ribbons work without wrapping paper, too.

Decorations: Decorate with nature. Use pinecones and evergreen boughs around your home. Fill glass vases with peppermint, colored candies and nuts. Also consider using everyday items around the house, like stringing cotton balls and popcorn for tree trimmings.

Entertainment: Think about the free delights of the season. Check out your favorite holiday movies from the library, drive around town to see Christmas lights, and take a winter hike at a local or state park.

Gift exchange: Ask your family or friends to consider drawing names this year. Or have everyone bring one gift and then play a gift-swapping game to see who gets what. To make gifting even less expensive, ask everyone to bring something from their home that they enjoy but no longer need.

Homemade gifts: Why not give a gift that truly comes from you. It might be something you make or bake, or it might be a gift of your time. Some ideas? Offer free babysitting, dog or cat watching, lawn care or gardening services. Your limit is your imagination.

Owning a pet may improve your quality of life, but it probably won't be cheap. Basic food, supplies, medical care and training can cost hundreds of dollars. Add to that surgeries, grooming, kennel boarding and miscellaneous costs, and you may end up spending much more than you anticipated to keep your pet healthy and happy throughout its life.

Fortunately, many of the costs associated with responsible pet ownership can be controlled, or at least reduced. Here are a few ideas:

Adopt an animal. Not only are you helping to stop factory-style breeding when you adopt an animal from a humane society or a rescue organization, you may save some money. Often spay/neuter procedures and vaccinations have already taken place before you adopt an animal. And in some cases, the animals have already been through training classes.

Spay/neuter. If you do own an animal that has yet to spayed/neutered, you'll find that some animal shelters provide this procedure at relatively low cost. Getting your dog or cat "fixed" may also mean fewer health problems down the road.

Buy food in bulk. For most pet owners, food is their largest ongoing expense. So reducing that cost often generates the greatest savings. Although big-box retailers offer substantial cost reductions for large quantities of pet food, it always makes sense to shop around. (Specialty stores have sales, too.)

Generally speaking, the more you buy, the cheaper the food. But be careful. Though there's no legal definition of "premium" in terms of pet food nutritional quality, think twice before grabbing the cheapest bag off the shelf. Long-term health problems may result from routinely feeding non-nutritional meals — food that's mostly filler — to your animal.

Exercise! Regular exercise and routine veterinary visits often reduce long-term health care costs.

Don't forget mouth health. Severe gingivitis may lead to serious health problems in your pet, including kidney and lung disease. If you don't want to brush your dog's ivories, consider dental chews that release teeth-cleaning enzymes.

Consider pet insurance pros and cons. Budgeting and contributing to your own "pet emergency fund" may be cheaper than paying insurance premiums. Research pet insurance options and then do the math before buying.

Obtaining a legitimate college degree is an expensive proposition. Many will be paying off student loans — month after month, year after year — for decades.

With smart financial management, graduates can liquidate their college debt in a reasonable time, freeing up cash for other priorities. Here are four tips for paying off loans quickly and efficiently:

Build a budget. Get a handle on where money is going. A budget can help prioritize, enabling you or your child to whittle down student loans more quickly. Several online tools are available. You can even use a simple spreadsheet listing monthly income and expenses.

Talk to your employer. Your company or your child’s company may offer one-time loan payoffs in exchange for a lower starting wage or other concessions. Negotiate when interviewing. After taking a job, check with the human resources department about options.

Use auto-pay. Reducing payment steps makes it less likely to divert those funds to lesser priorities. As an added bonus, you or your child may develop the discipline to live on less while loans are being paid off.

Reduce your other bills. Talk to your cell phone provider. Consider dropping cable. Postpone that expensive vacation. Hold off on expensive purchases that aren't necessary at the moment.

It all goes back to prioritizing student loan payments. It'll be worth it when you can enjoy the benefits of a rising salary, increased cash flow and a stellar credit score in a few years from now. And don’t forget to take advantage of possible education tax credits and deductions.

Give us a call for help determining what tax breaks are right for you.

Summer is often a time for vacations reunions. But it can sometimes be hard to justify spending the money to take one. Fortunately, with a little planning and ingenuity you can trim the cost of that summer getaway without cutting back on fun and relaxation. Here are a few ideas:

Consider package deals. By bundling airfare, hotel and car rental together, travel companies sometimes offer cheaper rates. Just be sure to read the fine print.

Eat in your room. Just because you're on vacation doesn't mean every meal needs to be expensive. For some dinners, try buying some staple items at the local grocery store. Sleep late and reduce your food intake to a brunch and a dinner. You'll eat less and possibly spend less on food, too.

Travel in the off-season. Christmas in Mexico is great, but it's also more expensive. By choosing the days just before or just after the busy season, you'll often find cheaper rates without much difference in climate. You'll also avoid some of the hassles that result from too many tourists in too little space.

Do some research before you go. You can often find info on local customs, authentic eateries, free events and the best times to visit museums online or in inexpensive guidebooks. Some also offer coupons.

Vacation nearby. Tourists visit your home state and marvel at its attractions. For a week, become one of them. You'll save on the cost of accommodations but still have the chance to explore the area around you through day trips.

Plan ahead. Instead of financing your getaway with a credit card (then struggling to pay off the balance and accumulated interest later), plan ahead. Every month or every paycheck, set aside money. Make it a family activity. If everyone wants to visit Disneyland, research the best airfares and hotel rates and let your kids do the math. The earlier you start, the more you'll be able to accumulate for that dream trip.

You're starting to feel overwhelmed with debt and you're not sure how to make even the minimum payments on all those accounts. That's when you realize that credit card companies are eager to come to your aid. They offer balance transfers to help you consolidate high interest accounts. They provide "one low monthly payment" to simplify your finances. With their assistance, you'll be debt-free in no time. At least that's what the advertisements say.

But before consolidating your debt on a new credit card, ask the following questions:

What fees can I expect? You may be charged for transferring balances. The new company may assess a monthly or annual fee, regardless of whether or not you use the card for additional purchases. If you make even one late payment, that low interest rate may skyrocket and you'll likely be charged a late fee. If you're late more than once, both the late fee and interest rate may jump. All such terms will be laid out in your new credit card agreement. Read it before signing.

Would a personal loan be a better option? In some cases, a credit union or bank may help you consolidate debt by offering a single loan with a fixed interest rate and term. If your credit is decent, this may be a better option than switching to a new card. Knowing that you're required to make a fixed payment each month and that your debt will be paid off in, say, three to five years can help you from falling into the minimum payment rut.

Should I ask family and friends for help? If someone offers to lend money, your credit score may actually improve because balances on existing debt will be paid off. However, be sure to put the agreement in writing and treat the loan like any other obligation. Borrow from friends and family at your own risk.

Am I willing to modify my spending habits? This, perhaps, is the most important question you can ask. If you can't find the discipline to spend less than you make, you'll likely end up with debt troubles again.

If you'd like help reviewing your debt consolidation options, give us a call.

If you're serious about saving money, it's important to focus on costs you can control. Some items may claim a large slice of the budget pie, but they're either fixed or relatively inflexible (like mortgage and utility payments). You can layer up to reduce heating costs, but you can only go so far.

By contrast, grocery costs are often more controllable. Careful planning and a little discipline when cruising the supermarket aisles can generate hundreds of dollars in savings. Here are four suggestions for taming your grocery bill:

Avoid prepackaged foods. Bagged salads may save a little time, but they often exceed the cost of individual ingredients. Instead of buying tuna helper, purchase the rice separately. Add your own spices and herbs. Make your own prepackaged helpers to save time and expense.

Skip the impulse buys. Energy bars, bottles of soda and mini-sized toiletries are often impulse buys. That's why marketing departments place them at eye level near the checkout stand. If you really need one of these items, it's often more economical to buy it in full-sized packages — not just as one-offs.

Stock up on coupons. Your mother and grandmother used them, and for good reason. Coupons can make a huge dent in your grocery bill. You can usually find coupons online and in store apps, as well as in your Sunday newspaper supplement.

Restrain yourself at the warehouse store. Bulk-purchase stores offer great deals on everything from toilet paper to ground beef. But buying in bulk doesn't always translate to savings. Consider whether a better price is available at your local supermarket, especially when coupons are available. And don't fall into the trap of buying more than you really need, just because the unit price is cheap. Six months later, when you're throwing away an unused portion of food, you may wonder whether the bargain purchase was really a bargain.

Looking for a way to tackle insomnia? Read your homeowner’s insurance policy. Kidding aside, it’s worth the effort. As many families have learned the hard way, failing to evaluate policy details can lead to unanticipated expenses when disaster strikes.

Sweat the fine print, especially if you’re a first-time homebuyer, and don’t make these three blunders:

• Underinsuring. If your policy covers only the mortgage or real-estate value, consider pumping up the bottom line, even if it means paying slightly higher premiums. Your policy should provide enough funds to start over from scratch. Construction prices tend to increase over time, so a new home on the same lot could deplete your emergency savings. In the aftermath of a natural disaster, when supply may outweigh demand for construction materials and labor, you’ll want enough funds to rebuild — not just pay off the mortgage.

• Disregarding exclusions. Is your home covered for exterior flooding, or only interior water damage? Does the policy include coverage for mold, sewer backup and earthquakes? Nail down the details and pay close attention to local risks.

• Misinterpreting deductibles. You may find that, unlike an auto policy, your homeowner’s insurance doesn’t include a flat-rate deductible. Some policies charge a percentage rate under certain circumstances. Say your house is insured for $300,000 and an earthquake strikes. If the insurer stipulates a deductible of five percent of the policy amount, you may be saddled with $15,000 in out-of-pocket costs before the insurance kicks in. Can you handle that?

It makes sense to comparison shop. Friends and family can often provide insight into how promptly claims have been paid and whether payouts have been fair. Check online rating sites. Be especially wary if a particular insurer is routinely cited for substandard customer service. Above all, be proactive. Don’t wait until the ground starts trembling.

Financial goals make it possible for you and your partner to achieve the things you dream about. Here are three things you can do to create – and achieve – financial goals as a couple:

Start talking sooner rather than later. Finances can be hard to talk about. People sometimes feel guilty about debt or ashamed that they don’t make more money than they do. More than that, many people consider money to be a private thing that shouldn’t be discussed with others.

However, the first step to setting financial goals as a couple is to start talking. And the sooner you start talking with your partner, the better prepared you’ll be to make positive financial decisions. Saving for big purchase, for example, takes time and planning. Having a discussion early gives you more time to start saving.

Don’t just agree on goals – agree on how to achieve them. Once you’re talking about your finances, you’ll want to discuss your goals. Would you like to pay off your credit card debt? Save for a big family vacation? Have more of a financial safety net?

After you’ve agreed on what you’d like to achieve, start talking about how you’ll work together to achieve it. The best financial plans require both partners to contribute to the financial goal – whether that means each agreeing to contribute monthly to a savings account or just give up your gourmet latte habits.

Keep the conversation going. Plans need maintenance to succeed. That means continuing to talk about them, checking progress on a regular basis. It’s important for both partners to know all the numbers, even if one partner manages the finances.

Scheduling a regular financial conversation is one way to keep you and your partner on track to achieving your goals. This “financial date night” is a good way to ensure that things are going as planned. It’s an opportunity to check in and adjust the numbers accordingly.

With open communication and commitment from both partners, you’ll be well on your way to reaching your financial goals.

Deciding when to apply for Social Security benefits can be confusing. It’s a decision that can impact your retirement income for decades. Spousal benefits, especially, are easily misunderstood. Here are three questions to consider:

What is a Social Security spousal benefit? As the term implies, it’s income provided under the Social Security program to spouses, current or widowed. (An ex-spouse may also qualify under certain circumstances.) If your spouse or ex-spouse paid into the program, you may be eligible for this benefit, even if you never worked under Social Security.

How much will I receive? Your monthly benefit consists of two parts: the amount based on your own work history and the spousal benefit (if applicable). Let’s say you’re entitled to a monthly benefit of $800 and your higher-earning spouse is eligible for $2,000 a month at his or her full retirement age (FRA). Because half your spouse’s benefit ($1,000) exceeds your own benefit, you’re entitled to a spousal benefit for the difference. In this scenario, you could collect an additional $200 ($1,000 minus $800) each month.

