How to Take Advantage of the Low Interest Rates

Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up. For illustrative purposes, a graph of the 30 year fixed mortgage rate shows that we have gone a long way since the 1980s when the rate was upwards of 17.5%. (Source: Yahoo Finance)

The Federal Reserve has maintained the interest rates low in an effort to stimulate the economy by discouraging saving and encouraging borrowing Chairman Ben Bernanke said last month that while the U.S. economy has improved, it still needs support from the Fed to help lower unemployment. Bernanke says that short-term interest rates will stay near zero until unemployment falls to 6.5 percent. Forecasters expect that won’t happen sooner than 2015. (Source: NPR News)

Do you feel like you should be doing something to take advantage of the interest rates at record low? Probably.

Whether you want to save, spend or invest, consider your options and choose the strategies that best suit your particular financial circumstances. Here are five tips for low-interest-rate periods:

1. Consolidate debt. With interest rates at historic lows, it makes sense to consolidate debt into one low-interest loan. For example, if you have outstanding balances on several credit cards, consider transferring those balances to one credit card with the lowest interest rate. If you qualify, it may be a good time to apply for a home equity line of credit to consolidate debt or make a home improvement.
2. Shop around for credit cards with the best interest rates. You may be able to get one with better terms than the one you are currently using. Or, ask your credit card issuer to lower your interest rate to make it more competitive.
3. Make large purchases now. If you’ve been thinking of making a major purchase like a house or a car, today’s low-interest rates make it a good time to finance big-ticket items. However, make sure you have a good credit record and can pay off the loan before applying.
4. Order a free copy of your credit report. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. If your score is lower than you’d like, pay down your balances and pay bills on time to raise your score. Read more about What to do if you are a victim of identity theft.
5. Keep saving. Just because standard savings accounts aren’t paying a lot of interest now doesn’t mean you should stop saving for your future. Your savings will still accrue, you’ll be less likely to spend it and you know it will be safe. If you can afford to lock up your money for a while, longer-term Certificates of Deposit (CDs) typically pay the highest interest rates. Specifically, Market Linked CDs are an extremely effective and popular solution as they are the only financial product that combines the guaranteed return of your principal and the protection of FDIC Insurance with the potential to earn reasonable rates of return.

In conclusion, although interest rates are at historic lows, it is important to ensure that whatever your strategy is, it makes sense in your particular situation. It’s probably not a great idea to buy an overpriced home now just because mortgage rates are low. Neither is it a good idea to acquire more debt just because it is cheaper to do so.

In any economic environment, the strategy that will ultimately bring you closer to financial freedom is one that focuses on debt elimination and creating tax-free income.

The Experts: Should People Buy Long Term Care Insurance?

Recently the Wall Street Journal posed the question SHOULD PEOPLE BUY LONG TERM INSURANCE to The Experts, an exclusive group of industry and thought leaders who engage in in-depth online discussions of topics from the print Report.

Predictably, answers are along the lines of  “Probably but we would rather not think about ” to “Definitely but timing is key”

One of the answers really stood out in the way it presents the reality that all of us have to face in thinking about the possibility of needing long term care. Written by Ken Dychtwald, a psychologist, gerontologist, best-selling author of 16 books, this answer points out that the potential high costs extend beyond the financial aspect.

I rarely include long quotes in my blog posts but in this case I wholeheartedly agree with his point of view. Below is an excerpt: 

“Ken Dychtwald: Why I Bought Long-Term-Care Insurance

With the average life expectancy now at 78 and rising, taking a moment to think about your—and your family’s—possible future long-term-care needs is becoming an essential piece of retirement planning. With our longer lives, two-thirds of people over age 65 will need some kind of long-term care, and many of us aren’t prepared for it. In fact, most of us haven’t even thought about it.

Uninsured medical expenses are now the top financial worry among men and women age 55 and over. People worry most about these expenses’ unpredictability and potential for high costs. To make matters worse, many Americans are confused about what long-term care actually is, and they’re surprised to learn that Medicare and/or traditional health insurance do not cover most long-term-care needs.

My Own Personal Decision to Buy LTC Insurance

When I turned 55, eight years ago, my wife, Maddy, and I stopped to talk about what might happen to each other and to our family if one of us ever needed long-term care. We knew that purchasing the insurance would carry a cost—it’s definitely not free! And I do not like the idea of rates being hiked up from time to time. However, we concluded that there were far higher potential financial and, even more important, emotional costs to avoid for ourselves and our children. We realized that if either of us ever needed some help, we wouldn’t want to burden our children and take them away from their own families or careers to look after us. And, if either of us ever needed care, we’d prefer to receive it in the comfort of our own home. My parents bought their long-term-care policies in their 70s; we decided to buy ours in our mid-50s when the rates were lower and we were far likelier to qualify. We also took advantage of special discounts for couples and very attractive tax advantages for small-business owners. We think of our long-term-care policy as “peace of mind insurance.”

