InSight

Better Money Habits: The first 8 “good” money habits (1/2)

Financial Planning Dentist

Finding yourself in a healthy and happy financial life means practicing better money habits. And, putting you and your family in the best position possible. Raising your income, having income that not employment related, mitigating taxes and positioning your assets in a way to provide maximum benefit for your family are all a part of having “good” money habits. Following these eight very controllable tips will have a positive impact on your families outlook.

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. ~ Benjamin Franklin

By Kevin T. Taylor AIF® and Peter Locke CFP®

Pay yourself first

good money habitsFor many, money gets mentally earmarked as spending, investing, saving, and giving away.  For some, finding the right balance among these four categories is difficult but essential, and a budget can be a very useful tool to help you accomplish this. So, one of the best better money habits, is paying yourself first. This becomes the mantra for the most successful savers and is the fuel for a financial plan. Here is the two step “Pay yourself first” plan: 

First create a budget: The only way to start planning is to create a budget. Thinking about both the near-term and long-term financial goals and what a monthly spend looks like and what one you can aspire to have in retirement might look like. This will help generate a baseline for mapping out and putting other better money habits in place. But don’t make the mistake of using this formula, Income – Expenses = Savings. This is the source of most people’s failure to plan. Because it makes you and your future self come last, i.e. the end result of the equation. Create a budget with the future you in mind, that version of your future self is the most important part of the equation. That equation should look like Income – Required Savings = Expenses.  Then create a budget that is less than the expenses amount. Although difficult to implement, this is the priority that financially healthy people adopt.

Automate your savings: Making savings a priority in your budget.  Consider determining a specific amount and making a deposit on a regular basis. Think about your 401k or other company contribution plan where funds are taken automatically from your paycheck and deposited in an investment vehicle or savings plan with every run of payroll. Your personal savings plan should be no different.  In order to do this, you need to know your required rate (read and listen to our required rate podcast for more information) so you know how much savings you need to put away at your required rate to reach your goals. 

Know your tax plan

Good Money HabitsThe entirety of the IRS tax plan is complicated, full of loopholes and derived from years of bolting on special interests onto the code. Hence, the process of doing taxes reflects this. But, the second of the better money habits addresses this. At its core there are four main sources of income: Employment, investments, inheritance and windfalls. Each of these sources may be taxed in different ways and at different levels. Have a plan and control what you can control.  Have two plans for how you want to be taxed:

Tax plan today: You may not feel like you have a lot of control over how you’re taxed and at what rate. But if you take a step back, you will find you have far more control then you may be aware of. Lets build on the budget example.  If you know exactly what your monthly spend looks like, then you can have more control over the total that goes into pre-tax or after-tax savings options. Think about it this way, if you make $100,000 a year but your budget only requires $80,000, then by letting yourself accept all that income you’re likely surrendering somewhere between $5,000 – $9,000 to taxes of the remaining $20,000. This should be written down as a total loss of income that could have been prevented with the use of a budget and a tax plan. 

Tax plan tomorrow: Knowing how to mitigate taxes in your working years is great, but having a plan for after retirement may be more important. One of the most tragic events in retirement is being confronted with the risk of a short fall, well into retirement. Finding out that your shortfall was the result of poor tax planning and income management. Having a plan in place in your working years, for how you fund pre-tax, Roth, and post tax savings gives you options for controlling the amount you will pay in taxes in a given year in retirement. This helps elongate the timeline your cash will survive, and gives you flexibility for a changing taxation landscape. Additionally, having a diverse source of cash flow from investments is a better money habits you will develop. If placed in the proper accounts it helps confirm both the amount and source of income throughout retirement. Every dollar that is mitigated in tax planning in retirement, helps to elongate the plan, support measures for unforeseen risks, and adds to your legacy. 

Remember: Tax nuances exist in every area of wealth planning. There may also be opportunities to incorporate potential tax benefits into your plans but oftentimes there are also negative tax consequences associated with certain decisions. It’s important to step back now to have a vision for yourself, so you can plan accordingly.  

Additionally, when choosing the best investments for your circumstances, taxes should not be the only consideration.  It’s important to factor in the after-tax rate of return in determining tax-efficient investments. For these reasons, it’s crucial to consult with a qualified tax advisor to ensure your circumstances and needs are appropriately accounted for.

