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The Fantastic Financial Four: A Tale of Time in the Market

Financial Planning Dentist

In the bustling world of financial fortitude, there exists an elite group known as the Fantastic Financial Four: Alex Annual, Morgan Monthly, Quinn Quarterly, and Yuki Year-End. Each with its unique savings discipline, paints a vivid picture of investment prowess and the magic of compound interest.

Boulder Investment, Finacial Advisor

Alex Annual rockets out of the gate, depositing a whopping $12,000 on the very first day of the year. The mantra? “Make the money work from day one!” And work it does, earning them dividends and returns right from January.

Morgan Monthly dances in with a regular rhythm, spreading her $12,000 across twelve orchestrated monthly performances. Consistency is her game, and every month she harnesses the power of incremental investments.

Quinn Quarterly takes the stage four grand times a year. With each act, $3,000 takes its position, ensuring that every quarter makes its mark.

And then there’s Yuki Year-End, the master of the grand finale. Waiting for the year’s curtain call, she pours her $12,000 into the pot, ensuring she doesn’t miss out on the annual investment extravaganza.

Now, while each contributes an equal $60,000 over five years, their returns sing different tunes. Alex, with the longest time in the market, witnesses the marvel of compound growth to its fullest. Morgan and Quinn, while not at Alex’s peak, still enjoy substantial growth, thanks to their steady and spaced-out approach. Yuki, despite her year-end dazzle, finds herself with the least returns due to her shorter time in the market.

Their collective journey unravels a crucial lesson: It’s not just about the amount, but also the time. While automated approaches, like Morgan and Quinn’s, might not capture the full magic of Alex’s year-long market time, they still earn substantial returns compared to last-minute lump-sum investments.

In the grand theater of finance, the Fantastic Financial Four reminds us that to truly reap rewards, “time in the market” often trumps “timing the market.” Whether you’re an Alex, a Morgan, a Quinn, or a Yuki, the key is to start, stay disciplined, and let time weave its compound magic.
Each of these market participants is invested the exact same, earning the average return and dividend for the SP500. The only difference is, how many months each of the money they add is participating in the market.

Alex Annual: The Savings Superhero!

Who said superheroes wear capes? Meet Alex Annual, the savings sensation who’s turning heads and flipping calendars in the financial world! On the first day of the year, while most of us are nursing our New Year’s Eve hangovers or breaking our resolutions already, Alex is smashing his entire annual savings goal. Bam! Just like that.

Not all of us can be like Alex, and not all of us need to. But this kind of planning, habit, and market participation earns Alex a full 1.2% a year more than his counterparts. This outperformance only comes from time and a few extra dividends, and it requires that have a plan in place to make these investments as soon as the calendar rolls over.  

So, Alex is a timely and highly planned investor and something you can work toward…but for most, this is just too much.

Morgan Monthly: The Investment Icon!

Introducing the legend, the guru, the monthly maven of moolah – Morgan Monthly! While some of us are just remembering to change the date we are looking at on our phones, Morgan’s already making her big investment moves. First day of the month? You bet she’s in the financial frontline, adding a sprinkle of investment glitter to her growing treasure trove.

But hold your horses, this isn’t about hasty decisions or risky gambles. This is the Morgan Method™: a combo of routine, and habitual decisions made long ago, and something that she said she could live within her Insight-Full® financial plan. 

So, even though Mogan is not making a big lump sum at the start of the year, they get 81% of the returns that Alex gets but doesn’t feel strapped from “oversaving” early in the year.

Quinn Quarterly: The Bonus Boss!

Number 3 on our list, but number one among savers who get quarterly bonuses – Here comes the quarterly sensation, the bonus bonanza guru, the financial phenom – Quinn Quarterly! While most are just counting the days to their next payday, Quinn’s got their eyes on the bigger prize. Every quarter, right on schedule, the bonus bell rings, and Quinn is dancing all the way to the savings bank!

But wait, it’s not about luck or merely waiting for the stars to align. It’s the Q-Strategy™: Every bonus, every time, diligently directed to the future’s treasure vault. No ifs, no buts, just pure, automated savings brilliance.

Perfomrativly this method is almost identical to the monthly method, and for those who get a monthly bonus as part of their employment, it’s an easy bridge to cross. Quinn gets 78% of the return of Alex who’s invested all year long.

Yuki Year-End: The Yearly Yen!

As the calendar winds down and most are getting lost in the holiday haze, there emerges a savings superstar from the shadows – Yuki Year-End! While many are busy planning New Year’s Eve bashes, Yuki’s preparing for a different kind of bash: a savings bonanza!

This is the last-minute saver, and they pay the price. While still better than doing nothing all year, investing at the end of the year, with tax returns, holiday bonuses, or whatever is left over comes with a hefty price tag. Yoki is only participating in 64% of the returns that Alex received.

So better than nothing, but for most the jump from a 4.25% annual return to a 5.36% is as easy as converting to a monthly or quarterly goal.