The Coming Caregiving Crunch

Many people assume that if they should ever need long-term care, they’ll be able to get a family member to pitch in. Currently, an estimated 66 million Americans serve as unpaid family caregivers. But beyond the often costly out-of-pocket finances, these responsibilities cause nearly half of caregivers to miss work, change shifts or even miss career advancement opportunities. However, due to several unprecedented demographic and social changes, there will be fewer family caregivers available in the years ahead. Declining birthrates resulting in smaller families, the superior longevity of women, repeated housing relocations (with family members living at a distance) and the rising number of middle-aged women in the workforce has begun to create a mass shortage of family caregivers: a “caregiver crunch.”

Talking and Planning for Your Peace of Mind

Whether you wish to self-insure by setting aside sufficient funds (a home-care aide could cost $30,000 to $40,000 per year—my parents have had an aide helping them out for over 10 years; without their LTC policy picking up the bill, they would have had to spend over $400,000 by now, and nursing care could cost twice that) or purchase an LTC insurance policy, don’t wait for an emergency to ignite your decision-making. You should not wait until you’re either too ill or too old to plan for this possibility.

There are three core topics in family conversations about long-term care: (1) What care options are most preferred (e.g. If you needed some help, would you prefer to be cared for at home, in an assisted-living facility or in a nursing home?); (2) Potential roles and responsibilities of different family members (and possibly, help from a professional care coordinator, aide or nurse), should it ever be necessary to manage care; and (3) How to pay for any required long-term care (with your or family members’ savings, through Medicaid or with a long-term-care insurance policy). Alarmingly, my firm’s research has found that over 90% of all Americans have NOT discussed all three of these issues with their spouses, adult children and/or parents.

To read the full article on the Wall Street Journal website, click here

If you need advice on what your options for Long Term Care Insurance are, please feel free to contact us at The Baron Group and we will be happy to provide a complimentary, no obligation consultation. 

 

 

 

Myths and Facts About Sequestration

By now, you probably have a good idea as to what is sequestration. There are however several common myths about the sequester. Here they are:

1. Sequestration is a one-time budget cut.

Myth. “Sequestration” is actually series of automatic, across-the-board spending cuts to federal government agencies that are scheduled to take place in fiscal years 2013 through 2021.

2. Sequestration will affect Social Security, Medicare and Medicaid Payments

Myth. Social Security, Medicaid, and Medicare benefits are exempt from sequestration. Although cuts to Medicare provider payments are on the table, they can’t exceed 2% of current payments.

 3. Sequester will cut growth and lead to job losses

Fact. The cuts, totaling $1.2 trillion, will be split evenly between defense and domestic discretionary spending. The cuts are effective March 1. (The cuts were originally scheduled to take effect January 1 but were postponed to March 1 as part of the last-minute fiscal cliff deal reached on New Year’s Day.

4. Sequester will not affect defense spending

Myth. The automatic cuts are effective March 1, 2013. From 2013 through 2021, sequestration is scheduled to cut $1.2 trillion from government agencies, split evenly between defense and domestic programs. More than $500 billion is scheduled to be cut from the Defense Department and other national security agencies. The remaining cuts will affect a variety of domestic programs, including education, public safety, energy, national parks, food inspections, housing aid, transportation, and law enforcement.

5. The sequester will result in a government shut-down.

Myth. You may have heard a great deal about what’s going to happen as a result of the sequester, and much of it has likely been alarming. It’s important to understand, though, that the government will not be shutting down. In fact, while it’s hard to know exactly how things will play out as the cuts are implemented, most individuals are probably not going to notice a significant, immediate effect. Federal agencies will notify employees of possible furloughs, and the Defense Department will do the same with civilian employees, but those furloughs likely won’t take effect for at least a month. In addition to potential layoffs and furloughs, individual agencies will begin announcing and implementing other cost-saving measures.

6. Despite the sequester, the government will run out of money.

Fact. This one is unfortunately true. Federal funding for the current fiscal year expires on March 27, 2013. Unless Congress authorizes additional funding, a partial government shutdown would result. In addition, a few months later, expect another debt ceiling debate. The federal government reached its $16.394 trillion debt ceiling limit at the end of 2012. Congress subsequently suspended the debt ceiling limit until May 19, 2013, and although the U.S. Treasury has some ability to continue operations beyond that date, at some point the debt ceiling debate will need to be addressed. Thus, it’s conceivable that any short-term agreement on sequestration would include provisions that address these deadlines as well.

Whether Congress addresses some or all of these issues over the coming weeks or months is anyone’s guess. So stay tuned.

10 Easy Ways to Lower Your Tax Bill

Tax season is underway, but it may not be too late to lower your tax bill. There are still steps you can take to cut your taxes and increase your refund.

Small Life Changes Make a Big Difference

The first tip to lower your tax bill is this: realize that the IRS changes the tax code, and has rules that “phase in” or “phase out”. The IRS often has specials- almost like the special of the day at your favorite diner- that are temporary and have an expiration date. They also, as needed, amend the tax code and change it mid-year depending on the economic circumstances that are driving the need.

