The Five Key Components of Financial Literacy

Having a good understanding of the building blocks of your financial success can help you in many ways on your financial journey. Taking the time to think through the various areas of finances ahead of time, before issues arise, and then make a plan and follow through is the foundation of a successful money mindset.

Financial literacy is about understanding how the different areas related to money, work, and life function independently and together. Breaking it down into clear areas and taking consistent action steps keeps you on top of the issues, helps you get ahead, and can lessen stress and worry when bumps in the road crop up.

The U.S. Treasury’s Financial Literacy and Education Commission has come up with a very simple framework for the biggest areas to think about. These are earn, spend, save and invest, borrow and protect.

Maximizing What You Earn – and What You Keep

Your compensation package includes more than your salary. In addition to your paycheck, you may have healthcare benefits, the opportunity to contribute to a tax-advantaged retirement savings plan with or without an employer-matching contribution, and the opportunity to participate in an employee stock option plan (ESOP). All of these are extremely valuable.

Taking care of yourself physically and mentally by using your healthcare benefits is critical. Don’t put off checkups or treatment, and don’t overlook alternative, non-invasive wellness treatments, like acupuncture, that may also be covered.

The earlier you begin to save for retirement, the more money you will have. A good target is 15% of your salary, but even smaller amounts contributed early in your career will have a big impact later on, due to the power of compounding. If your company offers an employer matching contribution, be sure to contribute enough to make yourself eligible for the matching funds.

Purchasing your company’s stock at a discount can be one of the foundational building blocks of your wealth. ESOPs generally have some rules and timelines you need to follow, but they are a good way to participate in the success of your company, beyond your salary.

Maximizing your benefits and minimizing your taxes are often two sides of the same coin. Contributions to a 401(k) or other tax-advantaged retirement plan will lower your income – and your taxes – in the year in which you contribute. Other benefits paid for with pre-tax dollars will do the same. These can include a transit plan, a healthcare savings account (HSA), or a flexible spending account.

Spend Smart – and Avoid Lifestyle Creep

The first step in managing your spending is creating a budget. Budgets have two components – the “hard” costs you have to spend every month, like debt payments, food, rent, utilities, insurance, etc., and the discretionary items you have control over. The key to keeping your spending in control is to minimize impulse purchases and be sure that big-ticket items are planned, so you can take advantage of smart shopping and seasonal sales or promotions.

A useful strategy is to set up different bank accounts for everyday discretionary spending, like meals out or small luxuries, and limit the amount of funds available for these. Or you may choose to use charge cards that need to be paid off every month, instead of allowing you to build a balance you’ll have to pay interest on, as with a credit card.

As you get further along in your career, it’s important to make sure that your success works for you. You’ll have additional funds available, so avoiding the temptation to spend them will be more difficult. Instead, think about your long-term goals. Living well within your means, or even below your means, will allow you to put your money to work for you by saving and investing.

Save and Invest – Early and Often

The first step to savings is to cover your bases. Set up an emergency fund with at least three months of your expenses. Keeping this current as your income and expenses increase is important. A cushion of funds can keep your long-term plans on track and can make short-term problems much easier to get through.

Contributing as much money as possible to a tax-advantaged retirement savings account lets you take advantage of the power of compounding and save on your taxes. But you shouldn’t stop saving even if you’ve maxed out your retirement account annual contribution. Saving and investing in a taxable account will allow you to build wealth, and also add investment vehicles that may not be available in your retirement account. A taxable account can help you build a diversified portfolio that will be better able to weather the ups and downs of the markets.

You may also decide to invest in real estate, which can provide rental income, potentially appreciate in value, and create tax benefits.

There are a lot of investment options available, and setting up a solid investment plan with short-term and long-term goals, and then sticking to a funding schedule is the best way to keep your plan on track.

Borrowing + Credit Are Investments in Yourself

You’ll need to borrow money throughout your financial journey. Education expenses and a home purchase are two of the big-ticket items that it makes sense to finance, as they are valuable assets in the long term.

You want to pay as little in interest costs as possible, and the key to that is to have an excellent credit rating. Keep credit card utilization low, pay off promptly, and automate as many payments as possible to ensure you always pay on time.

You’ll also want to check your credit score frequently, and your credit report at least annually, to be sure everything is correct.