Can I claim a spousal benefit if my spouse isn’t currently drawing Social Security? No. However, if you’re filing based on an ex-spouse’s work record, you may be eligible, even if that person hasn’t filed for his or her own benefits.

The spousal benefit rules are complicated. You’ll want to consider your spouse’s timetable for claiming Social Security benefits, your own benefits, your spouse’s likely longevity (a death can affect widow’s benefits), previous marriage history (if you expect to claim benefits based on a divorced spouse’s work record), and numerous other factors.

Check out the Social Security Administration’s Benefits Planner: Retirement page for more information. Call if you have questions about how your Social Security benefits will affect your taxes.

You’re approaching that long-awaited day when you can say goodbye to full-time employment. But you’ve been listening to the dire predictions of financial pundits. Not exactly encouraging stuff. Should you continue to plug along at work and ride out the storm? Or should you retire as planned, even if the market’s headed for a significant downturn?

Tough questions. Unfortunately, there’s not a one-size-fits-all answer.

Take a deep breath. Forget about the stuff you can’t control: the stock market, interest rates, government programs, the world economy… etc. One of the biggest hazards of retiring into a declining market is “sequence of returns” risk. That’s the problem of taking withdrawals — especially early in retirement — from a portfolio that’s headed in the wrong direction. Once shares are sold, fewer shares are available to profit from future market recoveries.

Nevertheless, you can take steps to cushion the transition even when retirement accounts are performing poorly. Here are four suggestions:

Think about pulling funds from other assets. If you have cash in “buffer accounts,” tap those sources first. If not, consider reverse mortgage or home equity lines of credit. Both may have significant upfront costs, but establishing a line of credit early in retirement can help you defer substantial withdrawals from your retirement accounts.

Consider selling your house and moving. Many people find that retirement is a great time to downsize and move to a less-expensive location. Proceeds from the sale can provide enough cash to cover expenses as you wait for the market to recover.

Set a realistic budget. Don’t just guess what you’ll need. Do the math. Establish the habit of living within your means, before and after you leave your job.

Seek professional help. A financial advisor can help you map out a plan for your golden years.

Whether you’re a seasoned investor or new to the game, you’ll want to make a conscious effort to avoid these three common investment mistakes:

Relying on emotions. According to Essentia Analytics, behavioral scientists have studied biases that shown to drive investment choices. For example, you might fall into anchoring bias. That’s the irrational decision to hold on to something — a stock, a car, a piece of information — just because you already own it. Or there’s recency bias, which involves the tendency to lean more heavily on recent investment performance when considering future returns. This type of bias can unduly impact investment decisions as people approach retirement.

One idea to skirt such emotional hazards may be to place investment contributions on autopilot and readjust portfolios annually to align with long-term goals.

Taking or avoiding risk. You might pack your investment portfolio with individual stocks that have performed well in recent years. Unfortunately, if stock in one of these companies takes a dive, your retirement account may never recover. On the other hand, if you’re too averse to risk, inflation may eat up the purchasing power of your money as it languishes in low-interest accounts. To avoid such pitfalls, many people consider investing in a few well-diversified low-cost mutual funds to allow money to grow without undue risk.

Not investing at all. If you live only for today and don’t save enough for retirement, you’ll likely struggle to meet expenses later. The good news: Because of compounding returns, the earlier you start saving, the less you may need to save.

And if your employer provides matching contributions to your retirement account, take full advantage.

You’re in the market for a house. Let’s assume you find a great place that’s selling for $240,000 and meets all your criteria — safe neighborhood, good schools, big enough to accommodate your growing family, and close to your workplace.

With a 20 percent down payment ($48,000) and estimated closing costs of $3,000, you’ll need to cover the balance of $189,000 with a mortgage. So you talk to your banker and learn that you qualify for a 30-year mortgage with an annual interest rate of 4.8 percent.

You also qualify for a 15-year mortgage with a lower interest rate of 4.4 percent. Both mortgages are “fixed,” meaning the interest rate won’t change over the payback period.

Assuming that you plan to make monthly payments for the entire term of either loan, should you opt for the longer mortgage or the shorter? These three primary factors are worth considering:

Monthly payment. In this example, you’ll pay about $991 each month for principal and interest (excluding taxes and insurance) on a 30-year mortgage. Monthly payments for the 15-year mortgage will be about $1,436 (nearly 45 percent higher). Will your budget — both now and in the future — accommodate the higher payment required by a 15-year mortgage?

Total interest. Here’s where the 15-year mortgage shines. Because you make interest payments for half as many years, you’ll save over $98,000 (58 percent) in total interest over the course of the loan. This route may be ideal for people who know they won’t need to rely on the financial wiggle room smaller payments typically provide.

Flexibility. Under both scenarios, you sign a contract. You’re required to make monthly payments regardless of job losses, medical emergencies or other unforeseen circumstances. Should life throw you a curveball, the lower monthly payment of a 30-year mortgage may enable you to stay within budget and prevent foreclosure.

You may also consider making extra principal payments on a 30-year mortgage. You’ll pay off the balance sooner and retain a measure of flexibility.

An important step in estate planning is creating an inventory of your assets. Your executor, or the person you designate in your will to carry out your last wishes, uses the inventory to make sure all of your property passes to your heirs.

It’s likely that some of your assets exist in digital form. Documenting your digital assets along with your physical belongings can help ensure your final wishes are honored and your estate is administered correctly.

Here are a few items to keep in mind as you compile a list of your digital assets:

Create a list of passwords. In order to review financial accounts with banks, brokerages or other businesses, your executor will need your current passwords. If you protect passwords with additional encrypted apps, include the master access info. Most importantly, keep your list updated when you change passwords.

Be comprehensive. Add URLs, usernames and passwords for nonfinancial accounts (such as your email and online storage sites) to your inventory. Why? These accounts can be essential for retrieving invoices, statements and other paperwork for which you've chosen electronic-only delivery.

Don’t forget device access. The physical assets you use to access your digital data include your phone, tablet and computer. That means your executor will need passwords and file names to access those devices. Also, list the location and encryption information for offsite or standalone storage devices, like external drives.

When it comes to planning, keeping track of your online assets can be vital. Call if you have questions how your assets may be affected by state and federal estate tax laws.

Your daredevil kid breaks an arm, the car overheats and the house roof starts leaking. You need cash right away. Should you consider a payday loan?

Payday loan basics

Payday loans (sometimes called cash advance or deferred deposit loans) can provide short-term financing to help cover immediate needs. You can usually apply online or at a local storefront.

Here’s how it typically works: You write the lender a post-dated check for the loan amount plus a borrowing fee. The lender hands you a check and agrees to hold your post-dated check until next payday. When payday rolls around, the lender deposits the post-dated check or you extend the loan for an additional fee.

If you apply online, you’ll often be approved in minutes without filling out paperwork. In a few hours or days, loan proceeds will be deposited directly into your bank account.

Are payday loans a good deal?

It depends. Before you apply, consider three disadvantages:

Borrowing costs are high. The interest rate on a two-week loan is typically 15-30 percent. Extend the loan for a year, and you may be paying more than 300 percent in interest.

Some lenders are unscrupulous. Loan shops are popping up in many neighborhoods, and crooks sometimes use them to engage in identity theft.

Root problems are not addressed. Habitually relying on payday loans can exacerbate poor financial habits.

Before an emergency strikes, take time to explore alternatives. Cut back on unnecessary expenses. Ask family and friends for help. Build an emergency fund by working a second job or perhaps selling good-condition items online.

Bottom line? If you must, use high-interest payday loans as a last resort.

For many Americans, debt has become a way of life. A recent LendingTree analysis of the latest Federal Reserve data showed that total U.S. consumer debt is on track to exceed $4 trillion this year. The analysis showed Americans collectively owe more than 26 percent of their monthly income on consumer debt, including car loans, credit card accounts and student or personal loans.

Living within one’s means may seem quaint or old-fashioned, but it’s the most tried- and-true way for most people to acquire financial security. Before you take out a loan for that shiny sedan or charge up your VISA card for the latest gadget, ask yourself three crucial questions:

Can I afford the payments? If your current income qualifies, some lenders may push you into loans that devour cash like a hungry hyena. Don’t fall for it. The housing crisis was the result, in part, of mortgage defaults. In other words, people took out loans that exceeded their ability to repay. When savings were drained, foreclosures became inevitable.

As a general rule, your housing payment (including property taxes and insurance) should not exceed 30 percent of your gross income.

How close am I to retirement? If you’re tempted to borrow for that trip to Europe, take a deep breath. Consider the long-term consequences. These days, many people can expect to live decades after they step down from full-time employment. What’s your priority? Contributions to your retirement accounts or the transient thrill of an impulse purchase?

Can I wait until later? By paying cash for purchases, you can avoid interest charges and generally spend less in the long run. An unscrupulous lender may gladly finance your toys and vacations, but think long and hard about the impact on your bank account.

Do you save regularly? If not, you should reconsider. Developing a saving habit is one of the best things you can do for your financial health.

In the short term, savings can provide you a cushion to deal with emergencies, such as a job loss, unexpected home repairs, medical bills, etc. It will also help you reduce or eliminate your need to take out loans or other financing. Most importantly, building up savings while you work can mean the difference between a comfortable retirement and scraping by on Social Security benefits.

There’s no better time than now to start saving

If you’re not a regular saver, where do you begin? Here are three tips to help you get started:

Set small, manageable goals. Remember the old adage that “what gets measured gets managed.” Set specific goals, whether it’s to save so many dollars per month or a set percentage of your earnings. Then track your progress toward your goal at frequent intervals. This will help you gradually expand your goals as you see your successes.

Save automatically wherever possible. Sign up for payroll deductions into your company 401(k) plan, or arrange for a portion of every paycheck to go straight into a savings account at your bank. Saving is much easier if you never get your hands on the money.

Track what you spend. Keep records for a month or two so you know where your money is going. Then figure out where you can cut back to generate some savings. For example, give up one espresso coffee per day, or make your own lunch two days each week instead of eating out. Or think up one creative, low-cost way to have fun with family or friends each week. Put aside the money you save so you can see the results.

Remember, saving leads to other financial benefits. The more you save, the less you borrow. The less you borrow, the less interest you pay and the more money you can add to your savings. So start your savings program now!

We have witnessed such volatile activity in the stock market in recent years that the old stock selection rules are not always applicable. Seasoned investors and new investors alike want a sure-fire way to pick the winners.

Well, no one can offer any guarantees, but smart investors do have certain characteristics they associate with a winning stock.

A crucial key is that the stock should meet certain criteria. There are good stocks that don't fit the mold, but historically, the stocks with the biggest gains shared most, if not all, of these features:

Strong balance sheet Look for companies with a low debt-to-equity ratio. In recessionary times, debt-laden companies may not stay afloat.

Low price-to-earnings ratio P/E ratios are usually industry-driven, so make sure you compare similar companies. Low P/E ratio may mean an increased rate of return on your investment.

Good management A strong management team and a leadership position in their industry are earmarks of a good company. Look for a history of steady growth to assess staying power.

Book value A stock priced lower than its book value provides extra assurance that your investment will not go sour.

Good dividends A strong dividend history with regular increases adds to a stock's desirability. A healthy income stream can make the wait for growth returns more pleasant, and it helps prop up a stock's price in a falling market.

Undervalued assets Company assets such as real estate and mineral holdings may be worth dramatically more than the balance sheet and stock price indicate. Companies with undervalued assets may be tempting to conglomerates in these days of merger mania.

Broad ownership base A stock that is held by relatively few investors is much more likely to be subjected to dramatic drops if a major holder decides to bail out.

Basic industries Shy away from faddish industries, notorious for meteoric rise and fall. When timing is the most crucial element in an investment's return, it becomes more akin to gambling than investing.

Strong cash flow Healthy cash flow will help a company weather economic downturns. It might also make the company a takeover target since takeover debt can be paid off with the surplus dollars.

Unusually low price A low price when compared to the stock's average historical price could indicate a bargain if the drop is due to market forces rather than changes in the company.

Though there is no magic way to select winners, the hallmarks of a good stock value are somewhat ascertainable. Good investing requires legwork and attention to detail, but that's a small price to pay for a healthy portfolio.

DRIPs

Have you ever considered setting up a dividend reinvestment plan (DRIP)? Now may be the time to think about doing so. Current tax law makes these plans more appealing than ever.

