So you’ve started tracking your budget, congratulations!  But now, you may be second-guessing a few of your category choices, or find yourself going over-budget each month. We’ve complied a few tips to help you get back on track.

Here are a few of our favorite “I’ve started budgeting, but now what?” budgeting tips:

• Budgeting software often has trouble correctly categorizing a few expenses, specifically towards the beginning of use.  Take a quick look at your transactions and identify and correct those that are mislabeled. If you are using Mint.com or an online version of Quicken, be sure to take advantage of their easy to read ‘trend’ or reporting sections.  You can see where you’ve spent money over specific categories in charts that allow you to drill down to the transaction level, helping to spot inaccuracies. If you are not using budgeting software, compiling data from your receipts and statements will be a good way to get started.  Remember, you are trying to identify where your spending money and look for ways to reduce spending, if necessary.
• Revisit the items you have budgeted.  Now that you have been tracking for a few months or longer, are your budgeted items realistic? Maybe some adjustments need to be made to common expenses like household utilities, food and dining, transportation costs (including gas and regular maintenance), and discretionary (misc. spending).
• It is common for your expenses to fluctuate over time and for some expenses to occur only during parts of the year.  Some items, like car insurance, homeowner association dues, and professional fees may be paid quarterly or semi-annually, so be sure to include those expenses in your budget now.
• If you are spending more than your budgeted amount on a regular basis, take some time to plan out ways to reduce your spending.  Little things like taking your lunch to work once or twice a week, making coffee at home, or planning errands around one trip can all add up over time.
• Have you had any lifestyle changes that should be reflected in your budget?  A home purchase, renovation or new child can increase (or decrease) spending and should be accounted for.  Adding new expenses to your budget while taking time to review your overall spending picture can help set you back on track.

For our current clients, we are available to help answer questions that you may have about Mint and Quicken.  We may also be able to assist you in starting the expense tracking process from the very start.  Please contact Heather Gudac at hgudac@financialsymmetry.com if you are interested.

Does the value equal the cost?

As a new mom I am always trying to do what is best for my child.  Whatever the decision-whether to swaddle, use a pacifier, or let him cry-I frequently second-guess myself and wonder if I should be doing things differently.  At the end of the day I know that we have to do what works best for our family.  One decision that I thought I was sure of was funding a college education.  My husband and I are both college graduates and value not only the opportunities that a degree provides, but also the experiences and maturity gained in those college years.

However, I have been reading a lot about the “Return on Investment” of a college education and that self-doubt is starting to creep up again.  In Bill Gross’ recent Investment Outlook , he questions, “A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?”  He is not the only well respected name questioning the value of a college education.  You may have also seen Peter Thiel on the news.  Theiel, head of Clarium Capital, established a foundation to give $100k grants to students to drop out of school and pursue entrepreneurial ventures.  What are well-meaning parents to do?

Luckily the latest Journal of Financial Planning has some food for thought:

• “Three-quarters of Americans believe college is too expensive and more than half (57%) say there is not an adequate value return for what students and families pay.”
• The U.S. Census Bureau reports that the median annual income gap between a college graduate and a non-graduate is $19,550
• “The strong majority of college graduates (86%), feel their higher-education experience was worth the investment.  Three-quarters believe that experience was very useful in helping them grow intellectually.  About 70% believe it helped them grow and mature as a person and 55% mention its use in preparing them for a job or career.”
• “Many Americans say a young person’s success depends largely on a good work ethic (61%) and knowing how to get along with people (57%).  Fewer than half (42%) point to a college education.”

This is all a lot to digest, but just another instance where I know I need to follow my instincts.  The financial planner in me is also telling me to practice what I preach-contribute to a 529 plan after fully funding retirement accounts and Roth IRAs and avoid over-funding those plans.   For more about this strategy read “Thinking Outside the 529 Box.”

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Money Savvy Pig

If you think back to your childhood, what were the biggest influences on how your view of money developed?  If you’re anything like me, this question triggers memories of the struggle between saving my hard-earned allowance and spending it on the newest pack of baseball cards in hopes of obtaining the rare 1989 Ken Griffey Jr. Upper Deck rookie card.