The kind of borrowing you want to avoid as much as possible is high-interest credit card spending. Paying credit cards off in full every month will save you money and keep your credit score high.

Protecting Your Assets

The old adage about insurance is that if you love someone, or you owe someone money, you need insurance. Having adequate life insurance for each stage of life is important, particularly if you have a young family. A term life insurance policy can protect them and keep their lives, education plans, home, etc., intact if something happens to you.  As you get older, different types of insurance can be investments or an estate planning strategy.

Adequate homeowner’s insurance and a solid motor vehicle policy with high coverage limits are also important. At some point, you may want to consider an umbrella policy that kicks in above the limits of standard coverage.

The Bottom Line

Financial literacy goes well beyond the basic blocks of wealth. As life gets more successful and complex, working with a financial advisor can help you ensure you have everything covered.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

April Market Commentary What a Long, Strange Trip It’s Been

March Recap and April Outlook

Among the more interesting bits of Jerome Powell’s testimony to Congress last year was his admission that he’s been a Grateful Dead fan for 50 years.

In his comments at the press conference at the March FOMC meeting, he affirmed that we will see rate cuts this year, even if the timing is, as of now, uncertain. If rates do fall, it will mark the end of a monetary policy tightening regime that started out weird as Powell delayed rate increases in the face of spiking inflation, and then quickly became almost surreal as the Fed raised rates higher and quicker than has been seen in decades. All of this has been accompanied by intense speculation around rates, which led to a lot of market volatility.

The carnage in both the equity and bond markets that we saw as inflation continued to spike and rates went ever higher has reversed somewhat, as performance in equities and bonds has responded to the prospect of rate cuts, even if the timing continues to be delayed.

As to when rates will be cut, as Powell continues to reiterate, it will depend on incoming data. The Fed is seeing recent stickiness in inflation as a bump in the road but has been clear that inflation needs to be lower before it declares victory. Strong labor markets are also making it difficult to justify a rate cut.

Let’s get into the data:

  • CPI was still over 3%. CPI rose 3.2% for the 12 months through February. Core CPI, excluding food and energy, rose 3.8%, slightly down from January
  • Core inflation is now projected to peak at 2.6% in 2024. The Fed’s Summary of Economic Projections number is now higher than the 2.4% projected in December 2023.
  • Growth is projected to be 2.1% in 2024. The SEP’s March projection is up from 1.4% in December.
  • Non-farm payrolls increased by 303,000 jobs in March. The Labor Department’s Bureau of Labor Statistics report was well above consensus expectations. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000

What Does the Data Add Up To?

The markets are having a goldilocks moment, as both equities and bond markets continue to anticipate rate cuts, if cuts seem to be perennially pushed further into the future.

The expectation of many economists, investors, and observers was that the first rate cut would be enacted at the June FOMC meeting. The very strong labor market data in March has made that a little less likely. However, the report did have some counterbalancing data that could be reassuring to the Federal Reserve. Average hourly earnings rose 0.3%, and are up 4.1% over the last year. This is slightly lower than January and shows moderate wage growth.

However, the election year does complicate matters. One school of thought is that the Fed will get at least one rate cut done, even if it decides to hold steady as the election gets underway.

Chart of the Month: A Look at Fed Rate Cuts in Election Years

The Fed has usually held rates steady in election years over the last thirty years. Of note – the only two times the Fed cut rates was in 2008 during the Global Financial Crisis, and in 2020 during COVID.

 

Source: Barron’s

Equity Markets in March

  • The S&P 500 was up 3.10%
  • The Dow Jones Industrial Average rose 2.08%
  • The S&P MidCap 400 gained 5.39%
  • The S&P SmallCap 600 was up 3.03%

Source: S&P Global. All performance as of March 31, 2023 

All eleven sectors of the S&P 500 gained again in March, and for the quarter ten of eleven sectors posted gains. Energy was the top performer on the month, up 10.43% Last month’s winner, Consumer Discretionary, went to last place and was barely positive at 0.01% The index saw eight new closing highs for the month, and has achieved 22 year-to-date.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.21%, down from 4.26% the prior month. The 30-year U.S. Treasury ended March at 4.35%, down from 4.39%. The Bloomberg U.S. Aggregate Bond Index returned 0.92%. The Bloomberg Municipal Bond Index was flat at 0.0%.

The Smart Investor

The first quarter is behind us. What should investors focus on?