What is a DRIP? DRIPs allow you to build your portfolio by using all or part of your dividends to purchase additional shares of stock in a company. One advantage to these plans is that they allow investors to avoid brokerage commissions when acquiring additional shares of stock. Furthermore, many plans grant discounts off the current price of shares purchased with dividends, thus creating an instant return.

Another nice feature is that many plans allow you to make cash investments to purchase shares, sometimes in amounts as little as $25 per month. Because DRIPs allow you to invest in small increments, they often appeal to small investors.

Investigate before you act. Before establishing a plan, review the inherent risks and limitations to make sure that a DRIP fits into your overall investment strategy. For example, even if companies increase their dividend pay-out amounts, the dividends alone will most likely not build a large portfolio. Also, it is difficult to build a well-diversified portfolio using DRIPs Instead, DRIPs should complement a core holding of stocks and fixed-income products.

Selling Stocks

Selling a stock is an important decision - almost as important as the decision to buy. Unfortunately, while the world is full of buy recommendations, there is very little advice on when to sell.

Many investors make the mistake of holding onto losing stocks too long. Sometimes they compound this error by selling their winners too soon. The results? A remaining portfolio of mostly poor performers.

Successful investors limit their losses and let their winners run. There are a variety of ways to do this; the more popular strategies include:

Setting a predetermined sales price. At the time you invest, choose two prices, one below your purchase and another above it.

For example, at the time you buy a stock for $50 per share, prepare to sell it at $60. Set a low-side "sell" price, too, to limit your loss if the price falls. Where to set these prices depends upon your expected profit and the loss you can withstand if the stock price drops.

Sell the stock if it hits either of these "target" prices. You may reevaluate and change these prices, but only if there's a compelling, legitimate reason to do so.

Another technique uses "moving averages." You can calculate various moving averages using different stocks and different time periods. These averages are plotted on a graph to reveal trends that help you determine when to sell.

Monitoring business fundamentals. Yet another technique is to sell when the company's fundamental business indicators begin to wane. A few of the important factors are earnings, market share, profit margin, and sales volume. You can obtain this information from the company's financial statements and from newspaper and magazine reports. The idea is to sell when the stock becomes overpriced in light of these factors.

Selling overvalued stock. The price/earnings ratio (share price divided by earnings per share) is one measure of a stock's relative value. If the ratio is too high, the stock may be overvalued, and it's time to sell. For example, if a stock has traditionally sold for 20 times earnings and it's now selling for 40, it's probably overvalued. Some investors compare their stock's ratio to the ratio of the Standard & Poor's 500, again as a measure of relative value.

Earnings trends. You might use the company's earnings to gauge whether the stock will perform well in the future. Some investors compare earnings to other companies in the industry or to the Standard & Poor's 500. If earnings trail the others by a certain percent, then sell. Other investors compare current trends to historical earnings. Sell the stock if a company's earnings for the most recent 12-month period are less than the previous 12-month period.

There are, of course, other techniques (and combinations of techniques). If you invest in stocks, be sure to give careful thought to what your selling strategy should be.

There is no consensus on which strategy works the best, but professional investors do agree on one thing: selling stock requires discipline. Any rational strategy is probably better than none at all. Pick one that makes sense to you and stick with it.

The nine basic rules of investing

Investing Basics

There is no magic to making money by investing. It requires discipline, determination, perseverance, and hard work. In deciding what investments are suitable for you, you must first understand the nine basic rules of investing.

1. Risk versus return. The greater the risk that you will lose not only the return on your investment but your original investment as well, the greater the potential rate of return. An individual investor should always try to get the highest rate of return without going beyond the risk level that he or she finds comfortable.

2. Inflation. If inflation is higher than the return on your investments, you are losing future purchasing power. If, for example, you have $1,000 earning 3% after tax, and inflation is 4%, your $1,030 will purchase only $990 of goods one year later.

3. Liquidity and marketability. A liquid investment can be readily converted to cash; a marketable investment can be readily sold for cash. A savings account, for example, is highly liquid, and blue chip stocks are readily marketable. A piece of real estate, on the other hand, may take time to sell and convert to cash. Often, yields run conversely with liquidity and marketability.

4. Tax aspects. An investor's return should always be computed after taxes. Some investments have tax advantages that increase their relative after-tax yield. Tax-exempt bonds, for example, carry a lower return rate than taxable securities. However, your after-tax return may be higher with the tax-free investment than with a taxable one.

5. Income versus appreciation. Some investments provide current income (such as high-dividend stocks); others have little current income but appreciate over time. The best investments provide both income and appreciation.

6. Management. Some investors enjoy managing their own portfolios. Others lack either the time or knowledge to be effective managers. Your desired degree of involvement will help determine the kinds of investments best for you.

7. OPM. Using "other people's money" and leveraging into investments allows you to get a higher return on your own invested dollars; however, the risk is also higher. Again, you'll have to decide your own comfort level.

8. Diversification. Those investors seeking safety count on diversification. Diversification is simply investing in two or more kinds of investments. Then if one investment goes sour, you do not lose everything.

9. Your goals. In your own investment program, it is your goals that are important, not the goals of your broker or financial advisor. Never invest in anything that you do not understand or with which you are not comfortable. Decide what your objectives are and what your risk-tolerance level is, and go for the highest return within those boundaries.

Dollar-Cost Averaging

The secret to success in the stock market is to buy low and sell high. That's much easier said than done, since an investor's natural inclination is to buy a stock when it's on the way up and to sell it when it's on the way down. For the long-term investor, there's one technique that can be used to build a solid portfolio without being battered by the up-and-down swings of the market.

It's a technique called dollar-cost averaging. Very simply, you invest a given amount of money at given intervals without concerning yourself about the stock's price on that given day.

For example, you might put $200 a month in a good quality stock or mutual fund. Instead of trying to identify the low point for the stock and buying it then, you simply buy whatever number of shares your $200 will purchase on the same day each month.

Assuming that the share price of your stock increases over the long term, your average cost per share is always lower than the current market value.

Look at the following chart to see a typical example of dollar-cost averaging.

Dollar-Cost Averaging - Investing $200 per month

Month Market Value

of Stock # Shares Bought

This Mo. Total Shares

to Date Average Cost

Per Share

1 $25.00 8.00 8.00 $25.00

2 30.00 6.67 14.67 27.27

3 28.50 7.02 21.69 27.66

4 27.75 7.21 28.90 27.68

5 25.00 8.00 36.90 27.10

6 26.25 7.62 44.52 26.95

7 23.50 8.51 53.03 26.40

8 27.50 7.27 60.30 26.53

9 28.00 7.14 67.44 26.69

10 30.00 6.67 74.11 26.99

11 33.50 5.97 80.08 27.47

12 32.00 6.25 86.33 27.80

Note that in Month #5, your average cost is $27.10, which is $2.10 more than the market value. Time to panic? No, the market moves in cycles, going up and down. As long as the long-term movement is up, you come out ahead.

Notice that after Month #12, you would have purchased 86.33 shares for a total investment of $2,400. Your average cost per share is $27.80, and the current market value is $32. Your $2,400 investment has increased by $363 to $2,763, giving you about a 15% return.

Mutual Funds

When you buy shares of a mutual fund, your money is pooled with other shareholders' money and invested in a portfolio of securities (stocks, bonds, etc.) An investment in a mutual fund offers you diversification and management by professionals.

Mutual funds have no guarantee of good returns or safety of your investment; they go up and down just like the rest of the market.

There are several different kinds of mutual funds, each with different investment objectives. If you decide to put your money into a mutual fund, you should look for one whose objectives match your own investment objectives and financial needs.

The different categories of mutual funds include these major classifications:

Aggressive growth or capital appreciation funds invest in smaller companies, looking for growth that will result in capital gains income rather than ordinary dividend and interest income. Because of their speculative nature, these funds are in the high risk category, giving you the chance of highest return as well.

Growth funds buy stocks that are expected to increase in value in the future. They are somewhat less risky than aggressive growth funds, produce very limited income, and are seeking long-term capital gain returns.

Income funds are those investing in securities to produce current income through dividends and interest, rather than long-term increase in value and capital gains.

Growth and income funds are aiming for both income and long-term growth. They invest in blue chip companies that pay reasonably good dividends and whose stock tends to increase in value over a period of time.

Bond funds are those that invest in corporate, municipal, and government bonds. Earnings are relatively steady. The value of the fund fluctuates inversely with market interest rates. There are bond funds that invest in tax-exempt municipal bonds, providing shareholders with tax-exempt income.

Some funds specialize in certain industries such as high technology, energy, health services, gold, etc.

Mutual funds are sold as "load funds" or "no-load" funds. A load is simply the sales commission, generally ranging from 5 to 8½%, that you pay when you buy mutual funds. A no-load fund has no sales commission. Some no-load funds charge "redemption fees" when you sell your shares. Before buying any mutual fund, be sure you understand how much you will be paying in sales commissions and various fees.

All mutual funds charge a yearly management fee, usually in the range of ½ to ¾% each year. You don't pay the fee separately; it's calculated into the return reported to you for each year.

Families of funds allow you to switch from one fund to another at no charge or for a very low charge. So if you buy a mutual fund from a company that has several mutual funds, you can switch from an aggressive growth fund to an income fund or from a high technology fund to an energy fund as your needs or market information dictates. Be aware that when you move money between funds, the IRS considers it a sale. As a result, you'll owe income tax on any gain unless shares are held inside a retirement account.

Speaking of taxes, every February, mutual funds send a Form 1099 to shareholders notifying them of the investment income that needs to be reported on their personal tax returns. Depending on the activities of your mutual fund during the year and on the type of investments it makes, you may need to report interest, dividend, and undistributed capital gain income.

Mutual funds, though they are managed by professionals, should be reviewed by the individual investor at least annually. The performance of the fund should be compared with the rest of the stock market and other funds.

If you'd like more information about mutual funds, request prospectuses of the funds in which you are interested. A prospectus will contain information on the investment goals, sales load, other fees, minimum investment requirements, and the fund's performance in the past.

Investment Clubs

While investment clubs provide an opportunity for friends or family to meet, learn about investments, and make money, it's best to treat a club as you would any other business relationship.

Written agreement. Most clubs are formed as partnerships. Every partnership should consider adopting a written partnership agreement.

This legal contract outlines how the business will operate and how profits and losses will be allocated among the partners.

In the beginning, your investment may seem small, and it's easy to dismiss the need for this document. However, a successful club can accumulate substantial assets. Having this document in place from the beginning can prevent problems later, such as how to liquidate a partner's interest when one leaves.

Taxes. Partnerships don't pay income tax, but they must file an annual return with the IRS. They must also provide a Form K-1 to each partner. This form reports each partner's share of income and deductions, which the partner must include on his/her individual income tax return. If the partnership fails to file a return, the IRS can assess late filing penalties.

Duties. As in any business, it's a good idea for club members to share financial duties. Consider requiring two signatures to transfer funds between accounts. Periodically review the treasurer's records to make sure that transactions were properly authorized by the club, that the recordkeeping is adequate, that tax returns were filed, and that all money and stocks are properly accounted for.

An investment club that gets off to a good start has a much better chance of a long and successful existence.

A new retirement savings account

" a Simple, Safe, and Affordable Starter Savings Account to Help Millions of Americans Start Saving for Retirement"

The White House Office of the Press Secretary

In an effort to help more Americans start saving for retirement, plans were announced to start a new retirement savings account called myRA. This new account is now available. Here is what you need to know.

What is a myRA?

Per the White House, the myRA (pronounced "my ARR, AAA") is meant to be a starter retirement account for employees that do not have access to traditional 401-k accounts through their employers. The contributions would be deducted from your paycheck by your employer and deposited in your myRA account. While the contributions would be in after-tax dollars, the earnings would be tax-free. In essence, the account acts somewhat like a Roth IRA from a taxation point of view.

Who is it for?

Per the White House, this account is for the approximately 50% of full-time employees and the 75% of part-time employees who do not have access to employer-sponsored retirement plans.

What are the benefits?

Low contribution amounts. You can start your account with as little as $25 and regular contribution amounts as low as $5.

No fees. The account would have no administrative fees for either the employer or employee.

Principal guarantee. Unlike most other retirement savings programs, your principal is guaranteed by the U.S. Government.