For instance, in 2008, the mileage allowance for reimbursement was 50.5 cents per mile from January 1, 2008 to June 31, 2008; but as gas prices skyrocketed; they changed to 58.5 cents per mile from July 1, 2008 through December 31,2008. Why is it important to understand this? People tend to think of their past experiences as a permanent condition. They also view things that have happened to their siblings or parents, in regard to income taxes, as permanent.

The tax code is a moving, changing document. For example, many people think,

“Well, I’ve never had enough to itemize, so I’ll just take the standard deduction again this year.” Because of that mind set, they may forget some of the components that go into the calculation and not realize that they could get extra tax savings because of a single event or number of small events.

For example, “Mary Jones,” 66 years old, carefully kept track of her medical expenses and taxes for several years. Each year, she would present them to her CPA, only to have him say that itemizing those expenses was a “waste of time,” and to take the standard deduction rather than to itemize. Mary didn’t consider the many things that had occurred since the last time she had tried to itemize when she was 62 years of age:

• At 62, she was working and earning more W-2 wages, so the 7.5% threshold that she had to beat in order for itemization to work was much greater. Now, Mary was retired, and had a part-time job.
• Also, her employer, at the time that she was fully employed, was paying 75% of her health insurance premiums. Since then, she had gone to the part-time job and had lost her employer-paid health insurance.
• She had enrolled in Medicare Part A and had enrolled in Medicare Part B, which was deducting $100 +/- per month from her Social Security check. She had also enrolled in Medicare Part D, which was also deducted from her Social Security. She didn’t write premium checks directly to companies, so she didn’t think of the dollars being deducted from her Social Security by the government as money she had spent.
•  She had purchased long-term care insurance and several years later purchased a new car, carrying with it a steep excise tax.
• She had substantial increases in her home’s property tax and at her winter residence property tax, a small mobile home in a park in Florida. Overall, on examination, we realized that at age 66, Mary was over $1,300 above the standard deduction and had been missing substantial tax savings, because of what a CPA had told her four years previous! Moreover, she hadn’t thought about how many little things had changed in her life.

Tax Tip 1

Remember: the tax code constantly changes, so you can’t compare one year to the next. Those changes may represent an opportunity to reduce your tax bill. It is imperative to work with a financial advisor who takes a proactive approach to tax planning, rather than allowing the tax piece of the financial plan to be prepared elsewhere.Indeed, your tax preparation should be a part of your overall financial plan. A good financial advisor, aware of all the year-to-year changes to the tax code, can be your best resource, especially if that advisor offers professional tax preparation.

Tax Tip 2

CD interest penalties are deductible. That’s right; if you have been working with a financial advisor, and have decided on employment of a taxadvantaged investment strategy such as tax-free municipal bonds or tax deferrals in annuities or life insurance products, you may be contemplating moving money from a certificate of deposit or other savings accounts. Often, people delay changing the way their dollars are invested or stored, because there would be a penalty for early withdrawal. They don’t realize that part of that penalty would actually lower their income tax bill on the adjusted gross income: line 30, penalty for early withdrawal.

Tax Tip 3

Another commonly overlooked strategy by those who are near the limit on their itemized deductions is prepaying expenses that are deductible. For instance, if, in 2010, you were planning on spending approximately $10,000 on deductible expenses—health insurance, property taxes, charitable donations, excise taxes, or other itemized deductions—then you could prepay next year’s charitable contributions, next year’s health insurance, and in some cases, even next year’s property taxes. For example, if a person paid all of their 2010 and 2011 expenses at the end of calendar year 2010, $20,000 of paid expenses would allow them to itemize and take greater deductions. Then, in 2011, they would simply claim the standard deduction because they would have no expenses that were on the itemized list. They were prepaid in 2010. This strategy leaves a smart tax payer in an every-other-year posture—one year, double up, file the long form and itemize; the next year, claim standard deductions; the next year, double up and itemize; the next year, take the standard deduction. (In sequence: itemize-standard deduction-itemize-standard deduction.) For people with the proper cash flow and circumstances, this is an excellent strategy for tax savings.

Tax Tip 4

If you have a sizable estate 2012 may be a good year to give some of it away! Last year 2011 and this year 2012 the gifting limit while living is much larger than it’s been it many years, 5 Million Dollars ! Although in 2010 there was no “Death Tax” for any size estate there was still a 1 Million limit on gifting assets while alive. This year could be an advantageous year to set up a trust for grandchildren or to hand over interest in a closely held family business. Who knows, after 2012 what the “powers that be” will allow, but for sure in 2012 it’s a higher gifting amount without taxation than it’s been in a long, long time it’s not likely to stay this way.