  • Strong performance in the equity markets may mean that portfolio allocations have strayed from their original risk parameters. Tuning up your portfolio to ensure you are not taking excess risk can keep you calmer when volatility hits.
  • Interest rates are likely to remain higher, and even if they do come down this year, it may not be as much as originally projected. Paying off high-interest debt remains a priority.
  • If you have set up 529 plans for education savings, the end of the school year is good time to review them. As your student gets closer to college, should you revise the risk parameters? If you haven’t set up 529 plan – there’s no better time to start, as the SECURE 2.0 Act changes went into effect this year.

Keeping your finances on track with your goals is something you don’t want to think about all the time, but focusing on it can ensure you create the flexibility you want throughout your financial journey. If you have questions, we’re always here to help.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

 

 

529 Plans and SECURE 2.0: More Flexibility

The cost of college has skyrocketed, and it raises the question of whether the cost/benefit assumptions of a college education should be revisited. The Federal Reserve did just that, with a web feature called “The Labor Market for Recent College Graduates.” This is an interactive, consistently updated series of charts that look at 20 years of economic data for unemployment, underemployment, and wages and outcomes by major.

All measures show the benefit of attending college, with lower rates of unemployment and underemployment. But wage data is particularly compelling. As of 2023, the median salary for a high school graduate is $36,000. The median salary for a college graduate with a BA is $60,000. The Fed defined recent college graduates as those aged 22-27 years and compared the same age group of high school graduates.

While investing in a college education does pay off, financing college now requires a lot more planning and saving than it used to. The 529 savings plan allows for money to be earmarked for education and then invested so that it grows tax-deferred, and as long as it is used for qualified education expenses, it is tax-free when withdrawn.

There are several other key benefits of 529 plans, but that part about “qualified education expenses” was one of the downsides. It was a risk to save for years, and then have to take a tax hit on the funds if the child did not attend college.

The SECURE 2.0 Act, passed in 2022, included a provision allowing unused 529 funds to be contributed to the beneficiary’s Roth IRA. This provision went into effect in 2024.

 

Potential for Tax-Advantaged Growth

The federal tax benefit of the 529 plan is that it offers tax-deferred growth of investments, similar to a retirement plan. The earlier you start it the better, and over time the funds accumulate from both contributions and the power of compounding.

As long as the funds are spent on education expenses such as tuition, books and school supplies, and room and board, no taxes are due.

529 plans are typically operated by states. You don’t have to invest in your home state’s plan, but some states offer a state income tax deduction or tax credit for contributions to the state plan.  When making the decision of which state plan to invest in, you should consider your goals, the investment performance history, and the fees and costs.

 

The Gift Tax Advantage

Unlike retirement plans that have yearly contribution limits, 529 plans have aggregate limits. These are different for each state, but in 2023 they were typically between $235,000 and $550,000.

While the plans may not have limits, if you contribute more than the gift tax exclusion of $18,000 in 2024, you may trigger a gift tax. There is a workaround for this, called the 5-Year Election. This allows for a lump sum contribution of up to $90,000 in 2024, if it is treated for tax purposes as though it were spread over a five-year period. This will require the contribution to be reported on Form 709 for each of the five years.

Contributing the funds all at once, or “superfunding” can be a way to build the account balance more quickly, and it can also be a good estate planning strategy as it shelters the funds from estate taxes.

 

The SECURE 2.0 Act Changes

Allowing for some of the unused funds in a 529 plan to be converted into a Roth IRA for the same beneficiary is a significant positive change. Contributing diligently for years, only to have to take a tax hit to reclaim the funds if they were unused, was a significant risk. There are some rules to follow to ensure that the transfer goes smoothly.

You’ll still want to start as early as possible. The 529 plan must be open for a minimum of 15 years before the 529-to-Roth transfer takes place. Contributions made during the five years before the transfer are not eligible to be converted tax-free.

The Roth IRA annual contribution limits apply, and you cannot contribute more to the Roth in any year than the beneficiary makes in income for the year.

The maximum amount that can be converted is $35,000.

 

The Bottom Line

 Education is one of the biggest financial investments you can make in your child’s future. Taking advantage of tax-advantaged savings vehicles, and starting early, can help you pay for it.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

If You Own a Real Estate Investment Property, Should You Have an LLC ?