Broad availability by income level. You qualify to participate if your household income is lower than $191,000 ( $129,000 for individuals).

Account transportable. If you leave your employer, you retain your myRA and may continue to fund it.

What are the downsides?

Low earnings. The only investment option is one that will be designed like a type of U.S. Savings Bond. The proposal is to have the bond be similar to the government's Thrift Savings Plan (TSP) who's rate was a low 1.47% in 2012 and only averaged 3.61% from 2003-2012.

Rollover requirement. Once the balance of your account reaches $15,000 you are required to roll it over into a Roth IRA account. It is uncertain whether you can then reopen another account or whether you may no longer be eligible for myRA.

Employer role. The plan must be accepted and administered by your employer in order for you to participate.

What you should know

The accounts are now available. Interested employers are now offering this retirement savings plan option. So check it out.

There is no guarantee your employer offers it. As proposed, the myRA requires employers to adopt the program. If this is not done by your employer, you will not have access to the program.

Debt Reduction

Investors are increasingly uneasy about the ups and downs of the stock market. If you're worried about your investments and want to reduce your debts, you're in luck. Debt reduction gives you a guaranteed rate of return. By paying off a typical credit card, you'll save about 18 percent interest on the amount you retire. Where else can you earn a guaranteed return of 18%?

Debt reduction also buys security. A low-debt family earning $80,000 a year can be financially stronger than many high-debt families earning twice as much. If you lose your job, your level of debt can make the difference between temporary discomfort and financial ruin.

To reduce debt, you should first avoid buying anything you can't pay for in 30 days. Then start working on your existing debts. Each month, pay as much as you can on the debt with the highest nondeductible interest rate, covering only minimum payments on the others. When you've retired the first debt, start on the one with the next highest rate. Continue the process until you've paid off everything but your home mortgage.

Naturally, this is a simplified approach, and individual circumstances vary. A professional can help you set realistic goals and work with you at achieving them.

Time Value of Money

If you were offered the choice of being paid $100 today or $100 a year from now, you would probably choose $100 today. After all, even at today's low interest rates, your $100 might earn a small return over the next year. This simple example illustrates an important concept: that the value of money changes with time. A dollar received today is worth more than a dollar received a year from now - and is worth even more than a dollar received five years from now.

There are at least three reasons why today's dollar is more valuable.

First, it can be invested to earn interest or dividends, as in the example above.

Second, future dollars may have their value eroded by inflation.

Third, the further into the future a payment is due, the greater the risk or uncertainty associated with receiving it.

The concept of the time value of money is important in many personal and business financial decisions. For example, you may have to choose between receiving a lump sum from a pension plan or a stream of payments in the future. In your business, you may be deciding whether to buy a new piece of equipment which will bring increased revenues in future years. Both of these decisions involve comparing the value of present and future dollars.

Finance professionals have developed a technique called present value for making such comparisons. The technique involves "discounting" the value of future dollars to reduce them to their equivalent value in current dollars. If you are faced with a decision that involves the time value of money, contact our office for assistance.

If you want to make a profit by investing in rental real estate, you must be willing to commit more resources to this property than you would to an investment made at your bank, through a broker, or in a mutual fund.

Someone has to collect rents, find good tenants, and maintain the property. If you hire help to do these tasks, your profit shrinks.

Also, if you borrow money to buy the property, you have to pay the mortgage whether or not the property is rented. You should have emergency funds so that you will not lose the property to foreclosure if you lose your tenant.

If you decide to invest in rental property, you may need professional help to match your resources to property that will meet your goals. Some of the questions you should consider before you invest:

What can you afford? Determine the highest price range you can sustain, given your present resources and the projected cash flow from the property.

Is the property fairly priced? Get a list of comparable listings and recent sales from a real estate company. Make any purchase offer contingent on the results of structural and pest inspections. Check local records to verify that additions and major improvements were made in compliance with building codes.

Are there any restrictions on the property? Rent control will lower the price that you can afford to pay for a property.

Who will be your tenants? Evaluate the likelihood of nonpayers, transients, and untidy housekeepers - and adjust your price accordingly. If you are buying a condominium in a building populated with young people, you may find it difficult to interest a retired couple (if that's your market) in living in the unit.

Investing in rental property can be very profitable, but you should be fully informed before you invest, or you could end up with more work and less return than you anticipated.

Please ask for help if you are considering this investment strategy.

As you look for year-end tax moves to save on your bill from Uncle Sam, you may consider selling stocks that have lost value. This can be a great strategy when up to $3,000 in stock losses can offset your ordinary income. However, there is a little known rule called the Wash Sale rule that could surprise the unwary taxpayer.

Wash Sales

If the Wash Sale rule applies, you cannot report a loss you take when you sell a security. Per the IRS,

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,

Acquire substantially identical stock or securities in a fully taxable trade,

Acquire a contract or option to buy substantially identical stock or securities, or

Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

Why the rule?

Many investors were selling stock they liked simply to book the loss for tax reasons. They then turned around and immediately re-purchased shares of the same company or mutual fund. If done repeatedly, shareholders could constantly be booking short-term losses on a desired company while still owning the shares in a chosen company’s stock indefinitely. Clever shareholders would even purchase the replacement shares prior to selling other shares in the same company to book the loss.

Some ideas

How does one take action to ensure the Wash Sales rule works to your advantage?

Check the dates. If you decide to sell a stock to book a loss this year, make sure you haven’t inadvertently acquired the same company’s shares 30 days prior to or after the sale date.

Dividend reinvestment. If you automatically re-invest dividends you will want to make sure this doesn’t inadvertently trigger the Wash Sale rule.

It is only losses. Remember the Wash Sale only applies to investments sold at a loss. If you are selling stock to capture gains, the rule does not apply.

Consider similar transactions. The Wash Sale rule applies to buying and selling ownership in the same company or mutual fund. With the exception of some common versus preferred stocks in the same company, buying and selling similar (but not identical) shares does not apply to the Wash Sale rule.

If your loss is ever disallowed because of the Wash Sale rule you can add the disallowed loss on to the cost of the new security. When the security is eventually sold in the future, the forfeited loss will be part of the calculation of future gain or loss. This also includes the original stock's holding period to help define the transaction as a short-term or long-term sale.

Your grandson needs a car, but cannot afford the payments. As a favor, you provide the $25,000 to purchase the car. You tell your grandson to pay you back when he can, but there is no loan document. The IRS sees this payment during an audit and asks you where your interest income is for this loan. Should this happen, you will quickly understand the meaning of AFRs.

Each month the IRS publishes a series of tables known as AFRs. So what are they and why should you care?

AFRs Defined

AFRs stand for Applicable Federal Rates. They are minimum interest rates that the IRS applies to a transaction when no rate is stated or implied. In other words, you may have a transaction that the IRS believes has an interest income/expense element to it, but none has been claimed by the taxpayer. These minimum interest rates are published each month by the IRS for three loan terms; short-term (0 – 3 years), mid-term (4 to 9 years) and long-term (over 9 years).

When does the AFR apply?

You may think that money you gave to a friend or that car sale to your cousin with repayment over time has no interest rate, but the IRS often sees it differently. So if no interest rate is stated, the IRS will apply the applicable AFR and you could be in for a tax surprise. Here are some common examples when the AFR rates can come into play:

Loans to family and friends.

Buying anything over time. If you take possession of an item, but can pay for it over a length of time, imputed interest is involved.

Employee advances. This can include giving an employee the rights of stock ownership, but not expecting payment for the stock right away.

How to use the AFR knowledge to your advantage

Create a loan document. Whenever you establish a transaction that has the expectation of repayment, write up a simple loan agreement. Not only will it clarify your repayment expectation, it also establishes the repayment terms. Please ensure both parties sign and date the document.

Establish a safe interest rate. Use the AFR tables to establish an audit-safe interest rate. Remember, AFRs are also used if the IRS believes your stated interest rate is too low.

Leverage gift rules. Remember you (and your spouse) can each gift up to $14,000 to an individual. If you stay under this threshold, you could defend your money transfer as a non-interest bearing gift and not a loan.

Caution with housing transactions. Banks are asking buyers to document where they receive their money for their down payment. If the money comes from you, it could establish a potential implied loan document that you might need to defend. If you plan to help with a down payment in the future, try to understand the bank’s look back rules for this disclosure reporting and use this knowledge in conjunction with the IRS gift rules to avoid creating implied interest.

Should you wish to see the published AFR rates, they are available on the IRS website at www.irs.gov.

If you were offered the choice of being paid $100 today or $100 a year from now, you would probably choose $100 today. After all, even at today's low interest rates, your $100 might earn a small return over the next year. This simple example illustrates an important concept: that the value of money changes with time. A dollar received today is worth more than a dollar received a year from now - and is worth even more than a dollar received five years from now.

There are at least three reasons why today's dollar is more valuable.

First, it can be invested to earn interest or dividends, as in the example above.

Second, future dollars may have their value eroded by inflation.

Third, the further into the future a payment is due, the greater the risk or uncertainty associated with receiving it.

The concept of the time value of money is important in many personal and business financial decisions. For example, you may have to choose between receiving a lump sum from a pension plan or a stream of payments in the future. In your business, you may be deciding whether to buy a new piece of equipment which will bring increased revenues in future years. Both of these decisions involve comparing the value of present and future dollars.

Finance professionals have developed a technique called present value for making such comparisons. The technique involves "discounting" the value of future dollars to reduce them to their equivalent value in current dollars. If you are faced with a decision that involves the time value of money, contact our office for assistance.

Basis is a common IRS term, but probably does not enter into your everyday conversation. This IRS term is important because it impacts the taxes you pay when you sell, exchange or give away property.

What basis is

The IRS describes basis as:

The amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.

In plain language, basis is the cost of your property as defined by the tax code.

There are a few different types of basis that apply to different situations, including "cost basis," "adjusted basis," and "basis other than cost."

Types of basis

Cost basis. Your basis usually starts with what the item cost. Cost basis also includes sales tax paid, freight, installation, testing, legal fees and other fees to purchase the property. If you acquire a business you must often allocate the purchase price to each of the assets to establish their basis.

Tip: Retain records of any major transaction. Ensure the documentation includes all allowable costs that could be applied to your basis. This will help reduce taxes when you sell or dispose of the property.

Adjusted basis. When you sell, exchange or dispose of property you may have to adjust its basis to account for changes to the property since you acquired it. This is known as its adjusted basis. A common example of adjusted basis is when you add the costs of capital improvements to property that have a useful life for more than one year.

Adjusted basis can decrease the value of property as well. This is the case when property is affected by things such as casualty or theft losses, depreciation and other deductions.

Home tax tip: Adjusted basis applies to many home improvements. These could include a full roof replacement, adding a room to your home, or even special assessments for local improvements. Create a folder and retain all documentation that could add to your home’s basis. It may lower your capital gain when you sell your home.

Basis other than cost. What is the basis when you inherit property, receive property for services or receive property as a gift? In most cases, the basis is the fair market value of the item. This is the price a willing buyer would pay for the item and a willing seller would be willing to receive for that item. But there are also special basis rules for:

Inherited property

Like-kind exchange of property

Involuntary conversions

Property transferred to a spouse

Should any of these situations apply to you, please ask for a review of your circumstances, as establishing basis can become fairly complex.

Too often taxpayers receive tax surprises at year-end due to actions taken by mutual funds they own. What can add insult to injury is the unsuspecting taxpayer who recently purchases the shares in a mutual fund only to be taxed on their recent investment. How does this happen and what can you do about it?

Tax surprises

Towards the end of each year, many mutual funds pay a dividend to the holders on record as of a set date. The fund might also distribute funds deemed as capital gains based upon buying and selling activity that takes place in the fund throughout the year. This can create many problems:

Taxable paybacks. If you purchase shares in a mutual fund just before a distribution of dividends, part of your purchase includes the dividends that are effectively paid right back to you. Not only will the asset value of your recently purchased shares in the mutual fund go down after the distribution, but you will owe tax on a distribution that is effectively your own money!

Kiddie tax surprise. Many taxpayers purchase mutual funds in their children's names to take advantage of their lower-tax rates. By keeping their child’s unearned income below $2,100 the tax is low or non-existent. A surprise dividend or capital gain could expose much of this unearned income to higher tax rates.