Tax Tip 5

It is not uncommon for some taxpayers to not be in a tax bracket at all, because they have money in tax-free or tax-deferred vehicles, collect Social Security, and have low fixed expenses. Yet those people often still have some IRA monies. People under the age of 70 not required to take their RMDs are allowed to leave money in IRAs and simply enjoy being at the zero bracket. Those people, however, often could have taken hundreds, even thousands of dollars out of their IRAs or deferred accounts and continued to pay zero tax. If you’re working with a proactive financial advisor, they may suggest a “what if” tax return in the month of December to determine how much actual income you are going to be reporting. If there are a few hundred dollars or more left that you could earn and still pay zero tax, it makes sense to take those dollars from IRA and either rolls them into a Roth IRA, or simply re-categorize those assets, expose them to the possibility of taxation, avoid paying the tax, and restore them in any non-IRA.

Tax Tip 6

For those people with capital gains from sales of stock or from mutual fund distributions, many know that they can offset those gains with a loss, but few actually sit down and do the annual exercise. It is a good idea to meet with a financial advisor or broker to look at your losses. By selling those losing assets, you can offset your other investment gains and end up with an equivalent of no capital gains. Many people would rather not sell their underperforming assets, because they believe they’re about to “come back” and wouldn’t dare wait the 31-day waiting period to repurchase the same asset as an allowable purchase. However, many people don’t realize that an ETF (Exchanged Traded Fund) is in a different asset class than a mutual fund, and many ETFs are comprised of many of the same assets as their mutual fund counterparts. For instance, someone invested in the Vanguard S&P 500 mutual fund could sell that fund at a loss and buy the Vanguard S&P 500 ETF the next day without violating the 31-day rule. There are other nuances to changing asset classes that must be considered, but the point is clear: in December, compare your investment winners and losers and plan accordingly.

Tax Tip 7

De-characterization of Roth rollovers. Many people have converted monies from an IRA to a Roth IRA, and have also inherited taxable IRAs from a relative who has passed away. This leaves them exposed to an unintentional tax bill. If you rolled money to a Roth during the year, the IRS will allow you to “unroll” that Roth back to regular IRA under certain circumstances. So, don’t feel that because you’ve converted money to a Roth IRA, and then had another tax anomaly take place, that you’re stuck with that conversion. Once a year, you can “un-Roth” money back to an IRA to undo a taxable event.

Tax Tip 8

Another special tax deduction that has been extended to 2012 is the Capital Gains Tax Rate. Many people believe that the Capital Gains Tax Rate is 15%, because that’s what they paid the last time they sold an investment at a gain. For instance, if Mary sold stock in 1998, she may have paid 15% capital gains on the federal level, and then an additional tax on the state level, making it unattractive to sell other stocks with large gains. However, the Capital Gains Tax Rate is not 15%; it is on a sliding scale based upon what your actual personal tax rate is. In 2012, if you are in the 10% tax bracket, then you might be able to sell a stock or other appreciated asset and pay 0% capital gain. That’s right; the minimum Capital Gains Tax Rate for 2012 is zero. For many people who primarily have Social Security income, which is not taxable up to a certain income limit, and perhaps a small pension or IRA income stream, it is not uncommon for them to be in the 10% or 15% tax bracket. Those people could sell highly appreciated assets this year, and pay no capital gains tax whatsoever. Single taxpayers with no more than 34,500.00 and joint filers with up to 69,000.00 are getting a last chance to take some non taxable profits in 2012. ALSO don’t forget if you sell a stock at a gain there is NO 30 DAY RULE! You could repurchase the same stock the next day; the 30 day rule is if you take tax losses…NOT profits! Selling a profit but still paying no tax means a free step up in cost basis after 2012 it’s not likely there will be a zero capital gains rate again. Carpe Diem!!

Tax Tip 9

When you find an error in your tax work for a particular tax year, you may have more than just that year to worry about. If an error was made, it is often carried forward from previous years, so look at the previous year’s return as well. Even if there’s an error in your favor, amend those returns. Form 1040X can be used to go back up to three years. Many people are afraid to ask for errors to be corrected. Many taxpayers believe, irrationally, that the IRS will look for other things “to get even” for filing for an additional refund. This is simply not the case. If you underreported deductions, or over reported income and subsequently paid too much tax, the IRS is happy to refund from prior years.

Tax Tip 10

One thing that almost everyone you speak to agrees on is the fact that in the future, 2012 and beyond, Tax Brackets and Tax Rules and Laws are going to be changing and becoming more and more of an issue. If your financial planner, insurance planner or other trusted advice giver is not giving you advise from a Tax Perspective than you may want to reconsider your choices. The IRS placed in force new rules in 2009 that mandates tax prepares to take Continuing Education Courses and Pass Exams which before 2009 was not required. Also IRS “letter audits” are on the rise and the US is still in financial trouble. If your current advisor says, “Don’t let the tax Tail wag the dog “as a response to tax planning questions ….Fire Them ! They are side stepping a major factor on your future financial security!

The Big Question – When to Claim Social Security

When faced with the decision of when to claim social security, it is important to consider all factors carefully as choosing the right Social Security election may be the most important decision of your retirement.

How much you receive in Social Security benefits depends on three main factors:

1. Your earnings record

2. When you elect

3. How long you expect to live

Since you can’t go back and change your earnings record, and you have minimal control over how long you live, calculating an expected lifetime benefit largely hinges on when and how you elect benefits.