Investing in a rental property can be a good way to achieve financial goals. It can be a source of steady income, potentially provide capital appreciation, help diversify your portfolio, and provide tax benefits.

There are a lot of things to plan for. You’ll need to fully understand the costs involved, including purchase price, closing costs, maintenance and upkeep, taxes, utilities, insurance, and the cost of a property manager, if you choose not to take on this responsibility yourself.

You should also consider the financial risks. These aren’t limited to tying up capital, taking on debt, or potential investment risk. The biggest risk may be opening yourself to potential liability. A landlord insurance policy can mitigate some of these risks, such as property damage, loss of rental income, or third-party liability claims. An umbrella policy goes even further and can provide additional protection if the costs of a liability claim exceed a standard policy.

But if you own the property as a sole proprietor, all of your other assets may be at risk. For this reason, and because there are additional benefits, rental property investors may choose to create a limited liability corporation (LLC)

The Basics: Understanding Real Estate LLCs

Setting up an LLC for real estate holdings separates you as an individual from the liability incurred by the business of the property. If you are renting out an investment property, and the tenant is injured on the property and brings a lawsuit, your assets can be shielded from the suit and only the company may be liable. If you own multiple properties, setting up an LLC for each property is the most effective way to maximize this benefit. The liability protection is not absolute, however. If you fail in your duties as a landlord, a court may ho

The limitation of liability covers more than being sued for damages. If you have a mortgage on the property, the debt is in the name of the business and does not affect your assets. However, if you personally guarantee any debt on the property, your assets will be at risk.

The structure of an LLC allows for more than one person to be a member of the company. This can be beneficial if you own property with someone else, as the LLC permits multiple people to be members, without having to change the deed of the property or name individuals on the deed. Since it’s a company, it’s governed by a legal agreement that specifies the percentage of ownership each member will have, and how any profits or losses will be distributed

The Tax Advantages of an LLC

The IRS considers a limited liability company as a blend of the benefits of a corporation and a partnership. It limits liability like a corporation but allows for pass-through taxation. LLC profits flow directly through to your personal tax return. This means you avoid the double taxation of being taxed at the corporate level and then taxed again on your personal income.

LLC Considerations

LLC rules and costs are different for each state. There is a setup or registration cost, and some states also require an annual report filing that requires an additional fee.

When you set up your LLC also matters. It’s best to do it before you purchase the property. However, if you do decide to transfer an existing property into an LLC, check with your lender first to see if the change of name of the property owner will trigger a “due on sale” clause. This clause can allow the lender to demand the remaining balance due on the mortgage. If this clause was included in your mortgage documentation, you’ll need to ask the lender to waive it.

The Bottom Line

Real estate rental properties can be an attractive investment that helps you fulfill your long-term goals. Setting up an LLC can limit liability, offer tax benefits, and facilitate investing alongside partners.

 


This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

April Market Commentary What a Long, Strange Trip It’s Been

March Recap and April Outlook

Among the more interesting bits of Jerome Powell’s testimony to Congress last year was his admission that he’s been a Grateful Dead fan for 50 years.

In his comments at the press conference at the March FOMC meeting, he affirmed that we will see rate cuts this year, even if the timing is, as of now, uncertain. If rates do fall, it will mark the end of a monetary policy tightening regime that started out weird as Powell delayed rate increases in the face of spiking inflation, and then quickly became almost surreal as the Fed raised rates higher and quicker than has been seen in decades. All of this has been accompanied by intense speculation around rates, which led to a lot of market volatility.

The carnage in both the equity and bond markets that we saw as inflation continued to spike and rates went ever higher has reversed somewhat, as performance in equities and bonds has responded to the prospect of rate cuts, even if the timing continues to be delayed.

As to when rates will be cut, as Powell continues to reiterate, it will depend on incoming data. The Fed is seeing recent stickiness in inflation as a bump in the road but has been clear that inflation needs to be lower before it declares victory. Strong labor markets are also making it difficult to justify a rate cut.

Let’s get into the data:

  • CPI was still over 3%. CPI rose 3.2% for the 12 months through February. Core CPI, excluding food and energy, rose 3.8%, slightly down from January
  • Core inflation is now projected to peak at 2.6% in 2024. The Fed’s Summary of Economic Projections number is now higher than the 2.4% projected in December 2023.
  • Growth is projected to be 2.1% in 2024. The SEP’s March projection is up from 1.4% in December.
  • Non-farm payrolls increased by 303,000 jobs in March. The Labor Department’s Bureau of Labor Statistics report was well above consensus expectations. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000

What Does the Data Add Up To?