Key Takeaway: Strive, Thrive, and Automate to Elevate Your Savings Game

The Fantastic Financial Four offers a mirror to our savings aspirations. While we may find ourselves identifying with one of these savers, the journey doesn’t have to stop there. The beauty of the savings discipline is that it’s adaptable. 

Starting your savings journey? Aim to step into the shoes of any member of our quartet. However, for many, the rhythmic and automated dance of Morgan Monthly strikes as the most achievable first step. It’s consistent, spaced out, and a fantastic way to immerse oneself in the discipline of saving regularly. 

Yet, if you’re already channeling your inner Morgan, why not aspire towards the ambitious cadence of Alex Annual? Moving up this ladder isn’t just about saving; it’s about maximizing your returns through increased time in the market.

Remember, the formula remains simple yet profound: Income – Savings = Expenses. This tale underscores the importance of prioritizing savings and automating them. It’s not just about how much you save, but how soon and how consistently. Aim high, start where you can, and let automation be your financial co-pilot.

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Do your chores or there will be NO MONEY in your retirement account!!!! ~ DAD

First off, review this list of answers and accept how incredible this idea is, to both fund college, make your kids earn it, and do it all in a tax-advantaged way: Yes, income earned in the home can be put into a child’s Roth (within the rules) Yes, the income and savings can be used for college, or really any major life purchase Yes, it is a relatively easy strategy if you follow the below tips If you are raising your kids like I am mine, the early years are an important time to ingrain a set of good money habits that hopefully they keep for the rest of their lives. I require my kids to put 10% of any money they earn into the following categories, college, giving, and taxes (back to the family). Meaning they only ever get to spend about 70% of their income. This has been met with several comments ranging from “awesome” to “cruel”. But for my kids, it’s all they know. They don’t negotiate or object to taxes because it has always been how they get paid. I hand them a dollar and take a dime back instantly. It’s visceral, and habitual at this point.  I feel money is a difficult idea if children are never given the opportunity to handle it, hold it, and lose it. When it comes to teaching financial lessons, setting a good parental example is important, but actually giving the child some experience making wise financial decisions is essential. This includes both giving the child decision-making authority with their own money and giving the child the means to earn money outside of or instead of an allowance. This is where the Roth comes into play, and your opportunity to hire your child… This is an open platform to pay your children in a way that makes sense for your family. And the best part is that this payment can be counted as earned income and thus qualifying for Roth eligibility. But there are some rules you need to follow and this article will walk parents through the right way to keep the Roth eligibility intact.  You will want to make it clear, under which IRS designation you want to use. The two options are as a self-employed independent contractor or a household employee of yourselves.  This all might sound silly, hiring your child as a contractor, but the benefits make it worth it. I promise. And like taxing your children, it might only sound silly because it’s new, but your kids won’t know this isn’t normal and will just roll with it. The Independent Contractor Route… If you decide that your child is an independent contractor, then all of the child’s earnings must be reported as Self-Employed on Schedule C.  So it should be noted that if their net earnings from this kind of self-employment are more than $400, the child would need to pay self-employment tax (Medicare and Social Security) on Schedule SE. That’s an important threshold to be aware of.  Quite possibly the best part of choosing the independent contractor route is that your child could work for many different families. So if they are routinely engaging in neighborhood childcare, lawn maintenance, or other jobs in your community, this might be the most open path.  Let’s be clear though, this route still requires that the child follow the child labor laws. But these laws are reasonable restrictions for most circumstances.  The first law of note is the age restrictions on certain occupations. If your child is under 14, then the list of potential occupations is limited to: delivering newspapers to customers; babysitting on a casual basis; work as an actor or performer in movies, TV, radio, or theater; work as a homeworker gathering evergreens and making evergreen wreaths; and work for a business owned entirely by your parents as long as it is not in mining, manufacturing, or any of the 17 hazardous occupations. This is the sweet spot for any family that has 1or more family businesses.  At age 14 and above the universe of employment can expand to include: intellectual or creative work such as computer programming, teaching, tutoring, singing, acting, or playing an instrument; retail occupations; errands or delivery work by foot, bicycle, and public transportation; clean-up and yard work which does not include using power-driven mowers, cutters, trimmers, edgers, or similar equipment; work in connection with cars and trucks such as dispensing gasoline or oil and washing or hand polishing; some kitchen and food service work including reheating food, washing dishes, cleaning equipment, and limited cooking; cleaning vegetables and fruits, wrapping sealing, and labeling, weighing pricing, and stocking of items when performed in areas separate from a freezer or meat cooler; loading or unloading objects for use at a worksite including rakes, hand-held clippers, and shovels; 14- and 15-year-olds who meet certain requirements can perform limited tasks in sawmills and woodshops; and 15-year-olds who meet certain requirements can perform lifeguard duties at traditional swimming pools and water amusement parks. At age 16 or 17, almost any job that is not expressly prohibited (like alcohol serves or licensed operations) becomes available to children.  For more details on the standing labor laws and how they pertain to children consult YouthRules.Gov. The Household Employee Route… This is likely the more common route, and requires less diligence in what the job is, and the laws that protect it. There are two general guidelines you still note before you take this route:  Your list of jobs allowed under child labor laws expands significantly as you are allowed to “work for a business owned entirely by your parents as long as it is not in mining, manufacturing, or any of the 17 hazardous occupations” at any age. The wages are exempt from FICA taxes if they are working for a business owned solely by their parent(s). When determining if this employment is suitable this is the question you need to ask yourself: Does the employer (you) have control