In theory, if you elect early, you will get a smaller benefit for a longer period of time. If you elect later, you will get a larger benefit for a shorter period of time. Single people can do a simple “break-even” analysis to determine whether to take early or wait. But for married couples, the decision is much more complex.

One decision can impact your retirement by tens of thousands of dollars.

For married couples, a simple breakeven analysis will usually give the wrong answer, costing you benefit dollars.

Why? Because Social Security offers three distinct benefits for married people:

1. Retired Worker Benefit – Based on you own earnings record

2. Spousal Benefit – Provides your spouse with a benefit once you claim your own benefit

3. Survivor Benefit – Provides your spouse with a benefit after your death

Virtually all of the simple break-even calculators in use today ignore the Spousal and Survivor benefits. Complex planning software includes spousal and survivor benefits but only for one combination of election ages. In short, neither tool offers a thorough analysis.

A study from the Boston University determined that 73.7% of seniors make mistakes when claiming Social Security.

You may be asking yourself what is at stake.  The answer is that the difference between the worst and possibly best time to claim Social Security benefits may be well over $100,000! Since at the Baron Group, I help many senior citizens decide when the best time to claim Social Security is, I had to find a robust solution. By using comprehensive and individual analysis provided by the Social Security Timing* software, we are able to examine hundreds of possible combinations, including 81 possible age combinations across nine possible election strategies, and find the one option that offers the highest expected lifetime benefit.

Case Study: A 62-year-old couple with one above average earner (PIA $1,800) and a lesser earning spouse (PIA $1,000), who both live to average life expectancy could lose over $60,000 in family benefits by making the worst possible decision for when to take Social Security.

 If they both elect at age 62, they could be losing over $50,000

 If they both elect at age 66, this couple could still be leaving $30,000 on the table

 Simply delaying benefits isn’t the answer either. If they both delay to 70, they could be losing over $40,000

The Switch Strategies™ Approach

Social Security offers three distinct types of benefits for retired workers and/or their spouses:

If you file prior to full retirement age, you are deemed to have filed for all benefits for which you are eligible. At full retirement age and beyond, you have several options to elect a limited benefit for a period of time, then convert to a larger benefit at some point in the future.

A recent study suggested that these options represent over $10 Billion in unclaimed Social Security benefits. For an individual family, it is not uncommon to receive an additional $20,000 to $40,000 or more in benefits.

The Switch Strategies™ approach takes advantage of two basic techniques: the “restricted application,” and the “file and suspend.” When you go to the Social Security office, the individual you meet with has been trained to help you identify the highest benefit you can get today, not necessarily over your lifetime, and definitely not over the joint lives of you and your spouse. As a result, you are unlikely to hear about these techniques during a typical visit.

Restricted Applications

Once you reach Normal Retirement Age, you have the option to restrict your application to exclude certain benefits. If a benefit is excluded, it will continue to build delayed retirement credits. As an example, a higher-earning spouse, who may want to wait until age 70 to collect his own benefit may be able to file at 66 for only the benefit available under his spouse’s work record, while still allowing his own benefit to build delayed retirement credits. At age 70, he would switch to his own benefit. Alternatively, a lower earning spouse could restrict his or her application to only spousal benefits while continuing to claim delayed credits on his or her own earnings record.

File and Suspend

The second technique is the ability to file and suspend. Spousal benefits are not available until the primary earner has filed for his or her own benefits. The Senior Citizens’ Freedom to Work Act of 2000 allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. As a result, a higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits. In the process, he will have made his spouse eligible for spousal benefits under his earnings record.

There are many possible combinations

It is important to note that Social Security benefits are completely gender-neutral. In other words, any technique that is available to the “primary earner” is also available to the “secondary earner.”

Certain combinations of the two techniques are also allowed. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for only spousal benefits. This would allow both earners to earn delayed retirement credits on their own earnings records while one spouse still collects benefits now.

The Solution

Family Benefits Analysis

Using software analysis, we examine hundreds of possible combinations, including 81 possible age combinations across nine possible election strategies and find the one option that offers the highest expected lifetime benefit.

We provide a summary of the best, worst and two common election strategies.

With your Family Benefit Analysis, you’ll receive a customized report including:

 Projected Outcomes for Best/Worst/Common Election Choices

 “Map” of expected outcomes for each election age combination

 The Switch Strategies™ solution that could further optimize your Social Security income

 

Why Maximize Social Security?

 

For most people, Social Security is the only income stream that:

 Is adjusted annually to keep up with inflation

 Is tax-advantaged—at worst, it’s only 85% taxable as ordinary income

 Will continue to pay you for as long as you live

 Is backed by a government promise

If you need more information, please contact us and we will be happy to help you answer the important question when to claim Social Security.

*Social Security Timing™ is not connected with, affiliated with or endorsed by United States government or the Social Security Administration. The local advisor offering Social Security Timing™ may be an insurance agent, financial advisor, accountant or attorney. Advisors may offer other products or services and are compensated by commissions and/or fees for any other services they may provide.