The $3,000 loss strategy. Each year, you may take a net of up to $3,000 in investment losses. Your losses can offset high rates of income tax with correct tax planning. But first, these losses need to offset capital gains. If you receive a surprise capital gain, you could be reducing the effectiveness of this tax strategy.

What to do

Here are some ideas to help reduce this mutual fund tax surprise:

Limit year-end activity. Plan your mutual fund moves with this year-end surprise in mind. Consider reviewing and rebalancing your funds at the beginning of the year to avoid fund purchases just prior to dividend distributions.

Research your mutual funds. If you wish to avoid a year-end surprise, do a little research on your mutual funds to anticipate what will happen with the fund. Check out the historic trends of your funds to determine which are most likely to issue a surprise Form 1099 DIV or Form 1099 B (capital gain/loss).

Use the knowledge to your benefit. If you like a fund and it has a practice of creating taxable events each year, consider investing in these funds within a retirement account. That way the tax implications can be part of your retirement planning.

No one likes a surprise at tax time. The best course of action is to navigate the options that are best for you.

When you're thinking of refinancing your home mortgage, simply comparing interest rates is not enough. Here are some other factors to consider before you refinance.

Compare apples to apples. Always request a good-faith estimate from any lender. This report should disclose all the fees and closing costs, such as points, credit report fees, inspection fees, private mortgage insurance, and appraisal fees. Use this information to evaluate competing loan proposals.

Calculate your breakeven period. This is the length of time it takes you to recover the costs a lender typically charges to refinance your mortgage. To do this, divide your closing costs by your monthly savings (your current loan payment minus your new loan payment). If you plan on selling your home in the near future, refinancing may not save you money because it usually takes several years to recover your closing costs through a lower monthly payment.

Read the loan agreement. Before you pay off your existing mortgage, check your loan for an early payment penalty clause. In addition, make sure you read and understand the terms of your new loan. For example, watch for restrictions against renting out your property without your lender's consent.

Evaluate the risks of debt consolidation. When you refinance, it may be tempting to consolidate high-interest personal debts into a single lower-interest home loan. Securing a consolidation loan with your home may turn your interest into a tax deduction, but be aware of the risks as well. If you can't make the payments, you could lose your home.

Whether refinancing makes sense in your particular situation depends upon a number of factors. Call if you would like a review of your situation. This extra step can help you select the loan that best fits your needs.

Tax-deferred exchanges

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can't swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a "deferred" exchange, the replacement property must be specifically identified in writing within 45 days and must be acquired within 180 days (or by tax return due date, if earlier), after transfer of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn't a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There's no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus writing a check. This part of the tax code provides a tax benefit to you in two ways:

Higher deduction. Your charitable gift deduction is the higher Fair Market Value of the appreciated stock on the date of your donation and not what you originally paid for it.

No capital gains tax. You do not have to pay tax on the profits you made on the stock. As long as you have owned the investment for over one year, you can avoid paying long-term capital gain tax on the increased value of your stock.

Other benefits

The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.

Remember this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.

This tax benefit could be worth even more with an increase in the maximum long-term capital gain tax rate and the introduction of the potential 3.8% Medicare surtax for investments.

This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.

Consider this a replacement for contributions you would normally make to qualified organizations.

Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.

This benefit also works for mutual funds and other common investment types, but be careful as many investments such as collectibles, inventory and other property do not qualify.

Contribution limits as a percent of Adjusted Gross Income may apply. Excess contributions can often be carried forward as deductions for up to five years.

How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.

Here is a tax planning tip for those who file their tax returns early and wish to contribute to a tax deductible IRA, but do not have the funds to do so.

Say you want to pay into an IRA to get a tax break but you don’t have the money? Take heart, there are ways to get around this. The IRS allows you to take the deduction now and pay later when you get your refund.

How it works

Step 1: Prepare your tax return early in the year (early February). Run the tax return considering an income reducing contribution to a tax deferred IRA. If you do not have the funds to put into the IRA, but your tax return has a refund that can fund your contribution, you are ready for step 2.

Step 2: File your tax return with the IRA contribution noted. File the tax return as early as possible to ensure your refund gets back to you prior to April 15th. E-file the return if at all possible.

Step 3: Fund your IRA prior to April 15th. Tell your IRA investment firm you wish your IRA contribution to be for the prior year.

That’s it. You have now effectively had the income reduction benefit of your IRA contribution help fund the account through your tax refund.

The risks

Timing is everything. If you use this technique it is critical that the IRA is funded on or before April 15th. If it is not, your tax return will need to be amended.

Refund not received in time. If you do not receive your refund in time, you may not have the funds to make a timely IRA deposit. In this case, you may need to borrow funds on a short-term basis until the refund is received.

No extensions. The IRA contribution for the prior year must be made by April 15th of the following year (the original filing due date). This is true even if you file your return under an approved extension period.

While not for everyone, this tax tip could help you fund more of your retirement on a tax deferred basis.

Debt Reduction

Investors are increasingly uneasy about the ups and downs of the stock market. If you're worried about your investments and want to reduce your debts, you're in luck. Debt reduction gives you a guaranteed rate of return. By paying off a typical credit card, you'll save about 18 percent interest on the amount you retire. Where else can you earn a guaranteed return of 18%?

Debt reduction also buys security. A low-debt family earning $80,000 a year can be financially stronger than many high-debt families earning twice as much. If you lose your job, your level of debt can make the difference between temporary discomfort and financial ruin.

To reduce debt, you should first avoid buying anything you can't pay for in 30 days. Then start working on your existing debts. Each month, pay as much as you can on the debt with the highest nondeductible interest rate, covering only minimum payments on the others. When you've retired the first debt, start on the one with the next highest rate. Continue the process until you've paid off everything but your home mortgage.

Naturally, this is a simplified approach, and individual circumstances vary. A professional can help you set realistic goals and work with you at achieving them.

Don't ignore the impact of taxes on your investments. While taxes should not drive your investment strategy, understanding how taxes affect your earnings will help you minimize taxes and maximize your return. Some things to consider:

1. Capital gains carry a special favored tax status. The tax rates on long-term capital gains are lower than the rates on ordinary income (such as wages and business income). Consider putting more of your investment dollars into investments that produce capital gain income, such as stocks and real estate that will appreciate in value. Hold investments at least long enough to qualify as long-term.

2. Balance your stock winners and losers. You can deduct annually up to $3,000 of capital losses in excess of gains. Consider selling enough losers each year to arrive at an overall $3,000 loss for the year. Your gains for the year will be sheltered, and then some.

Watch out! If you make a "wash sale" by buying the same security within 30 days before or after the sale, your loss will be disallowed.

If earlier sales generated losses over $3,000, consider selling enough winners before year-end to get back to that level. Taking these gains will not increase your current taxes.

3. Tax-free investments escape federal, state, or local taxes. Many investments can be found that escape taxes at all of these levels. For example, municipal bonds issued by your state of residence are generally exempt from all taxes. Conversely, U.S. Treasury securities are only exempt from state and local taxes.

A sage once said, "It's not how much you make that matters, it's how much you keep." When considering tax-advantaged investments, make sure you compare the after-tax yield of a comparable taxable investment with the yield of the tax-advantaged investment.

4. Consider savings bonds. The U.S. savings bond can be a sound long-term investment. In addition, you don't have to pay state or local tax on the bonds.

5. Invest to build a college fund. Investigate the options available to you that would allow tax-advantaged investing to build college funds for your children.

You should also consider Series EE and I savings bonds for college savings. The bond interest may be exempt from income tax if the bond proceeds are used for certain higher education expenses.

To get tax-free status, the bonds must meet the following requirements:

They must have been purchased after 1989.

They must be purchased by someone aged 24 or older. (Don't put the bonds in your child's name.)

The bonds must be used to pay educational expenses incurred by the bonds' owner, a spouse, or a dependent.

They must be used to pay higher education tuition and fees. (Bonds redeemed to pay room and board costs don't qualify.)

This interest exclusion is phased out for higher-income families. The income test is based on the parents' income at the time the bonds are redeemed.

6. Investing in real estate offers significant tax breaks. Real estate investments provide tax deferral through growth in the value of the investment due to inflation and other economic forces. Also, investors can engage in tax-deferred exchanges of their property for property of a like kind.

Real estate investors who "actively participate" in managing their property can deduct up to $25,000 a year in losses against other income (although this break disappears once your adjusted gross income exceeds $150,000).

7. Tax-credit investments can be found in certain real estate opportunities. Currently, tax credits are available for real estate investments in low-income housing, rehabilitation of commercial buildings originally placed in service before 1936, and rehabilitation of certified historic structures.

8. Choose the method that minimizes your taxes when you sell mutual fund shares. You can choose among three methods to determine capital gains and losses on mutual fund shares that you've purchased in lots over a period of time: the first-in, first-out method, the specific identification method, or the average-cost method.

Please do not hesitate to ask for assistance in identifying investment strategies that are suited to your tax situation.

Have you been offered a credit card lately? The industry sends out billions of credit card offers each year, and the average household has several thousand dollars in credit card debt. Credit card companies make it very easy and very tempting to say "charge it."

Unfortunately, like so many tempting things, credit card debt can be bad for your financial health. It is one of the most expensive ways to borrow money, and big balances on your credit report can hurt when you apply for a home loan or a car loan. Also, in today's uncertain economy, the last thing you need is high-interest debt that can jeopardize your ability to keep up with payments.

That is why one of your smartest financial moves might be to start paying down your credit card debt. Some people do this by taking out a home equity loan; others try debt consolidation. Neither of these strategies is without risk. You might want to talk to a reputable nonprofit debt counseling service before you adopt a plan. You can receive impartial advice on your financial strategy and useful practical tips too.

One way to get a handle on your debt is to list the outstanding balance and the interest rate on each of your cards. Then make the largest monthly payment you can afford on the card with the highest interest, while keeping up the minimum payments on all your other cards. Once you have paid off the first card, don't use it again. Repeat the process for the card with the next highest interest rate, etc. In the meantime, don’t hesitate to call your credit card companies and try to negotiate lower interest rates.

Paying off your credit cards will take time and will likely require a change in your spending habits. But the effect on your financial health will be well worth the effort.

Shopping can be fun and addicting but can also drain your wallet. So how do you maintain a respectable wardrobe in a cost-effective way? Here are three tips to help you find that perfect pair of jeans or classy wedges to add to your closet without breaking the bank.

Shop second-hand. Admit it. Most shoppers prefer shopping for new clothes rather than buying second-hand. Shopping for used clothes may sound unappealing at first, but you may be surprised by the stylish, quality items you’ll find for a fraction of the original retail price. Take the kids to a thrift shop and find outfits for a few bucks. If you’re looking for something a bit classier, hit up the local consignment stores. Some resale stores sell only name-brand and designer items, so you won’t have to worry about filling your closet with cheap or out-of-style apparel. The trick to a successful second-hand experience combines finding the right shop with understanding when they stock new offerings. This combination can land you some great deals on choices that fit your style.

Ask yourself “Do I really need this?” We often find something we like—maybe even for a good price—and toss it into the shopping cart regardless of whether or not we need it. When you’re tempted to buy something new, ask yourself, “Do I really need this? Will I really wear this?” To help yourself answer these questions honestly, imagine a specific time in the future when you will wear the item. Imagine what else you will wear with it. Then think about what you have at home. If you have something that would do just as well, consider leaving the new article on the rack. Asking yourself these questions doesn’t mean you can never buy something new, but it will help you make thoughtful spending decisions when it comes to new clothes.

Think versatility. Purchase items that can be paired with various articles of clothing and avoid apparel that is only occasionally useful. For example, don’t choose the unique pair of pants that can only be worn with one specific blouse. Similarly, a Hawaiian sundress that is only fitting for a beach party may not be the best decision for your budget. You can put your money to better use by purchasing a sweater that you can pair with most of your pants or a casual dress that can be worn both to work and on a date. Stick to items you can mix and match with the rest of your wardrobe and wear often.

Most Americans are doing what they can to cut their budget and save money. One of the biggest expenditures for individuals and families is gas for vehicles.

Generally speaking, gas costs can be reduced by improving your car's fuel economy, driving more efficiently, and buying less expensive fuel. The following suggestions address all three areas.

Let your engine breathe. Replace air cleaners at regular intervals. A dirty air cleaner reduces air flow, which translates to lower fuel efficiency. Every six months isn't too often.

