Mastering Risk Management: Emergency Funds and Financial Planning – A Comprehensive Guide

Financial Planning Dentist

Risk management goes beyond protecting yourself from unforeseen events; it also involves securing your financial stability. In this blog post, we will delve into the importance of having a well-funded emergency fund separate from your spending money, the value of having a financial plan, automating your savings, and creating deliberate tax-specific buckets for investing. By mastering risk management in these areas, you can enhance your financial security and navigate uncertainties with confidence.

Building a Robust Emergency Fund:

Understand the Importance: An emergency fund acts as a safety net, providing financial stability during unexpected events such as job loss, medical emergencies, or major repairs. It ensures that you have funds readily available without compromising your day-to-day expenses or long-term investments.

Set a Target Amount: Aim to save three to six months’ worth of living expenses in your emergency fund. This amount can vary based on factors like job security, income stability, and personal circumstances.

Keep it Separate: Maintain a separate account for your emergency fund to avoid commingling it with your spending money. This separation helps prevent the temptation to dip into the funds for non-emergency purposes.

Creating a Financial Plan:

Establish Clear Goals: Determine your short-term and long-term financial objectives, such as saving for retirement, buying a home, or funding your child’s education. Establishing clear goals will guide your financial planning efforts and provide a roadmap for managing risks.

Assess Risk Tolerance: Understand your risk tolerance and align your investment strategies accordingly. Consider your age, financial obligations, income stability, and personal preferences when determining the level of risk you are comfortable with.

Seek Professional Advice: Consider consulting with a financial planner or advisor to create a comprehensive financial plan tailored to your specific needs. They can provide insights, analyze your financial situation, and offer guidance on risk management and investment strategies.

Automating Your Savings:

Pay Yourself First: Automate your savings by setting up recurring transfers from your income to your savings or investment accounts. By prioritizing savings, you build a disciplined approach to risk management and ensure a consistent contribution to your financial goals.

Take Advantage of Employer Programs: If your employer offers retirement plans, such as a 401(k) or pension, contribute regularly and take full advantage of any matching contributions. This maximizes your savings potential and reduces the risk of not saving enough for retirement.

Deliberate Tax-Specific Buckets for Investing:

Utilize Tax-Advantaged Accounts: Take advantage of tax-advantaged accounts like IRAs (Individual Retirement Accounts), 401(k)s, or 529 plans (for education savings). These accounts provide tax benefits and can help optimize your investments by minimizing tax liabilities.

Diversify Your Investments: Spread your investments across different asset classes to reduce risk and increase potential returns. Consider a mix of stocks, bonds, real estate, and other investment vehicles that align with your risk tolerance and long-term financial goals.

Mastering risk management in emergency funds and financial planning is crucial for achieving long-term financial security. By maintaining a well-funded emergency fund, creating a comprehensive financial plan, automating your savings, and leveraging tax-specific investment buckets, you can protect yourself from unforeseen events, minimize financial risks, and work towards your financial goals. Remember, risk management is an ongoing process that requires regular evaluation and adjustment. By adopting these practices, you can navigate financial uncertainties with confidence and achieve a solid foundation for your financial future.


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Tax Document Checklist

Tax Preparation Checklist Personal Information Your social security number or tax ID number Your spouse’s full name, social security number or tax ID number, and date of birth Identity Protection PIN, if issued by the IRS Routing and account numbers for direct deposit or payment Foreign reporting and residency information (if applicable) Dependent(s) Information Dates of birth and social security numbers or tax ID numbers Childcare records (including provider’s tax ID number, if applicable) Income of dependents and other adults in your home Form 8332 if applicable Sources of Income Employed: Forms W-2 Unemployed: Unemployment (1099-G) Self-Employed: Forms 1099, Schedules K-1, income records Records of all expenses, business-use asset information Office in home information (if applicable) Record of estimated tax payments made (Form 1040–ES) Types of Deductions Forms 1098 or other mortgage interest statements Real estate and personal property tax records Receipts for energy-saving home improvements Charitable donation records Medical expense records Health insurance documentation Childcare expense records Educational expense records K-12 educator expense receipts State and local tax records Retirement and savings documentation Federally declared disaster documentation Check the FEMA website to see if your county has been declared a federal disaster area. Print Checklist