Since my wife and I just welcomed our first child into the world, I thought I would share some of the conversations that have been taking place at our house regarding how we plan to teach our daughter about money.  We’ve both heard and read over the years that teaching kids about how to handle money is one of the bigger challenges parents face.  Whether it is rewards for good grades or allowances for mowing the grass, the ability to spend that income develops quite naturally with young children.  So what are the key points to teach our children about the importance of saving vs. spending more than they earn?  Here’s a few we plan to employ…

Somebody’s Watching Me

This was not just a creepy 1980’s song by Rockwell, it’s really a phrase that describes how your kids are likely that somebody.  They are learning from our actions whether we like it or not. One of the best ways to teach sound money management is by actually using a budget to manage the family finances.  In addition to keeping the numbers updated, making a point to openly discuss where we are spending our money demonstrates how to be accountable for our decisions.  Using a budget also teaches how to delay gratification if money is not yet earned.   By communicating openly and explaining the why behind our money decisions, children can pick up lessons along the way.  Several examples include pointing out the unit cost of items in the grocery store, explaining your net pay vs. your gross pay and discussing the percentages you are giving and saving. Volunteer work can be a great way to demonstrate the benefits of giving your time while also validating that rewards that aren’t monetary can be just as fulfilling.

Value vs. Quantity

Other lessons that get lost in the money conversations is teaching our children the true value of an item.  By taking care of the things they already have, children can prolong the life of a toy decreasing the extra purchase to replace due to wear and tear.  Kids also can learn by making things instead of purchasing them.  Going through this exercise teaches young children how to use their imaginations and also how to be resourceful with the things they already have.

Experiences = Life Lessons

One of the best ways for anyone to learn a truth is by making a mistake.  Kids need to have the freedom to make mistakes because of their own decisions so that it creates teachable moments for parents.  One tool, that does a nice job of creating these situations is the Money Savvy Pig.  By putting this tool to use, kids learn about the opportunity cost of a dollar.  They can place money in the save, spend, donate or invest section of the bank.  Therefore, if they choose to save a dollar, that dollar can no longer be spent, given or invested.

We’d love to hear your input.  What are some of the successful methods you’ve used to teach your children about how to handle money?

Ready, Set, Go!

Many of our clients ask us, “is there a better way to track our budget?” Our answer is “Yes!”

We often suggest  Mint.com for it’s ease of use.  The online tool is free, very secure and relatively easy to learn. We find that it is helpful for those that have tracked a budget for years as well as those that are just getting started with budgeting.

Here are a few points to help you get started.

Why should I use Mint.com?

Mint.com is a free, online account aggregation tool that can help you plan, manage and stick to your budget. Setup is quick and easy—you can expect to have your accounts linked to Mint within a couple of minutes! Security is good, being at or above most institutional banking websites.

Mint never asks for your account numbers, name or other personal identification information. Money cannot be accessed, moved or transferred within Mint, and all data stored at Mint is backed by bank-level data security protections.

How many categories should I use and what are they?

Some common problems we see are trying to over-categorize and coding a large amount of regular expenses as one time occurrences.  Simplification should be emphasized when creating your budget and categorizing each transaction.  We recommend using the following categories in a combination that fits your household:

• Auto & Transport
• Bills & Utilities
• Food & Dining (Groceries, Restaurants, Coffee Shops)
• Gifts & Donations
• Travel (Vacations, large trips)
• Everything Else (Cash, Fun, Church/Charity Contributions)
• Food (Dining Out, Alcohol, Groceries)
• Debts (Mortgage, Equity Line, Car Payments, Credit Card or Student Loan Payments)
• Education (Books, Private School, College Tuition)
• Health & Fitness (Gym Membership, Doctor Visits, Prescriptions, Insurance)
• Home (Maintenance, Home Improvements, Furnishings)

From these basic categories, you can create future sub-categories, but it is important to keep the bigger picture in mind when monitoring your expenses. Keeping broad categories may also help speed up maintaining the data that Mint is able to aggregate between your accounts.

Should I be trying to hit the same number every month?

Comparing expenses on a monthly basis can be another source of frustration as there are many fluctuations that occur throughout the year (Holidays, Summer Vacation, etc.).  Therefore, it is important to measure your progress against a rolling year period.

For example:  If the month of May has just ended, you will want to measure June 1^st of last year to May 31^st of this year against the calendar year amount of your budget.  If the amount is more, then you know you are a little ahead of pace and you should scale back.  Performing this exercise monthly or quarterly can greatly improve your overall financial picture as it allows you to have greater control over your regular expenditures.

If you are interested in learning more about starting a Mint.com account, or have questions about your current Mint.com account (transaction coding, setting the right categories for your household, etc) feel free to contact Heather Gudac at hgudac@financialsymmetry.com or by phone, (919) 851-8200 ext. 205.

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Saving too Much?