 

How To Deal With The New Payroll Tax Hike

So by now, most of you have probably already opened your first paycheck for the year and were unpleasantly surprised by the decreased amount of your take-home pay. In case you were living under a rock for the past few months, here is what caused the tax increase. Well, it is not really an increase. There was a temporary tax break (reducing the Social Security Tax rate from 6.2% to 4.2%) that all American workers got for the last couple of years. This temporary tax break was given to us in an effort to stimulate the economy by letting us have more disposable income and was set to expire at the end of 2012.  Congress decided to let the tax break expire and therefore allowing all Americans to effectively lose 2% of their income starting January 2013.  There is a lot of speculation on how this tax hike will affect the economy. Many economists predict that the decrease in money Americans have access to on a monthly basis will lead to economic stagnation; some even go as far as predicting another recession. However, regardless of the impact the tax increase will have on the economy, most of us are now mostly concerned with how to immediately deal with the decrease in income and how it will affect our own budget.

The reality is simple – 2% less income is a lot for most of us. If your annual salary is $50,000, then you are looking at bringing home $1,000 less this year. Here are some of my thoughts I would like to share with my blog readers and my past, current and prospective clients at The Baron Group:

1. Reduce expenses. Of course the most obvious response to a reduction in income would be a reduction in expenses. Think carefully about your spending patterns and see if there is any discretionary spending you can easily reduce. Going out to eat, dry cleaning, daily lattes and buying lunch at work are some of the most obvious ones you can cut or reduce.
2. Go generic. If your budget is already reduced to bare necessities, think if you can save money by buying generic brands as opposed to brand names. You don’t have to immediately look at your groceries list. Realistically, most of us prefer a certain brand of food/drink and even if we can easily see that the ingredients are exactly the same, switching to a generic brand doesn’t happen easily. Instead, consider other household items such as paper towels, cleaning supplies, diapers etc.
3. Don’t reduce retirement savings. Reducing how much you contribute towards your retirement goals may seem like a good way to respond to the tax hike. This couldn’t be further from the truth. Remember with savings you have to always consider the effect of compound interest. Specifically, the amount you chose to not save today will be magnified because you will forgo the benefits of continuously accumulating interest on interest. So, before you decide to reduce your retirement savings contributions, explore every other strategy for cutting expenses. Ideally, you will avoid reducing your retirement savings altogether.
4. Increase debt payments. You may think it is counterintuitive to increase payments when your income is reduced. Not when it comes to debt payments. As you are scrubbing your budget to see where you can find a few extra dollars to respond to the payroll tax hike, you may surprise yourself with reductions increasing 2%. If that is the case, and in an event of any room in the budget, I always recommend increasing debt payments. The sooner you are completely debt free, the closer you get to financial freedom and the realization of your financial goals. (Learn how to Eliminate Debt, including your mortgage in a fraction of the regular time)
5. Deserve a higher raise. Usually 2% of annual income is what the average American receives as an annual raise.  However, since in 2013 this raise will be eaten by the payroll tax hike, maybe now is the best time to really excel and impress at work so you can make a case for an above average increase this year.

How about you? What will you do (have already done) to respond to the payroll tax hike? Please share in the comments section below.

 

How to Keep Your Financial New Years Resolutions

The new year is here! Usually that means being excited about the new beginning and setting goals to improve our lives. Very often New Year’s resolutions revolve around physical health but a large percentage of resolutions relate to personal finance. Getting out of debt, reducing expenses or increasing savings are some of the most common goals. And while setting goals is easy, most people find it difficult to stick to their resolutions and end up abandoning their goals within the first couple of months of the year.

So what can you do to stick to your resolutions?

First, give yourself credit. Before you start thinking about what your financial goals for 2013 are, take the time to acknowledge what you accomplished in 2012. Evaluating your financial accomplishments from the past year will help motivate you and make it easier for you to move forward towards your new goals.

Be realistic. Just like with any goal, you need a certain dose of realism to succeed. You can always make a resolution to save $1,000 a month but if all you can manage to save, even after cutting expenses to bare minimum is $700, you are better off aiming at a realistic target. Otherwise you are setting yourself up for failure.

Be accountable. Whether it is to your spouse, significant other, or just a friend, you will find yourself feeling more motivated to stick to your goals if you have shared them and if you communicate how you are doing.  

Start small. If your goal is to reduce discretionary expenses, do not try to stop eating out altogether. Instead start by eating out only once a week and progressively reduce the number of times you eat out even further.

Beware of budgets. Yes you read this right. Whether your goal is to save more, pay off debt or increase your retirement contributions, chances are you will have to take a hard look at your income and expenses equation. Very often you will reach the conclusion that you can succeed by setting a budget. But budgets are too restrictive and very often do more harm than good.  (See What do diets and budgets have in common?). Instead, create a spending plan, focus on tracking expenses and use your past spending habits to understand your financial behaviors. Then determine what aspects you can improve and how.