The markets are having a goldilocks moment, as both equities and bond markets continue to anticipate rate cuts, if cuts seem to be perennially pushed further into the future.

The expectation of many economists, investors, and observers was that the first rate cut would be enacted at the June FOMC meeting. The very strong labor market data in March has made that a little less likely. However, the report did have some counterbalancing data that could be reassuring to the Federal Reserve. Average hourly earnings rose 0.3%, and are up 4.1% over the last year. This is slightly lower than January and shows moderate wage growth.

However, the election year does complicate matters. One school of thought is that the Fed will get at least one rate cut done, even if it decides to hold steady as the election gets underway.

Chart of the Month: A Look at Fed Rate Cuts in Election Years

The Fed has usually held rates steady in election years over the last thirty years. Of note – the only two times the Fed cut rates was in 2008 during the Global Financial Crisis, and in 2020 during COVID.

 

Source: Barron’s

Equity Markets in March

  • The S&P 500 was up 3.10%
  • The Dow Jones Industrial Average rose 2.08%
  • The S&P MidCap 400 gained 5.39%
  • The S&P SmallCap 600 was up 3.03%

Source: S&P Global. All performance as of March 31, 2023 

All eleven sectors of the S&P 500 gained again in March, and for the quarter ten of eleven sectors posted gains. Energy was the top performer on the month, up 10.43% Last month’s winner, Consumer Discretionary, went to last place and was barely positive at 0.01% The index saw eight new closing highs for the month, and has achieved 22 year-to-date.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.21%, down from 4.26% the prior month. The 30-year U.S. Treasury ended March at 4.35%, down from 4.39%. The Bloomberg U.S. Aggregate Bond Index returned 0.92%. The Bloomberg Municipal Bond Index was flat at 0.0%.

The Smart Investor

The first quarter is behind us. What should investors focus on?

  • Strong performance in the equity markets may mean that portfolio allocations have strayed from their original risk parameters. Tuning up your portfolio to ensure you are not taking excess risk can keep you calmer when volatility hits.
  • Interest rates are likely to remain higher, and even if they do come down this year, it may not be as much as originally projected. Paying off high-interest debt remains a priority.
  • If you have set up 529 plans for education savings, the end of the school year is good time to review them. As your student gets closer to college, should you revise the risk parameters? If you haven’t set up 529 plan – there’s no better time to start, as the SECURE 2.0 Act changes went into effect this year.

Keeping your finances on track with your goals is something you don’t want to think about all the time, but focusing on it can ensure you create the flexibility you want throughout your financial journey. If you have questions, we’re always here to help.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

 

 

The Five Key Components of Financial Literacy

Having a good understanding of the building blocks of your financial success can help you in many ways on your financial journey. Taking the time to think through the various areas of finances ahead of time, before issues arise, and then make a plan and follow through is the foundation of a successful money mindset.

Financial literacy is about understanding how the different areas related to money, work, and life function independently and together. Breaking it down into clear areas and taking consistent action steps keeps you on top of the issues, helps you get ahead, and can lessen stress and worry when bumps in the road crop up.

The U.S. Treasury’s Financial Literacy and Education Commission has come up with a very simple framework for the biggest areas to think about. These are earn, spend, save and invest, borrow and protect.

Maximizing What You Earn – and What You Keep

Your compensation package includes more than your salary. In addition to your paycheck, you may have healthcare benefits, the opportunity to contribute to a tax-advantaged retirement savings plan with or without an employer-matching contribution, and the opportunity to participate in an employee stock option plan (ESOP). All of these are extremely valuable.

Taking care of yourself physically and mentally by using your healthcare benefits is critical. Don’t put off checkups or treatment, and don’t overlook alternative, non-invasive wellness treatments, like acupuncture, that may also be covered.

The earlier you begin to save for retirement, the more money you will have. A good target is 15% of your salary, but even smaller amounts contributed early in your career will have a big impact later on, due to the power of compounding. If your company offers an employer matching contribution, be sure to contribute enough to make yourself eligible for the matching funds.