Stop living on borrowed time

Good Money HabitsAll borrowed money needs to be divided into two camps, accretive and erosive. When you borrow money you are borrowing from that money’s future potential. It’s time travel, and you are simply robbing the future you, for the benefit of present you. With that in mind, it’s essential that all borrowed money be for the benefit of the future you. So let’s discuss the two different ways money is borrowed:

Accretive: Debt that is for the acquisition of assets that will gain in value over time. The best example is a mortgage, and it’s knowing the difference is one of the better money habits we coach. You borrow money from your future self, to buy an asset that is both accretive to the future version of you, and give the present version of you a place to live. Any time that borrowed capital can grow at a rate faster than the cost you pay for it, you are generating wealth with leverage. When lending rates are low, and asset increases outpace them, it is positive to your net worth to borrow. 

Erosive: This is debt that is borrowed from your future self, at the cost of your future wealth. Examples are credit cards or car payments, where the underlying assets do not appreciate over time, or worse yet, there is no future value of the asset. Think of putting a vacation on debt, there is both a long term handicapping of that money’s capacity to generate wealth and there is no long term asset for future you to settle that debt with.  

Invest for your plan

Good Money HabitsIdentifying your short- and long-term financial goals will help determine which types of investments and planning approaches will have the greatest impact on your financial plan. This will help govern the types of investment you seek out. Knowing your required rate will help you stay focused on the right type of investing. All too often people get swept up in the astronomical and often unrepeatable gains people have seen. This causes people to focus on the upside of an investment without accommodating for the downside. Additionally, this causes clients to drift away from the long term goals in favor of short term market swings. A successful plan and portfolio both have the same common denominator, a steady, and predictable cash flow. Companies that can produce a predictable supply of income, over time, will outperform. But uncovering that potential and pricing it correctly becomes the question. There are two ways to determine if the investments you have will lead to the desired cash flow you want for your goals. Having this as a part of your investment practice is one of the more nuanced better money habits. The two approaches to planning finances:

A simple projection: A simple cash-flow analysis that looks at short- and long-term goals relative to the timeline or investment horizon you have available is a great start. This will give you some idea of the presence of a shortfall in your investments. 

A detailed plan: A comprehensive wealth plan, also referred to as a financial plan, which helps guide individuals towards achieving more complex financial goals throughout their lifetimes and beyond. This takes into account more complex expectations for your wealth, the taxation implications, and uncovers more risks that may cause you to fall short. A financial plan becomes essential if a shortfall is anticipated.

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Kevin Taylor

Your Money, Your Freedom: The 4-Point Fun Guide to Decoding Your Employment Dependency!