Eligible to Contribute?

Roth IRA’s have been around since they were established by the Taxpayer Relief Act of 1997 and are named for the late Senator William Roth of Delaware who introduced the legislation.  They have grown in popularity because of the special tax treatment they receive as long as certain requirements are met.  Although you don’t receive a tax deduction for contributions to a Roth, the earnings grow tax free.  There are certain rules that you have to meet in order to contribute to a Roth; you have to have earned income and your adjusted growth income cannot be above certain limits – for 2011 those limits are $179,000 for married filing jointly and $122,000 for single filers.

I Contributed Too Much!

If you have made a contribution to a Roth IRA and find out later that you either don’t meet the requirements or that you’ve contributed too much you’ll need to take corrective action.  IRS publication 590 explains that an excess Roth contribution “withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed.  This treatment only applies if any earnings on the contribution are also withdrawn.”  The earnings will be subject to a 10% early withdrawal penalty if you are under the age of 59 ½. If you have losses in the Roth account since the excess contribution was made then you’ll need to take out the excess contribution less the losses associated with the contribution. Note that the gain or loss is calculated across the account and not the individual holding that was purchased with the excess contribution.

Making the Correction

In the IRS instructions for form 8606 you can find an explanation that a corrective distribution includes the excess Roth contribution plus earnings and must be reported on form 1040, lines 15a and 15b for the year that the excess contribution was made and you should attach a statement explaining the distribution.  You cannot deduct a loss that occurred.  If you were under the age of 59 ½ the earnings generally will be subject to a 10% penalty which is calculated on form 5329.  The following year you will receive a 1099R from the custodian of the Roth account with a distribution code P in box 7 which indicates return of contribution taxable in a prior year.  If you have already filed your return you still can withdraw the contributed amount plus earnings as long as you do it within six months of the due date of the return.  You’ll need to file an amended return in this case.
The other option for correcting the excess contribution is to apply them to the following year.  Be sure, however, that you expect to qualify based on the earned income and AGI limitations for the year you want to apply the excess contribution as there is a 6% excise tax for each year that it is considered an excess contribution.  If you have chosen to apply the excess contribution to the next year the tax reporting is treated differently.   You will report the excess contribution on form 5329 where the excise tax of 6% of the smaller of the excess contribution or the value of your Roth IRAs as of the end of the tax year is calculated.

Take Advantage

Roth IRA’s are a great vehicle for retirement funding.  There are some rather complex rules associated with Roth’s, however, that can trip you up so you should seek out some professional advice if you are uncertain what applies to you.

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Add to your nest egg!

Have you made your 2010 Roth IRA contribution?

If you have not yet made the maximum contribution, and are eligible to make contributions, you still have time!

Tax payers have until April 18^th of 2011 to make their Roth contributions for the 2010 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.

For 2010, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2011 contributions, contribution limits for this year have stayed the same as 2010.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Photo credit: Scott Willis.

Many of our newer clients have come to us with old 401(k), 403(b), 457 and Simple IRA accounts from previous employers.  Some even have multiple IRA accounts, often from past rollover situations.  It’s important to have qualified professionals to help you decide on what to do with your inactive qualified plan and multiple IRA accounts.  Whether you are changing jobs, entering retirement or simply wanting to consolidate your accounts, we can help you with each step of the rollover process.

Should you always Rollover a 401k?

There are a few options for dealing with an inactive qualified plan including:

• Rollover the account into a self-directed IRA account, such as a traditional IRA.
• Rollover the account into a new employer-sponsored plan, if allowed under your current plan’s rules.
• Rollover the account into a self-directed IRA account, then convert all or a portion of the funds to a Roth IRA account (after careful tax analysis).
• Leave the account at the current custodian and bring your investment options in line with a comprehensive portfolio strategy.

Despite popular belief, it is not always best to rollover an old employer plan.  Certain custodians offer favorable investment options or have special tax provisions (the North Carolina employees’ Bailey provision, for example), meaning  it could benefit you to leave your account at the current institution rather than combining the funds into another account.

We have experience in dealing with many different custodians when it comes to the rollover process.  For our investment management clients, part of our service is to request and complete paperwork while monitoring the rollover process.  If you are interested in combining inactive qualified accounts, please feel free to contact us.  Your advisor will research the best approach for your individual situation and determine if a rollover is the best choice for you.  If it is, we’ll get the process started as soon as possible.

Not yet a client and unsure if a rollover is right for you? Contact us to schedule an appointment to review your financial picture and develop a plan that will help provide the answer.