Inflate those tires. Studies have shown that properly inflated tires can increase fuel efficiency by 3% or more.

Don't idle. Idling the car for even a minute uses the gas equivalent of starting the engine.

Start slowly. It's a good idea to accelerate slowly from a dead stop. This allows the carburetor more time to function efficiently.

Slow down. Don't put your pedal to the metal. If you're racing down the freeway at 75 mph, let up. Studies have shown that each 5 mph over 60 mph is like adding $0.24 per gallon to your gas cost.

Stick to good roads. Driving on rough roads can reduce gas mileage by up to 30%.

Lighten up. The more weight you carry, the more fuel is needed to carry your car down the road. So heft those heavy golf clubs from the trunk to the garage this winter.

Use cruise control. This device is standard in many modern cars. Cruise control will help you maintain a constant speed, a boon to good gas mileage.

Commute wisely. If possible, ride to work in a car pool or ride the bus. Why not save the gas and depreciation on your own vehicle?

Combine trips. Think a little longer about possible errands you can run while traversing town to the soccer game or wheeling to the nearest megaplex for a movie.

As some point you will be responsible for your own money. If that is not currently the case for you, here are some ideas to help get your financial plan in order.

Retirement fund. Saving for retirement is crucial. Even small amounts can go towards U.S. savings bonds or mutual funds with an automatic savings plan. If you have more money to work with, diversify your holdings among several types of investments. The younger you are, the more you should consider growth investments, which are likely to increase your nest egg in excess of the inflation rate. True, your strategy may change over time, depending on your age, total assets, tax bracket, and tolerance for risk. But you should never totally stop investing for growth.

Disability insurance. Of course, picking winning investments isn't the only goal of good financial planning. Adequate insurance is also essential. For example, disability is far more common among middle-aged people than death, yet disability insurance is often overlooked. Consider supplementing any employer's coverage with your own policy. Most people aim to replace 60%-80% of pretax income, since disability payouts are generally tax-free. A disability policy should cover partial disability as well as total disability. You should be able to save money on premiums by opting for a longer waiting period before receiving benefits.

Life insurance. If you have dependents, you need enough life insurance to protect them. This is true even if you're a married stay-at-home mom, if your absence as caregiver would create financial hardship for your family.

Estate plan. Finally, prepare an estate plan that meets your needs. Review it with your accountant and your attorney every few years to ensure that you stay current with the tax law and with changes in your personal circumstances.

Whether you find yourself as a single parent or a widower, you may need to step up your financial understanding. Why not start the process now?

Credit Report

You can check your credit rating from all three of the major credit reporting agencies for free to insure the accuracy of your report. Simply log onto the Internet and go to www.annualcreditreport.com. Alternatively, you can receive your free report if you call 1-877-322-8228. You are allowed to obtain one free report from each agency annually.

Why bother to get a credit report? Identity theft is a multi-billion dollar industry, and checking your credit rating is one of the best ways to protect yourself. You might also be surprised at the number of mistakes that can be found on credit reports. Relatives or even non-relatives with the same (or similar) last name could have their credit information jumbled with yours. Individual companies could have incorrectly reported a negative credit occurrence (in the form of a delinquent payment or nonpayment) to the reporting agencies. Reviewing your credit report is a way to find and fix those negative credit issues.

What if there's an error? If you find an error, it might take some time to fix, but all of the agencies will provide you with instructions on how to correct errors. It's possible that you'll also have to contact the company that gave the incorrect information to the credit reporting agency. All of this communication should be done in writing.

One thing you can't get for free is your credit (or FICO) score. This is the number that companies use to determine how well you manage your credit. You will still be required to contact the three agencies individually in order to, for a fee, obtain your FICO score. However, watch for the "free" credit rating come-ons. If you use another service, either by e-mail or telephone solicitation, you will likely be charged for something that you can get for free.

Mutual Funds

When you buy shares of a mutual fund, your money is pooled with other shareholders' money and invested in a portfolio of securities (stocks, bonds, etc.) An investment in a mutual fund offers you diversification and management by professionals.

Mutual funds have no guarantee of good returns or safety of your investment; they go up and down just like the rest of the market.

There are several different kinds of mutual funds, each with different investment objectives. If you decide to put your money into a mutual fund, you should look for one whose objectives match your own investment objectives and financial needs.

The different categories of mutual funds include these major classifications:

Aggressive growth or capital appreciation funds invest in smaller companies, looking for growth that will result in capital gains income rather than ordinary dividend and interest income. Because of their speculative nature, these funds are in the high risk category, giving you the chance of highest return as well.

Growth funds buy stocks that are expected to increase in value in the future. They are somewhat less risky than aggressive growth funds, produce very limited income, and are seeking long-term capital gain returns.

Income funds are those investing in securities to produce current income through dividends and interest, rather than long-term increase in value and capital gains.

Growth and income funds are aiming for both income and long-term growth. They invest in blue chip companies that pay reasonably good dividends and whose stock tends to increase in value over a period of time.

Bond funds are those that invest in corporate, municipal, and government bonds. Earnings are relatively steady. The value of the fund fluctuates inversely with market interest rates. There are bond funds that invest in tax-exempt municipal bonds, providing shareholders with tax-exempt income.

Some funds specialize in certain industries such as high technology, energy, health services, gold, etc.

Mutual funds are sold as "load funds" or "no-load" funds. A load is simply the sales commission, generally ranging from 5 to 8½%, that you pay when you buy mutual funds. A no-load fund has no sales commission. Some no-load funds charge "redemption fees" when you sell your shares. Before buying any mutual fund, be sure you understand how much you will be paying in sales commissions and various fees.

All mutual funds charge a yearly management fee, usually in the range of ½ to ¾% each year. You don't pay the fee separately; it's calculated into the return reported to you for each year.

Families of funds allow you to switch from one fund to another at no charge or for a very low charge. So if you buy a mutual fund from a company that has several mutual funds, you can switch from an aggressive growth fund to an income fund or from a high technology fund to an energy fund as your needs or market information dictates. Be aware that when you move money between funds, the IRS considers it a sale. As a result, you'll owe income tax on any gain unless shares are held inside a retirement account.

Speaking of taxes, every February, mutual funds send a Form 1099 to shareholders notifying them of the investment income that needs to be reported on their personal tax returns. Depending on the activities of your mutual fund during the year and on the type of investments it makes, you may need to report interest, dividend, and undistributed capital gain income.

Mutual funds, though they are managed by professionals, should be reviewed by the individual investor at least annually. The performance of the fund should be compared with the rest of the stock market and other funds.

If you'd like more information about mutual funds, request prospectuses of the funds in which you are interested. A prospectus will contain information on the investment goals, sales load, other fees, minimum investment requirements, and the fund's performance in the past.

Time Value of Money

If you were offered the choice of being paid $100 today or $100 a year from now, you would probably choose $100 today. After all, even at today's low interest rates, your $100 might earn a small return over the next year. This simple example illustrates an important concept: that the value of money changes with time. A dollar received today is worth more than a dollar received a year from now - and is worth even more than a dollar received five years from now.

There are at least three reasons why today's dollar is more valuable.

First, it can be invested to earn interest or dividends, as in the example above.

Second, future dollars may have their value eroded by inflation.

Third, the further into the future a payment is due, the greater the risk or uncertainty associated with receiving it.

The concept of the time value of money is important in many personal and business financial decisions. For example, you may have to choose between receiving a lump sum from a pension plan or a stream of payments in the future. In your business, you may be deciding whether to buy a new piece of equipment which will bring increased revenues in future years. Both of these decisions involve comparing the value of present and future dollars.

Finance professionals have developed a technique called present value for making such comparisons. The technique involves "discounting" the value of future dollars to reduce them to their equivalent value in current dollars. If you are faced with a decision that involves the time value of money, contact our office for assistance.

Whatever your financial goals in life - whether they include buying a new house, taking a trip to Europe, funding your children's college educations, having enough money for a comfortable retirement, or all of the above - you are more likely to reach your goals if you do some planning. The fact that you are reading this indicates your desire to plan and to take control of your financial life.

After you've set your financial goals, the next step is to determine your current net worth. Only when you know where you are today can you calculate how far you have to go to reach your financial goals in the future.

On a sheet of paper, list everything you own (your "assets") and everything you owe (your "liabilities"). Subtract the total liabilities from the total assets; the result is your current "net worth."

In doing this exercise, it's important to review the actual documents for the specific assets and liabilities and accurately record account numbers, identification, and dollar amounts. It's easy to forget details about assets and liabilities and to list misleading information.

After you've arrived at your current net worth, ask the following questions:

1. Has your net worth increased since you last did this listing? If it hasn't, you need to determine the reason and perhaps make some changes in your spending, saving, or other financial habits.

2. Does your net worth statement reflect a preference for personal assets such as an expensive home, cars, furs, and jewelry? Your balance sheet should show a concern for acquiring investment assets, not just personal assets that are far less likely to increase in value or produce income that will help you meet other financial goals.

3. Is your debt out of proportion? If your sheet shows excessive debt, especially for personal consumption, that's a signal to review your spending. Keeping debt under control is essential in good financial management.

4. Have you given enough thought to money needed for retirement? If your sheet shows total neglect for accumulating funds for retirement, you'll want to make some changes as soon as possible.

5. Are your assets diversified? Diversification is a good hedge against inflation and changes in the economy. Having all your eggs in one basket is seldom a good idea. Also, don't keep excess cash in no-interest or low-interest accounts unless you have an immediate need for the cash.

6. Where do you want to be three years, five years, and ten years from now, in terms of your net worth? You might determine this by doing projected net worth calculations for three years, five years, and ten years from now.

Conduct a net worth calculation like this every year in order to chart the progress you're making in increasing your net worth.

Building a Nest Egg

Building a nest egg to give you a secure financial future doesn't require a degree in economics, just a degree of common sense. The rules are easy and time-tested, and the smart players always abide by them.

1. It's never too late or too early to start. Think back five or ten years and say to yourself, "Where would I be now if I had started saving a little each month back then?"

2. Get out of debt. Payments on certain things such as a home or a car may be necessary, but pay off the charge cards. That alone is a sound investment with a return equal to the interest credit card companies charge you.

3. Establish a budget, a realistic one that accounts for everything, including the big financial drains like taxes, vacations, and holiday spending. While you're drawing up a budget, streamline your finances. Don't buy things that give you nothing in return. Don't splurge; think about what you're buying. Be sure you are properly insured with the right types and amounts of insurance.

4. Set aside an emergency fund, enough to live on for three to six months. Consider building your emergency fund in a low-risk investment that's easily converted to cash, such as a no-load mutual fund or a savings account.

5. Invest safely and simply. Be cautious with your investments until you have built a portfolio and have some knowledge of how the financial world operates. Your first investments might be CDs, mutual funds, or savings bonds.

6. Stick with your plan. Investing a fixed amount every month without fail is far wiser than waiting for a windfall from interest rate changes or a stock market jump. Inform yourself with periodicals, books, and television financial programs. Monitor your plan and gently steer it in a new direction if necessary.

7. Diversify. Remember to diversify even within the broader markets. A mutual fund may provide a range of stocks, but you should diversify further by investing in different types of mutual funds and in different "families."

8. Include your spouse in planning sessions, or your spouse may live a nightmare trying to unravel your financial affairs if something happens to you. Also, input from a spouse gives fresh perspective for establishing realistic financial goals for the entire family.

9. Have patience. You do not create financial security in a few months; you achieve it over many years. Seek professional assistance when you are in unfamiliar territory.

Say "insurance" to most people and auto, health, home, and life are the variants that spring to mind. But what if an illness or accident were to deprive you of your income? Even a temporary setback could create havoc with your affairs. And statistics show that your chances of being disabled for three months or longer between ages 35 and 65 are almost twice those of dying during the same period.

Yet people with financial savvy often overlook disability insurance. Perhaps they feel adequately covered through their job benefits. However, such coverage can be woefully inadequate. The fact is, most individuals should consider disability insurance in their financial planning. To get the right coverage for you, take the following steps:

Scrutinize key policy terms. First, ask how "disability" is defined. Some policies use "any occupation" to determine if you are fit for work following an illness or accident. A better definition is "own occupation," whereby you receive benefits when you cannot perform the job you held at the time you became disabled.

Check the benefit period. Ideally, your policy should cover disabilities until you'll be eligible for Medicare and social security.