Purchasing your company’s stock at a discount can be one of the foundational building blocks of your wealth. ESOPs generally have some rules and timelines you need to follow, but they are a good way to participate in the success of your company, beyond your salary.

Maximizing your benefits and minimizing your taxes are often two sides of the same coin. Contributions to a 401(k) or other tax-advantaged retirement plan will lower your income – and your taxes – in the year in which you contribute. Other benefits paid for with pre-tax dollars will do the same. These can include a transit plan, a healthcare savings account (HSA), or a flexible spending account.

Spend Smart – and Avoid Lifestyle Creep

The first step in managing your spending is creating a budget. Budgets have two components – the “hard” costs you have to spend every month, like debt payments, food, rent, utilities, insurance, etc., and the discretionary items you have control over. The key to keeping your spending in control is to minimize impulse purchases and be sure that big-ticket items are planned, so you can take advantage of smart shopping and seasonal sales or promotions.

A useful strategy is to set up different bank accounts for everyday discretionary spending, like meals out or small luxuries, and limit the amount of funds available for these. Or you may choose to use charge cards that need to be paid off every month, instead of allowing you to build a balance you’ll have to pay interest on, as with a credit card.

As you get further along in your career, it’s important to make sure that your success works for you. You’ll have additional funds available, so avoiding the temptation to spend them will be more difficult. Instead, think about your long-term goals. Living well within your means, or even below your means, will allow you to put your money to work for you by saving and investing.

Save and Invest – Early and Often

The first step to savings is to cover your bases. Set up an emergency fund with at least three months of your expenses. Keeping this current as your income and expenses increase is important. A cushion of funds can keep your long-term plans on track and can make short-term problems much easier to get through.

Contributing as much money as possible to a tax-advantaged retirement savings account lets you take advantage of the power of compounding and save on your taxes. But you shouldn’t stop saving even if you’ve maxed out your retirement account annual contribution. Saving and investing in a taxable account will allow you to build wealth, and also add investment vehicles that may not be available in your retirement account. A taxable account can help you build a diversified portfolio that will be better able to weather the ups and downs of the markets.

You may also decide to invest in real estate, which can provide rental income, potentially appreciate in value, and create tax benefits.

There are a lot of investment options available, and setting up a solid investment plan with short-term and long-term goals, and then sticking to a funding schedule is the best way to keep your plan on track.

Borrowing + Credit Are Investments in Yourself

You’ll need to borrow money throughout your financial journey. Education expenses and a home purchase are two of the big-ticket items that it makes sense to finance, as they are valuable assets in the long term.

You want to pay as little in interest costs as possible, and the key to that is to have an excellent credit rating. Keep credit card utilization low, pay off promptly, and automate as many payments as possible to ensure you always pay on time.

You’ll also want to check your credit score frequently, and your credit report at least annually, to be sure everything is correct.

The kind of borrowing you want to avoid as much as possible is high-interest credit card spending. Paying credit cards off in full every month will save you money and keep your credit score high.

Protecting Your Assets

The old adage about insurance is that if you love someone, or you owe someone money, you need insurance. Having adequate life insurance for each stage of life is important, particularly if you have a young family. A term life insurance policy can protect them and keep their lives, education plans, home, etc., intact if something happens to you.  As you get older, different types of insurance can be investments or an estate planning strategy.

Adequate homeowner’s insurance and a solid motor vehicle policy with high coverage limits are also important. At some point, you may want to consider an umbrella policy that kicks in above the limits of standard coverage.

The Bottom Line

Financial literacy goes well beyond the basic blocks of wealth. As life gets more successful and complex, working with a financial advisor can help you ensure you have everything covered.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

April Market Commentary What a Long, Strange Trip It’s Been

March Recap and April Outlook

Among the more interesting bits of Jerome Powell’s testimony to Congress last year was his admission that he’s been a Grateful Dead fan for 50 years.

In his comments at the press conference at the March FOMC meeting, he affirmed that we will see rate cuts this year, even if the timing is, as of now, uncertain. If rates do fall, it will mark the end of a monetary policy tightening regime that started out weird as Powell delayed rate increases in the face of spiking inflation, and then quickly became almost surreal as the Fed raised rates higher and quicker than has been seen in decades. All of this has been accompanied by intense speculation around rates, which led to a lot of market volatility.