Taking Advantage of your Roth 401k?

It’s very possible that you could be saving more money tax-free.  If your company offers a Roth 401k option, then this could be your ticket.  In recent weeks, the question we’ve heard most from clients is “should I be taking advantage of a Roth 401k?”  To help you make a decision we’ve answered the most common questions that people consider when weighing the benefits of using a Roth 401k.

1.       What will my tax picture look like in retirement? If you think your tax rate will be higher than it is now when you retire, then it might make sense to be making contributions to your Roth 401k option.  As you grow older, you will likely pay down your mortgage and have children move out, leaving you with lower itemized deductions, thus increasing your taxable income.  Similarly, if you plan to have an increased spending pattern in your golden years, then higher taxes will most likely be a reality you will be facing.  Some would argue that given our current state in the tax history of this country, we’re very likely to see taxes increase at some point down the line as well.

2.       Will my paycheck be lower? If you choose the Roth 401k, your paycheck will be lower than when you were making traditional 401k contributions.  This is because your deposits are being taxed before they go into the account.  This is in direct contrast to the 401k you may have already been contributing to.  Those contributions were deposited before they were taxed.  Therefore, less comes out of your paycheck with traditional 401k contributions.

3.       I’m not sure I have enough time before retirement? The time before retirement could make or break your decision.  If you have a 30 year time span in which to invest, the tax-free growth during that time would be hard to beat.  On the other hand, if you are in your late 50’s with retirement no more than 5 years away, the tax-free growth may not be enough to make the switch.

4.       What if I make too much money? There are no income restraints to participate in the Roth 401k.  In order to contribute to Roth IRA’s your income needs to be south of $167k to make the full $5000 ($6,000 if you’re 50 or over in 2010) per year contribution.  By using the Roth 401k, you will be able to deposit $16,500 ($22,000 if you’re over 50) into a tax-free account.

5.       Does my match grow tax-free as well? Even if you decide to fund the Roth 401k, your employer’s match (assuming you receive one) will be funneled to the traditional 401k in pre-tax deposits like it normally would.

Also, as of this year, you are now able to convert a portion of your current 401k to a Roth 401k.  Keep in mind, that each situation is different and you can only truly know if a Roth 401k is right for you by evaluating your own personal situation.

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Deal Nearly Completed

You’ve no doubt heard stories this week that the Obama Administration and Republican leaders have negotiated an end-of-year tax deal which will, among other things, extend the current income tax rates for the next two years for all Americans.  Capital gains and dividends would also be taxed at the current preferred (lower) tax rates.

According to published reports, the compromise measure would also re-institute the estate tax, with a $5 million exemption ($10 million for a married couple), and a top estate tax rate of 35% for amounts above the exemption threshold.

If this estate tax measure is passed, it would fix a major source of estate planning confusion for planning professionals and our clients.  As you know, there is no estate tax for persons who die in 2010; instead, heirs inherit the tax basis of the assets that they receive, which can create some extremely messy tax calculations going forward.  In 2011, if no new law were passed, the estate tax exemption would have reverted to $1 million and the top estate tax rate would have moved up to 55%.

In addition, unemployment benefits would be extended, and there is talk that part of the compromise is to get Republican support for a nuclear treaty that would reduce Russian stockpiles.

From a budget standpoint, the deal will add an estimated $314.9 billion to the U.S. government’s deficit over the next two years.

There appears to be no written version of the compromise; at least nothing has been published in the media so far.  We should know a great deal more in the next few weeks, as Congress hammers out the final details.  Obviously, this last-minute tax measure makes precise tax planning a bit difficult.  But we’ll stay on top of developments, and keep you posted when we know more.

Sources

Estate tax provision: http://www.frumforum.com/the-estate-tax-rises-from-the-dead

Outline of tax compromise: http://blogs.wsj.com/washwire/2010/12/07/the-big-issue-the-cost-of-a-second-year-of-tax-cuts/

This post was authored by Bob Veres as a part of his “Client Articles” service.  He is the publisher of Inside Information, an industry leading publication for financial advisors.

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Take Steps Now

The end of the year is drawing ever closer and that can mean only one thing … tax planning.  Well, of course there are other things to worry about before the clock strikes midnight on Dec 31, however, making the right moves where Uncle Sam is concerned can save you money and that makes for a Happy New Year.   The current uncertainty in Washington regarding future tax laws makes tax planning that much more difficult, but there are still opportunities if you know where to look.  This article does a good job of highlighting a few of those opportunities.

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