And finally, the best tools are within you. With the right mix of determination, patience, resilience, and adaptability you will stick to your financial new year’s resolutions and may even surprise yourself with what you can achieve.

 

 

Great Reading on Frugal and Real Christmas

In line with my article from last week on How to Not Overspend This Christmas season, I would like to share with you some really interesting and useful articles I stumbled upon in the last few days. They all relate to the idea of focusing on Christmas for what it is and giving frugal yet thoughtful gifts. It is great reading on frugal and real Christmas.

15 Fantastic Financial Christmas Gift Ideas for Children –  never miss an opportunity to strengthen your kids’ financial education. Instead of indulging in yet another toy, consider giving them useful financial gifts that can keep on giving. Piggy bank, Monopoly, abacus, stock and even Roth IRA are some of the ideas the author suggest that will provide children with a solid financial foundation for the future.

50 Frugal Gifts You Can Give This Christmas is an awesome list of frugal and creative gift ideas.

And my personal favorite post on How Your Family Can Take Back Christmas. It offers creative ideas on how to incorporate unusual gift ideas or even start a new family tradition this Christmas.

What are some great ways your family has found to take back Christmas?

What You Need To Know About Identity Theft

With our increasing dependence on the World Wide Web, identity theft is now more than ever a threat to all of us. There are no guarantees that we will not become the next victim of this crime. This is why the more we know about identity theft, the more equipped we will be to protect ourselves against in.

The History of Identity Theft

While identity theft is not a new crime, it has mutated over time to respond to the ever evolving technology and most importantly the World Wide Web, credit cards and ATMs.

Before the popularization of credit cards in the 1950s, stealing someone’s identity meant getting their passport, driver’s license or Social Security number. However, what made identity theft far less common in those days was the fact that a person had to be physically present at a bank branch in order to open a credit card.

Everything changed in the 1980s when the Fair Isaac Corporation invented the FICO system of credit scoring. This system rates a person’s credibility in a report which also contains other personal and financial information. When an identity thief gets a hold of that information, they are likely going to be able to access other banking and financial information. Unfortunately, with the automation of transactions and the ever more common online banking, stealing one’s identity has become easier than ever. Fortunately though, this ever increasing threat is recognized and today your maximum liability under federal law for unauthorized use of your credit card is $50.

Identity Theft Scams

The criminals specializing in identity theft are very skilled in the “craft” and constantly come up with new and improved ways to scam people just like you and I. No one is really protected because the schemes are getting more and more believable and sophisticated. The best way to find out about identity theft scams is to check out the resources on the website of the Federal Trade Commissions, the FBI, and the websites of your local Better Business Bureau or Chamber of Commerce.

Types of Identity Theft

Although there are many ways to steal an identity, below are the three more common types that everyone concerned about identity theft should know about.

Application Fraud (or True Name Identity Theft) – In this case the thief will use your personal information to open new accounts or purchase large items on credit. Most common forms of application fraud are a thief opening a credit card in your name or cell phone service. The biggest issue with this type of fraud is that it may take a while for it to be noticed. Very often people do not even realize that they have become victims of identity theft until they order a credit report and see consumer credit account that they do not recognize.

Account Takeover – in this case the thief uses your existing accounts to make purchases or withdrawals. This type of fraud is easier to notice and with the protection mechanisms many financial institutions currently have about identity theft, it is usually caught relatively efficiently. Many credit card issuers, for example, have protection mechanisms in place, such that in an event that a transaction meets their suspicion criteria, a call is generated to the credit card holder to verify the transaction was legitimate.

Criminal Identity Theft – possibly the most devastating type of identity theft, this is where the thief uses your identity and presents a counterfeit ID assuming your identity to law enforcement when questioned concerning a crime. This may seem an unlikely scenario to you but it is a form of identity theft that you should guard against.

What Identity Thieves are After

Social Security – a gateway to all your personal information

Date of Birth – to verify identity and confirm most transactions

Account Numbers – to with draw money or make purchases online

Mother’s Maiden Name – the ultimate identity verifier

Pins and passwords – to access various accounts

Driver’s license – to obtain fraudulent identification

How Is Your Identity Stolen

• Identity Theft Online
  • Spyware – is type malicious software that collects information about your online activity. Spyware can come in the form of backdoor entry – which gives thieves access to your computer or keystroke logging when thieves get a log of everything you type online including passwords and account numbers. The presence of spyware is typically difficult to detect.
  • Phishing – is when you receive emails which seem to be coming from a reputable institution, your bank from example, asking you to update personal information. This way thieves can obtain your account numbers and other personal information
  • Fraudulent Sites Online – are fraudulent e-commerce sites offering various goods and services thru spam or online price comparison sites. Therefore, when your purchase something online, the thieves gain access to your personal information.
  • Wireless Snooping – occurs when the thieves access directly your unsecured wireless network and steal your private financial information directly from your computer.
  • Identity Theft At Home
    • Mail – stealing your mail can give thieves access to bank statements, credit carsd information, auto loans etc. Make sure your mailbox is locked or opt for paperless statements from your financial institution.
    • Trash – all personal information from above can be found in your trash. The solution is simple – get a shredder.
    • Phone Fraud – if you receive a call from your “financial institution” notifying you that there has been fraud suspected on your account and need you to verify your personal information, suspect that it may be a fraudulent call.
    • Identity Theft From Third parties – Sometimes thieves can access your information from a third party such as accessing your credit report illegally or hacking in  the records of a business that has your information (stores, restaurants etc.)