Ever wondered how chained you are to your 9-to-5? Or dreamt of making your money work for you while you sip cocktails on a beach, climb mountains with friends, or just hang out with children and grandchildren? Welcome to the guide to adding content to InSight’s – Employment Dependency metric—your secret weapon in the quest for financial freedom! 1. Your Money’s Scorecard Imagine for a moment that your investments are akin to a bunch of lazy couch potatoes. Yes, those starchy loungers sprawled across your financial living room, eyes glued to the TV, completely oblivious to the world of productivity. Now, ask yourself, how many of these lethargic spuds would it take to keep your life’s engine running—your fridge bursting with food, your Netflix subscription ticking over for those all-important binge sessions, and even ensuring there’s enough in the kitty for those spontaneous adventures or cozy dinners out? This quirky analogy is precisely what delving into your investment asset performance feels like. It’s an exercise in evaluating whether your hard-earned money is actively working towards your dreams and lifestyle needs or if it’s just taking up space on the sofa, idly passing time. It’s high time those potatoes were given a meaningful job! If your employment dependency is on the higher side, meaning a significant chunk of your lifestyle relies on your job income, the pressure on these couch potatoes—your investments and savings—is somewhat alleviated. They can afford to be a bit more relaxed because your job is doing the heavy lifting. However, if that dependency figure is alarmingly low, indicating that you’re leaning heavily on your investments to fund your day-to-day life, then it’s a wake-up call for your sedentary spuds. This scenario demands that your investments shed their couch potato persona and shift into high gear. Transforming these idle assets into diligent workers is essential to securing not just your current lifestyle but also your future comfort and financial independence. It’s about making your money work for you, pushing those investments to sweat so you can eventually kick back and enjoy the fruits of their labor. 2. Lifestyle Limbo: How Low Can You Go? How long can you keep sailing smoothly if your paycheck suddenly turns into a ghost, leaving you in a financial limbo? It’s a scenario that many might find daunting, yet it’s crucial in understanding how equipped you are to live not just a life, but your best life, sans the regular income stream. This goes beyond the mere basics of survival; it’s about thriving, indulging in your passions, and maintaining your lifestyle without compromise. The Employment Dependency metric serves as your financial limbo stick in this high-stakes game. How low can you dip without hitting the floor? The beauty of this metric is that the lower your dependency on your employment income, the more freedom you have to enjoy life’s pleasures without the ominous cloud of the next payday looming over you. It’s about achieving that delicate balance where your financial stability is not rocked by the absence of a paycheck, allowing you to lead a life filled with joy, security, and prosperity. Moreover, the concept of employment dependency doesn’t just offer a snapshot of your current financial resilience; it’s also a crystal ball into your future, especially your retirement years. By putting your lifestyle through a “stress test” using the Employment Dependency metric, you gain invaluable insights into how your days of leisure and retirement could look. Will you be sipping margaritas on a beach, or will you be pinching pennies? This metric illuminates the path to ensuring your retirement paycheck—funded by pensions, savings, and investments—can support your dream lifestyle. It’s about preparing today for the tomorrow you desire, making sure that when work becomes an option rather than a necessity, your lifestyle continues unabated. This dual focus on present joy and future security is what makes understanding and optimizing your employment dependency so crucial. 3. What If… The Game Life, with its unpredictable twists and turns, often throws us into scenarios we never saw coming. Imagine one day you’re on top of the world, with a hefty bonus check in hand, ready to splurge or invest. The next day, the tide turns, and those freelance projects that were your bread and butter suddenly dry up. Here’s where playing the “What If” game with your Employment Dependency metric becomes your secret superpower, allowing you to navigate through life’s uncertainties with grace and poise. Think of it as your personal financial forecasting tool, crafting an umbrella sturdy enough to shield you from any storm that life decides to brew. This approach not only tests your financial resilience in times of stress but also empowers you to remain comfortable and secure, no matter the financial weather outside. It’s about preparing for the worst while hoping for the best, ensuring that whatever life tosses your way, you’re ready to catch it with a smile. But let’s push the envelope further. What if your Employment Dependency metric could do more than just safeguard your current lifestyle? What if it could open the door to possibilities you’ve only dreamed of? Imagine living on a cruise ship, traveling the world without a care, or dedicating your days to volunteering for causes close to your heart. By understanding and adjusting your employment dependency, you start to sketch the blueprint of your life’s next chapter. It’s not just about surviving; it’s about thriving in ways you’ve only imagined. This foresight enables you to allocate your finances not just for survival or comfort, but for the fulfillment of your deepest desires and dreams. Asking “What might it require today to get there?” transforms your financial planning from a mere exercise in numbers to a strategic map leading to your ideal future. It’s about realizing that with the right planning and insight, your financial decisions today are the seeds of the lifestyle you aspire to live tomorrow. 4. Your Financial Safety Net Finding yourself high on the employment dependency scale can feel akin