The carnage in both the equity and bond markets that we saw as inflation continued to spike and rates went ever higher has reversed somewhat, as performance in equities and bonds has responded to the prospect of rate cuts, even if the timing continues to be delayed.

As to when rates will be cut, as Powell continues to reiterate, it will depend on incoming data. The Fed is seeing recent stickiness in inflation as a bump in the road but has been clear that inflation needs to be lower before it declares victory. Strong labor markets are also making it difficult to justify a rate cut.

Let’s get into the data:

  • CPI was still over 3%. CPI rose 3.2% for the 12 months through February. Core CPI, excluding food and energy, rose 3.8%, slightly down from January
  • Core inflation is now projected to peak at 2.6% in 2024. The Fed’s Summary of Economic Projections number is now higher than the 2.4% projected in December 2023.
  • Growth is projected to be 2.1% in 2024. The SEP’s March projection is up from 1.4% in December.
  • Non-farm payrolls increased by 303,000 jobs in March. The Labor Department’s Bureau of Labor Statistics report was well above consensus expectations. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000

What Does the Data Add Up To?

The markets are having a goldilocks moment, as both equities and bond markets continue to anticipate rate cuts, if cuts seem to be perennially pushed further into the future.

The expectation of many economists, investors, and observers was that the first rate cut would be enacted at the June FOMC meeting. The very strong labor market data in March has made that a little less likely. However, the report did have some counterbalancing data that could be reassuring to the Federal Reserve. Average hourly earnings rose 0.3%, and are up 4.1% over the last year. This is slightly lower than January and shows moderate wage growth.

However, the election year does complicate matters. One school of thought is that the Fed will get at least one rate cut done, even if it decides to hold steady as the election gets underway.

Chart of the Month: A Look at Fed Rate Cuts in Election Years

The Fed has usually held rates steady in election years over the last thirty years. Of note – the only two times the Fed cut rates was in 2008 during the Global Financial Crisis, and in 2020 during COVID.

 

Source: Barron’s

Equity Markets in March

  • The S&P 500 was up 3.10%
  • The Dow Jones Industrial Average rose 2.08%
  • The S&P MidCap 400 gained 5.39%
  • The S&P SmallCap 600 was up 3.03%

Source: S&P Global. All performance as of March 31, 2023 

All eleven sectors of the S&P 500 gained again in March, and for the quarter ten of eleven sectors posted gains. Energy was the top performer on the month, up 10.43% Last month’s winner, Consumer Discretionary, went to last place and was barely positive at 0.01% The index saw eight new closing highs for the month, and has achieved 22 year-to-date.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.21%, down from 4.26% the prior month. The 30-year U.S. Treasury ended March at 4.35%, down from 4.39%. The Bloomberg U.S. Aggregate Bond Index returned 0.92%. The Bloomberg Municipal Bond Index was flat at 0.0%.

The Smart Investor

The first quarter is behind us. What should investors focus on?

  • Strong performance in the equity markets may mean that portfolio allocations have strayed from their original risk parameters. Tuning up your portfolio to ensure you are not taking excess risk can keep you calmer when volatility hits.
  • Interest rates are likely to remain higher, and even if they do come down this year, it may not be as much as originally projected. Paying off high-interest debt remains a priority.
  • If you have set up 529 plans for education savings, the end of the school year is good time to review them. As your student gets closer to college, should you revise the risk parameters? If you haven’t set up 529 plan – there’s no better time to start, as the SECURE 2.0 Act changes went into effect this year.

Keeping your finances on track with your goals is something you don’t want to think about all the time, but focusing on it can ensure you create the flexibility you want throughout your financial journey. If you have questions, we’re always here to help.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

 

 

Financial Literacy Five Components

The Five Key Components of Financial Literacy

Having a good understanding of the building blocks of your financial success can help you in many ways on your financial journey. Taking the time to think through the various areas of finances ahead of time, before issues arise, and then make a plan and follow through is the foundation of a successful money mindset.

Financial literacy is about understanding how the different areas related to money, work, and life function independently and together. Breaking it down into clear areas and taking consistent action steps keeps you on top of the issues, helps you get ahead, and can lessen stress and worry when bumps in the road crop up.

The U.S. Treasury’s Financial Literacy and Education Commission has come up with a very simple framework for the biggest areas to think about. These are earn, spend, save and invest, borrow and protect.