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Kevin Taylor

Using a Delaware Statutory Trusts (DST) with 1031 Exchange Investments

Delaware Statutory Trusts (DSTs) are extremely popular with 1031 exchange investors. In addition to the tax mitigation aspects of the 1031 itself, they allow investors to diversify the make-up of an investment portfolio, access new buildings and investment types, and easily scale up or down the size of their real estate portfolio. 1031 exchange investors favor DSTs due to the fact that it can be difficult to identify a replacement property within 45 days and in most cases, the DST can accept the exact balance investors are looking to replace a part of the 1031 Exchange. What is a Delaware Statutory Trust? The name will usually confuse new investors. The “Delaware” in Delaware Statutory Trusts is simply a component of the law being initially conceived and developed in Delaware. A common state for incorporation and legal standing. The use of the DST structure helps keep the title clean in connection with ownership by many co-investors. It separates the investor holding title individually into a holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. Why invest in a DST? Few investors have the requisite net worth to own a 30-story office complex and keep the real estate exposure for their portfolio in line with their risk expectations. That is where the use of DSTs comes into play. A DST is attractive to an investor who desires access to a single property or portfolio of high-value, high-quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. A DST puts the management and ownership of a real estate venture into a manageable box for most investor types. Collecting income, managing taxes, and maintaining the risk are all far easier in the real estate space through the DST structure. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. Is a DST like a REIT? It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate. How does the DST provide income? Similar to the other real estate investments, DSTs generally pay monthly or quarterly an amount based on the excess rent over the property expenses. This includes any mortgage payments so as the debt service is paid, the equity ownership of the investor shifts as well. The Return on Equity (RoE) varies from deal to deal based on the specifics of the property, the building type, and financing goals. With most deals, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. How long does the DST operate? Most DSTs have a well-defined expectation for liquidation of the asset. The asset’s holding period varies and is prescribed in the beginning, but most have an intermediate time frame. Usually, 3-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. How does the liquidation work? This final stage of a DST is a complete liquidation of the Real Estate assets. This is also part of the investor’s stake in the holding. This can increase the overall annualized return by a couple of percentage points and is paid out in cash upon liquidation. While most investors seek out real estate for the prospect of a current and predictable income – tax mitigated capital appreciation as part of the real estate investment is typically the larger portion of the total return of the investment. Who can buy into a DST? The manner in which DSTs are marketed to the public has a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor, or a licensed Financial Advisor. The DST structure usually, if not always, requires the investor meets the Accredited Investor standard as the offerings are listed through the Reg D issuing process. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely.

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Definitions: Fixed Income

Fixed Income (or debt) represents your ownership over the repayment of a debt. Usually considered bonds, they are contracts promising the repayment of loaned money. Other forms of debt arrangements include Mortgage-Backed Securities, liens, loans, and CDs. Fixed income is called that because the return is decided on the outset – so the return is fixed from the initial offering. Because the upside is fixed from the start, the change in their pricing is less dramatic. Thus, fixed income pricing becomes less about the asset itself, and more about the prevailing rates for other options (read “current interest rate environment”). Debt is usually priced based on three variables, 1) How likely you are going to get your debt repaid, who owes the borrowed money, and what is the way they will pay it back? (Taxation, revenue, etc.) 2) how long until you are repaid your initial investment, this is called duration and indicates how long the money is at risk for. 3) the rate that the debtor is paying on the borrowed sum, usually expressed percentage as a coupon or yield. There are subcategories based on who the entity requesting the money fall into: Muni’s  – a Districts or Municipalities Debt. Usually issued to fund special projects, schools, or city and municipal improvements. In addition to the yield, these are priced for risk based on cities’ credit history, the source they plan to repay the loan (taxation or toll-based), and any available insurance they put on the bonds. Treasuries – the sovereign debt of a country. This is debt usually supported by the taxing authority of a country and its ability to create (fiat) the money they need. This is priced based on the credit rating of the country, the outlook of its currency, and the yield. Corporate – debt issued by companies and priced based on their creditworthiness. These are divided into investment grade and non-investment grade (called affectionately “high yield”) and then subdivided further. Certified Deposits (CD’s) – debt issued by banks. These are usually issued in small increments and for a short duration. The returns are insured by the FDIC (federal government) Mortgages (MBS) – These are backed by the creditworthiness of the borrower, and usually the risk is mitigated by grouping a pool of mortgages into tranches based on their collective credit rating. Collateralized Debt Obligations (CLOs) – Similar to the mortgages, this is a collection of debts that secure equipment or are backed by specialty financial arrangements.  Often backed by the repossession of accounts receivable or equipment.  

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