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Kevin Taylor

Passive Tax vs Active Tax Strategy

Key InSights: Too few investors have an active tax strategy The efficiency or a potential write off should not be the reason you own or sell an investment Managing federal and state income taxes is a year-long process Taxes are a permanent erosion of wealth Using the right investment and the appropriate accounts can help keep more of your money invested Certain strategies and accounts can support the causes you care about, transfer more money to your family, all while paying less in taxes Most tax strategies require little or no investment, and even the complex long term strategies can be developed and enshrined with little costs  We work with clients and prospects who will happily spend untold hours researching stocks, bonds, and funds for the highest possible return on investment. They will bookmark and read articles about new funds, strategies, and investment opportunities. They watch investment shows, the news, and will ask friends for help and advice. In the past, we have addressed the importance of acknowledging the difference between accretive and erosive debt, and likewise, we think it’s important to discuss the difference between active and passive tax strategies.  The vast majority of investors can be serviced better by addressing the most logical source of manageable loss in a portfolio: tax efficiency. We love picking the right investments in a portfolio – but even the best funds and stocks outperform irregularly. However, a regular source of loss in a portfolio and one of the most avoidable is in the tax ecosystem investors build for themselves both inside and outside of a portfolio. This is the difference between a passive tax strategy and an active tax strategy.  Investing with tax-efficiency in mind doesn’t have to be complicated but it does take some planning. While taxes should never be the primary driver of an investment strategy, tax awareness and some tax infrastructure does have the potential to improve after-tax returns for most investors.  Passive Tax Strategy Most investors and seemingly all of the do-it-yourself investors are part of the passive tax group. These are investors who will trade in and out of stocks of funds through the year, and come February and March of the following year, will likely need to write a check (or get their refund reduced) as a result of this methodology. Taking a year-end inventory of your investments and income will likely result in a double-digit taxation loss that might otherwise have been avoidable. Additionally, several of the best and easiest ways to mitigate taxes can only be established before the taxable event has happened. Many of the passive tax strategies investors implement begin with managing a gain or loss when ideally they should begin months before so that all options can be weighed. Without knowing some of these tax-efficient strategies, investors have theoretically chosen to put blinders on and stick to their plan, or worse off, change it when it’s too late. Additionally, investors sometimes miss impactful tax law changes that tend to occur every couple of years.  The harsh reality is that this method of tax planning over 30 years costs a person with a Bachelors’s Degree level of income about $226,000 in avoidable taxation over the course of their earning years. That sum mitigated differently and invested routinely can be worth over a million dollars in retirement or passed down to an heir or charity. For many that million-dollar difference is the difference between fully supporting their investment and legacy goals and being forced to sacrifice some part of their plan.  There are several lever and investment manager can pull to try to manage federal and income taxes: selecting investment products, timing of buy and sell decisions, choosing accounts, taking advantage of realized losses, and specific strategies such as charitable giving can all be pulled together into a cohesive approach that can help you manage, defer, and reduce taxes. Of course, investment decisions should be driven primarily by your goals, financial situation, timeline, and risk tolerance. But as part of that framework, factoring in federal and state income taxes may help you build wealth faster. Active Tax Strategy Investors have a variety of levers at their disposal they can use to transform their income and or investment tax strategy: selecting investment products, the timing of buys/sells, account types, tax harvesting, and specific strategies such as charitable giving can all be pulled together into a cohesive approach that can help you manage, defer, and reduce taxes. We have addressed many of those ideas below.  But as I stated above, taxes shouldn’t be the driver for your investment decisions.  Those should be determined by your goals, financial situation, timeline, and risk tolerance. But as a complement to that framework, factoring in an active tax strategy for income and taxes may help you build wealth faster and in most cases, make you better prepared for life after work. Tax budgeting: Part of a tax and financial plan involves knowing what the acceptable range for paying taxes is as part of the long-term equation. Generating income for the most part will result in taxation. But the difference between knowing a strategy for income and an investment that will generate a 38% tax liability or a 15% liability can save investors tens of thousands of dollars in a given year.  Tax losses and loss carryforwards: Many investors are aware that a loss on the sale of security should be used to offset any realized investment gains. Fewer know that up to $3,000 in taxable losses can be used to offset ordinary income annually. In some cases, if your realized losses exceed the limits for deductions in the year they occur, the tax losses can be “carried forward” to offset future realized income. All gains and losses are “on paper” only until you sell the investment. Tax-loss harvesting: This strategy involves taking advantage of losses as part of the rebalancing process. Deliberate capturing of losses can provide tax relief when investors have positions that have unrealized gains that

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boulder investment management, tax planning, k-1, real estate
Articles
Kevin Taylor

How to use your K-1?

A K-1 form is a tax document used to report income, deductions, and credits for partners in a partnership, shareholders in an S-corporation, or members of a limited liability company (LLC). Here are the steps to use a K-1 for taxes: Obtain the K-1 form: If you are a partner, shareholder, or member of an LLC, your entity will provide you with a K-1 form that reports your share of income, expenses, and credits. You should receive your K-1 form by March 15th for partnerships and S-Corps and by April 15th for LLCs. Review the K-1 form: Before you start preparing your tax return, review the K-1 form carefully to make sure all the information is accurate. Check the name, address, and identification numbers to ensure they match your records. Also, review the income, deductions, and credits to ensure they are correct. Use the K-1 form to complete your tax return: You will use the information on the K-1 form to complete your tax return. If you are filing Form 1040, you will report your share of income, deductions, and credits on Schedule E (Form 1040). If you are filing Form 1120S or Form 1065, you will use the K-1 information to prepare the entity’s tax return. Report your income and deductions: The K-1 form will provide you with information on your share of income, deductions, and credits. You will report this information on your tax return. Make sure you report the information in the correct fields. Pay any taxes owed: If you owe any taxes, you will need to pay them by the tax deadline. You may need to make estimated tax payments throughout the year to avoid penalties and interest. In summary, a K-1 form is used to report income, deductions, and credits for partners in a partnership, shareholders in an S-corporation, or members of an LLC. You will use the K-1 form to complete your tax return and report your share of income, deductions, and credits.

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