How Identity Thieves Can Use Your Information

• Make purchases – usually large ticket items that can later be resold for cash
• Make withdrawals – can be done from both credit and debit cards
• Change your address – so it delays you discovering the fraudulent activity on your accounts
• Open new accounts – using your Social security, a thief can open new credit cards and/or new auto loan or other loan accounts.
• Get employment – it may sound strange but it happens often than you may think. Your identity may be used to secure employment.
• Receive Social Security payments.

To prevent identity theft online you could take these measures:

• Ensure your Operating System is up to date
• Make sure your Browser is up to date
• Get good antivirus software
• Get anti spyware software
• Do not click on pop ups
• Be careful what you download

When using email you could take the following measures:

• To protect yourself from phishing scams, do not respond to emails asking you to verity your personal information. Beware that thieves are very skilled and unfortunately they have succeeded at making those emails appear legitimate. Always use caution and suspect fraud. Keep in mind that it is highly unlikely that your financial institution will ask you for such verification via email
• Make sure your antivirus software scans incoming emails.
• Do not open attachments from people your do not know.
• To open links that friends have sent always copy and paste the URL directly into your browser. Remember that sometimes fraudulent emails appear to come from people you know. This happens when their email accounts have been hacked.
• Consider investing in encryption software to use each time you need to send personal information via email.

Follow these suggestions to protect your wireless network:

• Enable 128-bit encryption
• Change the routers default user ID and password
• Change the default Service Set Identifier (SSID)
• Disable SSID broadcasting

What Do Diets and Budgets Have In Common

Did you know the US government has a list of the most popular New Year’s resolutions? No, this is not some form of “Big Brother watching” way of keeping track of the goals we set for ourselves but a list of most popular resolutions with links to useful web resources to help achieve them.

To no one’s surprise, a big percentage of the resolutions on the list are related to two coveted outcomes: to be physically and financially healthy.

Most everyone has been taught that one of the main methods to achieve financial health is to create a budget and stick to it. Same goes for physical health – get on a diet and stick to it.

So what do diets and budgets have in common? They don’t work! And let’s face it; they are not any fun either.

They both focus on what you cannot do and cannot have and do not account for surprises. Psychologically, both diets and budgets are ineffective and even potentially damaging to our wellbeing because the sense of restriction and deprivation create feelings of resentment which only destine the plan for failure. I think most of us know all too well the feeling of being motivated to start a diet just to fail a few days or weeks later.

So my suggestion, although it may seem counterintuitive, is to abandon the budget and the diet altogether. By focusing on the big picture and what you can have you will be more likely to be successful in changing your mentality and be better positioned for success.

It is really quite simple:  in case of financial health – spend less than you bring in; and in the case of physical health – the other way around – expand more than you take in. We all fully understand the theory but once when we try to live by those principles we realize that it may be much easier said than done.

Change the way you see saving and spending. Similar to healthy eating, you would be much more successful if you focus on the nutrition you get from your food rather than obsess with counting calories. The recipe is quite simple – eat whole, “clean” foods, cook more at home, eat less “empty” calories and move more. When it comes to your financial health, the principles are similar. Instead of feeling restricted with an unrealistic budget, develop a spending plan based on trends and be prepared and aware of “surprises” that will come along the way. Think about the purchases you make, the state of mind you are in when you make them. Are you an impulsive buyer? Do you have to have all the latest gadgets? A spending plan and a careful analysis of your historical spending will help you answer all those questions truthfully to yourself.

Budgeting and dieting share another similarity. Regardless of how devoted you are to your budget or your diet, life just happens. You will have that piece of scrumptious chocolate cake at the office birthday celebration party just when you have started your “No Sugar” diet. Or you will have to spend hundreds or even thousands on inevitable car repairs. This often creates the feeling of failure and makes us feel like we are not staying on target and not meeting our goals. That’s why an overly detailed budget will set you up for failure when a spending plan will outline the major categories in your spending: monthly bills, living expenses, saving for retirement, vacation, emergency fund etc.

Reexamine your priorities and consider why are you following the diet or budget anyways. Instead of being forced to focus on the restrictions that come with dieting and budgeting, focus on the long term goals and acknowledge progress along the way.

And last but not least, take advantage of all the tools available. There are so many options, from do-it-yourself programs like Mint.com , thru complementary advice from Mymoneyplan.net to customized, comprehensive spending plan you can work on with your advisor, like the ones from Your Family Bank. Whichever one you choose, focus on your goal of financial freedom. The budget is just an imperfect tool to get there and not the goal itself.