Determine how much coverage you need. Tally the after-tax income you would have from all sources during a period of disability and subtract this sum from your minimum needs.

Decide what you can afford. Disability insurance is not inexpensive. Plan to forgo riders and options which boost premiums significantly. If your budget won't support the ideal benefit payment, consider lengthening the elimination period (but be sure that accumulated sick leave, savings, etc., will carry you until the benefits kick in).

Ask your insurance agent about the options available to you.

To keep your insurance costs down, don't buy insurance to pay for every small medical bill, auto repair, or financial loss. Build a savings account to handle life's small financial inconveniences. Think of insurance as protection against catastrophes.

You can lower your insurance premiums significantly by taking larger deductibles. Also, look for comprehensive insurance, not coverage for one specific event. Buy a good health insurance policy rather than a cancer policy, for example.

Health Health insurance is often provided by your employer. However, self-employed individuals and many others must find their own policies and pay the premiums. Generally speaking, you should purchase a good major medical policy with the highest deductible you can handle.

Auto Auto insurance generally includes bodily injury, liability, property damage, collision, and comprehensive coverage. You should understand each type of coverage and how much it adds to your premiums.

Homeowner Your homeowner's insurance should be reviewed to be sure your coverage takes increased replacement cost into account. Also check your coverage on household contents; they may have changed substantially since you took out the policy.

Personal Property Coverage for your personal property should include the contents of your home, if you're a renter rather than a homeowner, and such assets as jewelry, stamp collections, boats, airplanes, and other valuables which are not covered by another policy.

Life There are two basic kinds of life insurance - term and cash-value insurance. When you buy term insurance, you purchase pure protection; that is, if you die, your beneficiaries receive the policy amount. If you live, you receive nothing. Cash-value insurance comes in numerous packages. What they all have in common is a combination of insurance and a savings/investment feature. The premiums on term insurance are much lower than for cash-value insurance, usually one-fifth to one-fourth the cost. Your insurance and investment needs should be reviewed to determine which program is best for you.

Disability You may have as much life insurance as you need, but not enough disability insurance. Disability insurance will provide you with income if you become disabled and cannot work, a situation that is four times more likely to happen than dying before age 65.

Business Your business insurance policies should include insurance for building and equipment, inventory, receivables, errors and omissions, key man life insurance, joint-venture insurance, and whatever else applies in your business circumstances. Review all of your coverage, plus purchases and sales of assets, with your agent at least annually.

General Liability You may want more protection than specific insurance policies provide. You can take an umbrella liability policy to supplement your other insurance coverage. Such policies usually are inexpensive.

Specialty & Other Insurance Anything can be insured, even a racehorse or a movie star's legs. Common specialty insurance includes such things as rental car insurance, cancer insurance, vacation insurance, contact lens insurance, and air travel life insurance. Never purchase any of these without serious consideration. In many cases, you are simply wasting your premium dollars.

Most parents, at one time or another, have asked their teenaged child, “Do you think that money grows on trees?” While the question is just a common expression, it hits at an underlying truth. Children on the verge of adulthood often don’t have a clue about financial matters.

For instance, can you honestly say that your brood knows enough about managing debt, saving for college, or planning for retirement? If not, here are a few financial tips you should pass along.

Debt management. Debt doesn’t have to be treated like a four-letter word. In fact, there are times when it makes financial sense to borrow money, such as taking out a home mortgage. But caution your children about over-extending themselves, especially when it comes to credit card debt.

College savings. At an early age, include your children in planning for their college education. When appropriate, let them participate in investment decisions, and monitor portfolio progress together on a regular basis. Also, point out the advantages of tax-advantaged vehicles such as 529 plans and Coverdell Education Savings Accounts.

Retirement planning. Sure, retirement is way off your child’s radar screen, but don’t ignore the need to plan ahead. Advise your child about the benefits of tax-sheltered retirement vehicles. If your child works summers or part-time, he or she can contribute up to $6,000 to an IRA for 2020. Contributions to a traditional IRA are tax-deductible, but distributions are taxable. On the other hand, contributions to a Roth IRA are not deductible, but qualified distributions are tax-free.

Is that all there is? Not by a long shot. But these simple suggestions will be a good start.

To keep your insurance costs down, don't buy insurance to pay for every small medical bill, auto repair or financial loss. Build a savings account to handle life's small financial inconveniences. Think of insurance as protection against catastrophes.

You can lower your insurance premiums significantly by taking larger deductibles. Also look for comprehensive insurance, not coverage for one specific event. Buy a good health insurance policy rather than a cancer policy, for example.

Health. Health insurance is often provided by your employer. Self-employed individuals and many others, however, must find their own policies and pay the premiums. Generally speaking, you should purchase a good major medical policy with the highest deductible you can handle.

Auto. Auto insurance generally includes bodily injury, liability, property damage, collision and comprehensive coverage. You should understand each type of coverage and how much it adds to your premiums.

Homeowner. Your homeowner's insurance should be reviewed to be sure your coverage takes increased replacement cost into account. Also check your coverage on household contents, as they may have changed substantially since you took out the policy.

Personal Property. Coverage for your personal property should include the contents of your home, if you're a renter rather than a homeowner, and such assets as jewelry, stamp collections, boats, airplanes, and other valuables which are not covered by another policy.

Life. There are two basic kinds of life insurance - term and cash-value insurance. When you buy term insurance, you purchase pure protection - that is, if you die, your beneficiaries receive the policy amount. If you live, you receive nothing. Cash-value insurance comes in numerous packages. What they all have in common is a combination of insurance and a savings/investment feature. The premiums on term insurance are much lower than for cash-value insurance, usually one-fifth to one-fourth the cost. Your insurance and investment needs should be reviewed to determine which program is best for you.

Disability. You may have as much life insurance as you need, but not enough disability insurance. Disability insurance will provide you with income if you become disabled and cannot work, a situation that is four times more likely to happen than dying before age 65.

Business. Your business insurance policies should include insurance for building and equipment, inventory, receivables, errors and omissions, key man life insurance, joint-venture insurance and whatever else applies in your business circumstances. Review all of your coverage, plus purchases and sales of assets, with your agent at least annually.

General Liability. You may want more protection than specific insurance policies provide. You can take an umbrella liability policy to supplement your other insurance coverage. Such policies usually are inexpensive.

Specialty & Other Insurance. Anything can be insured, even a racehorse or a movie star's legs. Common specialty insurance includes such things as rental car insurance, cancer insurance, vacation insurance, contact lens insurance and air travel life insurance. Never purchase any of these without serious consideration. In many cases, you are simply wasting your premium dollars.

Many parents own houses and may want to pass them on to their children at some point. A common thought is to just add the children's names to the title of the house. While this might sound like a simple solution, it's usually not a good idea. At a minimum, it risks causing tax problems for your children. In the worst case, you could even lose control of your own home.

Here's a quick look at the potential problems:

A tax bill for your children. If your children inherit the house, they'll receive what is called a stepped-up basis. That means their cost basis in the house is the fair market value on the day they inherit it. When they sell the house, any capital gain is measured from that cost basis. But if you just add their name to the title, you're effectively giving them an interest in the house. Their ownership interest in the house won't receive a stepped-up basis, and any capital gain when they sell is likely to be larger.

A gift tax liability for you. Generally, any annual gift to one person over $15,000 could be taxable. So giving away a share of your property can be a taxable gift. You may not pay the taxes immediately but the effect will be to reduce the amount of your estate that is exempt from joint gift and estate taxes.

You risk losing control of your home. Because your child or children are now co-owners, their share of the home could be at risk if they incur a major liability. In the worst case, you could even be forced to sell the home to satisfy a judgment against them. Or consider what could happen if you add a married daughter's name to the title. If she then dies or divorces, you could find yourself in a family fight with your son-in-law or daughter-in-law over the disposition of their share of the house.

While it's generally not a good idea to add your child's name to your title, every case is different. Please call if you would like guidance on the tax implications of any specific situation.

What every Traditional IRA owner should know

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:

Medical insurance premiums if unemployed. If you receive federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.

Qualified higher education expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.

Medical expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 7.5% of your adjusted gross income you may do so penalty-free.

First-time home buyer. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. To qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.

Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.

You're the beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.

Qualified reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.

Annuity distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life expectancy." This option is complicated and must use an IRS-approved distribution method to qualify.

Some Final Thoughts

Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.

While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.

While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.

Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

Have you recently married, divorced, or lost a spouse? A change in marital status should prompt a review of financial matters, but at such a time it is easy to overlook the details. Here are a few reminders and suggestions.

Insurance coverage. When your marital status changes, review your insurance policies. Combining separately held health insurance policies with a spouse can result in savings and discounts. Most group health insurance policies allow spousal coverage. You may want to opt for coverage under your partner's policy if superior or less expensive coverage is offered. Married couples are often considered a better insurance risk, so together you may qualify for a lower rate. Also evaluate your need for disability or long-term care insurance.

Beneficiary designations. Review beneficiary designations on life insurance policies and retirement accounts.

Estate planning. Update choices that have become obsolete. Incomplete paperwork or inappropriate choices could mean your intended beneficiary may not end up with your assets. You should periodically review and update your existing will and other estate planning documents. This is especially important whenever your marital status changes. Before you get married, consider a prenuptial agreement if there are children from a prior marriage or if you own substantial assets.

Other documents. Review any other important documents. If you change or hyphenate your name, notify the Social Security Administration and Department of Motor Vehicles of your name change. Make copies of your estate papers and final divorce decree. Keep the originals in a safe place.

Tax planning. Your tax liability will likely change when you marry, divorce, or become a widow. Newlyweds may face higher taxes due to the so-called marriage penalty. In either case, you may need to change your income tax withholding or estimated tax payments.

The "baby boomers," Americans born between 1946 and 1966, are moving like a wave into their fifties and sixties. Unfortunately, many of them are facing new financial pressures. Their kids are likely to need help paying for increasingly expensive colleges. Their folks are getting older and living longer. Boomers are digging into their wallets to make up the shortfall in their parents' retirement income, and many are trying to help cover the costs of long-term care. On top of that, they're struggling to save for retirement and pay for the groceries. No wonder they feel squeezed.

If you're part of the "sandwich generation," take heart. Careful planning and a little diligence can help to alleviate some of this pressure.

First, you need to identify your priorities. How important to you are such things as setting aside funds for retirement, paying for your kids' schooling, and helping your parents with the cost of long-term care? Once you've identified your priorities, you can set realistic goals to address them, putting the bulk of your financial resources and energy toward meeting the most important goals first.

Retirement. Many people would like to retire at a relatively young age. But some may have to rethink that goal in light of other financial demands like college tuition and care for elderly parents. Working longer can have distinct benefits. Besides funding an accustomed lifestyle for a few more years, working longer and leaving your retirement accounts intact will give the funds more time to grow.

Education. Many families want to help finance the education of their children. Tuition, books, and other college costs can eat up tens of thousands of dollars. If your child is still young, it's a good idea to start saving early and invest for growth. If your child is ready to start college but isn't financially prepared, you might consider letting him or her finance a portion of the cost by working or obtaining loans. College-age kids have their working lives ahead of them. Their income, including their ability to repay loans, should increase.

Parents. For many in the sandwich generation, helping to pay for the high cost of a parent's long-term care is a priority. For example, a year in a nursing home can cost $30,000 to $50,000. At some point, your parents may need financial help to cope with such high expenses. In the meantime, you may be able to help them manage their finances and consider options such as long-term care insurance. You might want to meet with their banker, lawyer, and accountant to look over your parents' financial status and review legal papers, including such documents as power of attorney, wills, and trusts.

Feeling squeezed? Call if you wish a review of your situation.

Now is the time you will start receiving year-end informational tax forms. We’re all fairly familiar with W-2s from our employer, but you will also probably receive a number of different 1099s. Make your tax filing experience smooth this year by staying on top of these informational tax returns. Here are some tips.

Know the different types of 1099s. The most common 1099s that taxpayers receive are:

1099 INT: for interest received

1099 DIV: for dividends received

1099 B: for brokerage transactions (selling stocks and mutual funds)

1099 R: for annuity, retirement, and pension income

1099 MISC: for miscellaneous income

1099 K: for merchant card activity

Make a list. Review last year’s list of informational tax forms and create a checklist of them. Add to that list any new forms you might expect to receive. Mark them off your list as you receive them.