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June 15, 2021 No Comments
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Managing the 1031 Exchange Rules for Vacation Homes, Conversions and Mixed Use Properties

It is quite common for clients to call a 1031 exchange company with questions regarding exchanges of their former or future principal residences or vacation homes. After all, if you can have a rental property with some side benefits, it would be the best of two worlds, right? Well, we will discuss the requirements you should be aware of as you evaluate the replacements. So these are the questions imbedded in the 1031 Exchange requirements that must be answered:  Under what circumstances can these dwellings be used as part of a 1031 exchange? Do they satisfy the requirement that both the relinquished and replacement properties must be held for investment or for use in a business or trade? Does some personal use trump the investment use of the property? This article is intended to answer these commonly asked questions: Under what circumstances can a second home or vacation home constitute relinquished or replacement property for the purposes of a 1031 exchange? Can a principal residence be converted into an investment property eligible for 1031 tax deferral upon sale? Can a property that has been held for investment be converted to a principal residence and what are the rules when it is sold? Can a mixed-use property be sold with a personal residence exemption and 1031 exchange deferral? Rules for Including a Vacation Home in a 1031 Exchange Historically, determining whether a home that was both rented out and used by its owner could be eligible for a 1031 tax deferral was difficult to ascertain.  There was some case law but that was a bit inconsistent.  The IRS attempted to provide some definitive guidance regarding some of these questions in the form of Revenue Procedure 2008-16.  As the IRS aptly put it: “The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under §1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.” This revenue procedure made clear that for a relinquished vacation property to qualify for a 1031 exchange, the property has to be owned by the taxpayer and held as an investment for at least 24 months immediately prior to the exchange.  Additionally, within each of the two 12-month periods prior to the sale, the property must have been rented at fair market value to a person for at least 14 days or more, and the taxpayer cannot have used the property personally for the greater of 14 days or 10% of the number of days in the 12-month period that it had been rented. The requirements for a property to qualify as a 1031 replacement property are very similar.  The property has to be owned by the taxpayer for at least 24 months immediately after the exchange.  Also, within each of the two 12-month periods after the exchange, the property must have been rented at fair market value to a person for at least 14 days or more and the taxpayer cannot have used the property personally for the greater of 14 days or 10% of the number of days in the 12-month period that it had been rented. The taxpayer is allowed to use the relinquished or replacement property for additional days if the use is for property maintenance or repair. These days and the project and maintenance completed should be documented thoroughly. Rules for Converting a Personal Residence for a 1031 Exchange In many cases, conversion of a personal residence to a property held as an investment or for use in a business or trade “exchange eligible property,” as defined above, may still allow a taxpayer to receive a full exemption of gain pursuant to the rules of Internal Revenue Code (IRC). The comprehensive set of tax laws was created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress and is sometimes also referred to as the Internal Revenue Title. The code is organized according to the topic and covers all relevant rules pertaining to income, gift, estate, sales, payroll, and excise taxes. Internal Revenue Code Section 121 upon sale of the property.  That Code section provides for an exclusion of gain of up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly upon the sale of a principal residence.  There is a requirement that during the five-year period immediately preceding the sale, the taxpayer must have used the property as a principal residence for a cumulative period of at least two years. Even if the property has had principal residence use followed by exchange eligible use, the taxpayer does not necessarily have to do an exchange on the investment/business use of the property if the total gain can be sheltered by the §121 allowed exclusions.  So even if during the immediate two years preceding the sale, the property was used as exchange eligible property, the taxpayer may still benefit from the personal residence exclusion.  In the event, the gain exceeds the maximums allowed for per IRC Section 121 primary residence, the taxpayer may still be able to shelter the balance via a 1031 exchange, thus combining the benefits of these two code sections. Under Revenue Procedure 2008-16 the conversion of the principal residence to an exchange eligible investment property does not disqualify a family member as the tenant.  However, the revenue procedure requires that this should be done at a fair market rental and it must constitute the family member’s personal residence and not the family member’s vacation home.  There are additional rules for the rental of the property by a family member who co-owns the property with the taxpayer. Should a taxpayer wish to convert the personal residence to exchange eligible property, the

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October 12, 2021 No Comments

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