Check for accuracy. Review each of the informational tax forms for accuracy. Is the income, interest, annuity or other income correctly reported? If cost is reported on the 1099 B, is it the correct amount? Make sure your name and your tax ID (Social Security Number) are also correct.

Take corrective action. If you have not received your information return by the mid February, contact the issuing organization. Also call and start the process to correct any errors you find. Make sure you follow up any correction request in writing.

Conduct withholding verification. If the supplier withheld any tax on this activity ensure it is noted as well.

Understand those 1099 Ks. This is the new kid on the 1099 block and was introduced to try to capture sales activity from places like e-bay and Amazon. If you receive one of these, please pay special attention to the information being reported to you and the IRS. These forms are complicated and track payment processing transactions. If not properly understood, you could inadvertently double book income on your business activity.

It is late January and you realize the 1099-MISC you receive is in error. In fact, it overstates your income by $2,000. What should you do?

Gather your facts. Put yourself in the shoes of the vendor, bank or investment company representative. Gather evidence they will need to support your claim to correct the tax form. This includes receipts, e-mails, and statements. Have your account number handy as well.

Contact the vendor. Contact the vendor as soon as you discover the error and ask them to reissue the statement if they have not sent in their information to the IRS. If they have already sent their forms to the IRS, you will need to ask for a corrected form. Start with a phone call and then put your evidence in writing and send it to them via certified mail. Give the vendor a reasonable, yet concrete timeframe to correct the error. You do not want to wonder when a correction is coming, so keep control of the timing for correction if at all possible.

Written confirmation. If the vendor agrees with your change, ask for a letter from them that outlines the correction. File this letter with your tax return to help you defend against a potential audit.

Tell the IRS. After a reasonable attempt to correct the error with no progress, contact the IRS to inform them of the failure to correct your information.

File an extension? If you believe a correction is on the way, you may wish to file a tax extension. Remember, you will still need to pay any tax owed by the original due date. If you do not have assurance of a correction, file your tax return with correct information and provide documentation that outlines the reporting error.

Marriage and Money

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start.

Premarital financial discussions. You and your intended might enjoy the same movies and the same kinds of food, but are you financially compatible? Take some time to discuss your finances before you tie the knot. Talk about your assets, your debts, your credit ratings, and your financial attitudes, including your spending and saving habits. Do you share the same goals, such as having children, buying a home, or continuing your education? How will you finance your dreams?

How will you handle your finances as a married couple? For example, who will pay the bills? Will you maintain joint or separate checking accounts? If you maintain separate accounts, how will you split your expenses?

Premarital financial counseling. Every couple needs to work out their own style for handling money. Call upon your accountant to assist you in setting up a budget, controlling your taxes, and mapping out a financial plan for your future.

Premarital legal counseling. If you have substantial assets, discuss the merits of a premarital agreement with your attorney. If your partner has substantial debt, ask your attorney how you can protect yourself from his or her creditors.

Perhaps you plan on buying a house together or combining financial accounts. Your attorney can advise you on the best way to hold title to your assets.

Discussing your finances before you say "I do" may increase your chances for living happily ever after.

The importance of a CPA

Life is often viewed as a series of stages - childhood, graduation, parenthood, and retirement, to name a few. Like the points on a clock, time moves us from one stage to the next. No matter what "time" it is in your life cycle, you probably share a common worry: money. Managing money for today is one thing; making decisions to ensure adequate funds for the next stage is quite another.

The CPA commitment. As trusted advisors, CPAs across the country have made a commitment to increase financial literacy. How? By volunteering to educate the public about financial issues and the decisions that must be made at every stage of life. Americans are faced with significant financial concerns, but often have insufficient financial literacy. Bright and even highly educated people sometimes have trouble speaking the language of money, often to their economic detriment.

To combat this trend, the CPA profession has united around a cause to educate Americans, rich and poor, young and old, on how to better handle their finances. With the life cycle "clock" as a model, CPAs have taken a full, 360-degree view of the challenges Americans face. For each milestone, the profession has solid, practical advice to share. You might say CPAs are once again emphasizing the term "public" in their title.

Call on us. Which brings us to our firm. We, too, have accepted the call to educate our community. We would be pleased to speak to your organization about life's financial challenges. We can also speak to students or provide classrooms with timely, interesting material on money and financial issues.

If you would like to find out more about the accounting profession's drive to improve financial literacy, give us a call. Life's financial clock is ticking. Let us help you before the alarm goes off.

A COVID-19 pandemic reminder

To keep your business solvent through the COVID-19 pandemic, stay focused on the 3 rules of cash:

1) Now versus later. Cash now is better than cash later.

Decreasing cash flow for many of your customers means you’ll likely have trouble collecting 100% of your accounts receivable in the short term. But don’t overlook clients whose cash flow or revenue has yet to be dramatically affected by the pandemic or who have a big enough emergency fund to pay most of their bills for several months.

What to do now: Be compassionate, but don’t stop your A/R collection efforts. You need as much cash as possible now, not later. You likely have some customers who can still pay your invoices. So actively communicate with key customers and consider offering slightly better terms to receive payments earlier than normal. Also look to suppliers to extend payment terms with them. By working together, you can find unlikely partners to help you both through this hardship.

2) More versus less. More cash is better than less cash.

It is important to build your cash reserves now more than ever. While difficult after the pandemic hits your business, it is not impossible. Review every asset on your balance sheet – accounts receivable, prepaid expenses, fixed assets, and inventory. Determine what it would take to convert each of them to cash.

What to do now: Consider leveraging these assets with your bank as a line of credit. Also talk to your lenders about the possibility to postpone several months of loan payments. Perhaps your bank will take interest only payments. Ask suppliers who will give you discounts for paying on time during the pandemic. Get involved in your bill paying process and pay bills on time, never early. And think long-term, any ideas to build up your cash now will only help later.

3) NEVER zero. Don’t run out of cash.

According to a 2019 survey by The Service Corps of Retired Executives, 82% of small businesses that eventually fail do so because they run out of money. So it is critical to constantly forecast your business’s worst-case scenario and figure out how much cash you need to keep your doors open. Then take steps to protect your business before you run out of cash.

What to do now: Start by prioritizing your business’s expenses. Know who you have to pay and who can be delayed. Identify expenses you can cut and in what order they should be cut. Use your forecast as an early warning system to determine when to start these cuts, if you haven't already done so.

These simple cash principals are timeless, but the pandemic reminds all businesses that you need to have a sharp focus on your cash position. By keeping these ideas top of mind, you may be able to meet your goal: Have enough cash to keep your doors open and stay solvent.

Tips to avoid IRS penalties on 401(k) retirement plan distributions

While each retirement plan has similar early withdrawal penalty exemptions, they are not all alike. Knowing these subtle differences within 401(k) plans can help you avoid a 10 percent tax penalty if you take money out of the plan prior to reaching age 59 1/2. This is true because a basic rollover of funds into a Traditional IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:

Using Retirement Funds for Qualified Higher Education Expenses. Want to use retirement funds to pay for college? Make sure you pull the funds out of an IRA and not another retirement account type or you could be subject to an additional 10 percent early withdrawal penalty. After rolling the funds into an IRA, the funds can be used penalty-free as long as they are for qualified educational expenses at a qualified school.

Using Retirement Funds to Buy, Build, or Rebuild a First Home. You may use up to $10,000 of your IRA per person to purchase a first home and avoid paying the 10 percent early withdrawal penalty. If these same funds are pulled out of a 401(k) plan you could be subject to an additional federal tax of up to $1,000. Roll the funds to a Traditional IRA first, and save the tax.

Using Retirement Funds to Pay for Medical Insurance. There is also a provision for an unemployed individual to use IRA funds to pay for medical insurance. This provision does not exist in 401(k)s, so to avoid the early withdrawal penalties, roll the money from your 401(k) into an IRA prior to using the funds to pay for your insurance premiums.

Remember, by rolling the funds prior to pulling the funds for pre-retirement distribution you are avoiding the early withdrawal penalties, but you must still pay the applicable income tax.

Bonus Retirement Plan Tips.

Two other quirks in the retirement tax code to be aware of;

Early Distributions From a SIMPLE IRA Could Trigger a 25 Percent Penalty. The early distribution penalty of 10 percent increases to 25 percent for those in SIMPLE IRAs, if the withdrawal occurs during a two-year time period starting from your initial enrollment date in the SIMPLE plan. You may not roll your funds into another retirement plan type during this two year period to try to avoid the increased early withdrawal penalty.

Minimum Distributions are Required From ROTH 401(k)s but Not ROTH IRAs. In an unusual quirk in the tax code, if you have a ROTH 401(k) you are required to make minimum required distributions from this account like other 401(k)s and IRAs when you reach age 70 1/2. If, however, you roll the ROTH 401(k) funds into a ROTH IRA you are no longer subject to the minimum distribution rule requirements.

Lending to friends and relatives is a tricky business, and not only because of the stress it can place on your relationships. There are tax issues involved as well. If you have to lend money to someone close, here are some tips to do it right in the eyes of the tax code.

Charge interest

Yes, you should charge interest, even to friends and family. If you don’t charge a minimum rate, the IRS will imply interest in the loan and tax you for the interest they assume you should be getting. This can occur even if you’re not actually getting a dime.

Charge enough interest

Not only should you charge interest, the amount must be reasonable in the eyes of the IRS. If it's not, the IRS will imply interest at their minimum applicable federal rates (AFRs). To stay on the safe side, always charge an interest rate at or above these AFRs, available on the IRS website. The good news is these interest rates are low and almost always below the prime interest rate.

Know the exceptions

If you don’t want to charge interest, you don’t have to IF:

The money is a gift. You and your spouse can each give up to $15,000 to an individual each year (this maximum remains $15,000 in 2019).

OR:

The loan is less than $10,000 and is not used to purchase income-producing property.

If you don’t charge interest and the loan is used to purchase income-producing property such as capital equipment or to acquire a business, special tax rules apply. In this case it’s good to ask for assistance.

Get it in writing

If you expect repayment, write out the terms of your loan. There are a variety of basic loan document formats online that you can use. Creating a loan document may seem unnecessarily formal when dealing with a friend or family member, but it’s important for two reasons.

1. It documents your tax code compliance. By documenting the terms and charging a stated interest rate you can clearly show you are within tax code rules.

2. You avoid misunderstandings. Creating a written document will make it clear that it is a real loan, not an informal gift. Your friend or relative will know that you expect to be paid back and when you expect repayment.

The IRS is clear on their point of view. If you barter you must include the barter activity's fair market value as income on your tax return in the year the barter activity is performed. But is it really that simple? Here are some things to consider if you barter.

What is fair market value? The classic definition is the price someone is willing to pay and someone is willing to receive for the exchange of goods or services. But we all know this requires a level of judgement. What if an item is on sale when the barter activity is performed? Are prices always the same for a similar item or service? Prior to establishing the value of a barter item, shop around and take the lowest defendable value possible for your bartered item.

Example: You barter dog grooming for lawncare work. If you offer a range of prices from $20 to $60 for your grooming service what rate do you use? You must be prepared to defend your barter value. Perhaps shopping competitors can help establish a lower value.

What about your costs? The IRS barter documentation is so focused on capturing and taxing your barter income it under informs taxpayers on the reasonable reporting of costs associated with that income.

Example: If two retailers exchange wholesale goods of equal value for resale, the cost of goods could logically eliminate much of the fair market value of the barter income. What if the fair market value of the goods received is worth less because you discover it is distressed? Then you could actually have a barter based loss on your books.

Is the barter fair? If you are bartering with another firm, look at the “tax value” of the barter. This can change the true value of the barter depending on the “hard costs” associated with the barter activity.

Example: A painter exchanges $3,000 house painting with a law firm for legal services.

If both firms are sole proprietors, the salary of the owners is reflected in their net income. Self-employment taxes, sales taxes, and other taxes would also need to be applied to the net income number of each barter participant. In this case, the barter does not appear equal.

Caution with barter exchanges. With barter exchanges you receive credits (vouchers) for your provided services prior to using those credits on another service. Since you are required to report income when your service is provided, you could potentially have barter income without receiving the benefits for your barter activity until later years.

Clear reporting. If you use bartering in your business, you generally report the activity on 1099-B's each year, separate from other informational reporting.