Maximizing What You Earn – and What You Keep

Your compensation package includes more than your salary. In addition to your paycheck, you may have healthcare benefits, the opportunity to contribute to a tax-advantaged retirement savings plan with or without an employer-matching contribution, and the opportunity to participate in an employee stock option plan (ESOP). All of these are extremely valuable.

Taking care of yourself physically and mentally by using your healthcare benefits is critical. Don’t put off checkups or treatment, and don’t overlook alternative, non-invasive wellness treatments, like acupuncture, that may also be covered.

The earlier you begin to save for retirement, the more money you will have. A good target is 15% of your salary, but even smaller amounts contributed early in your career will have a big impact later on, due to the power of compounding. If your company offers an employer matching contribution, be sure to contribute enough to make yourself eligible for the matching funds.

Purchasing your company’s stock at a discount can be one of the foundational building blocks of your wealth. ESOPs generally have some rules and timelines you need to follow, but they are a good way to participate in the success of your company, beyond your salary.

Maximizing your benefits and minimizing your taxes are often two sides of the same coin. Contributions to a 401(k) or other tax-advantaged retirement plan will lower your income – and your taxes – in the year in which you contribute. Other benefits paid for with pre-tax dollars will do the same. These can include a transit plan, a healthcare savings account (HSA), or a flexible spending account.

Spend Smart – and Avoid Lifestyle Creep

The first step in managing your spending is creating a budget. Budgets have two components – the “hard” costs you have to spend every month, like debt payments, food, rent, utilities, insurance, etc., and the discretionary items you have control over. The key to keeping your spending in control is to minimize impulse purchases and be sure that big-ticket items are planned, so you can take advantage of smart shopping and seasonal sales or promotions.

A useful strategy is to set up different bank accounts for everyday discretionary spending, like meals out or small luxuries, and limit the amount of funds available for these. Or you may choose to use charge cards that need to be paid off every month, instead of allowing you to build a balance you’ll have to pay interest on, as with a credit card.

As you get further along in your career, it’s important to make sure that your success works for you. You’ll have additional funds available, so avoiding the temptation to spend them will be more difficult. Instead, think about your long-term goals. Living well within your means, or even below your means, will allow you to put your money to work for you by saving and investing.

Save and Invest – Early and Often

The first step to savings is to cover your bases. Set up an emergency fund with at least three months of your expenses. Keeping this current as your income and expenses increase is important. A cushion of funds can keep your long-term plans on track and can make short-term problems much easier to get through.

Contributing as much money as possible to a tax-advantaged retirement savings account lets you take advantage of the power of compounding and save on your taxes. But you shouldn’t stop saving even if you’ve maxed out your retirement account annual contribution. Saving and investing in a taxable account will allow you to build wealth, and also add investment vehicles that may not be available in your retirement account. A taxable account can help you build a diversified portfolio that will be better able to weather the ups and downs of the markets.

You may also decide to invest in real estate, which can provide rental income, potentially appreciate in value, and create tax benefits.

There are a lot of investment options available, and setting up a solid investment plan with short-term and long-term goals, and then sticking to a funding schedule is the best way to keep your plan on track.

Borrowing + Credit Are Investments in Yourself

You’ll need to borrow money throughout your financial journey. Education expenses and a home purchase are two of the big-ticket items that it makes sense to finance, as they are valuable assets in the long term.

You want to pay as little in interest costs as possible, and the key to that is to have an excellent credit rating. Keep credit card utilization low, pay off promptly, and automate as many payments as possible to ensure you always pay on time.

You’ll also want to check your credit score frequently, and your credit report at least annually, to be sure everything is correct.

The kind of borrowing you want to avoid as much as possible is high-interest credit card spending. Paying credit cards off in full every month will save you money and keep your credit score high.

Protecting Your Assets

The old adage about insurance is that if you love someone, or you owe someone money, you need insurance. Having adequate life insurance for each stage of life is important, particularly if you have a young family. A term life insurance policy can protect them and keep their lives, education plans, home, etc., intact if something happens to you.  As you get older, different types of insurance can be investments or an estate planning strategy.

Adequate homeowner’s insurance and a solid motor vehicle policy with high coverage limits are also important. At some point, you may want to consider an umbrella policy that kicks in above the limits of standard coverage.

The Bottom Line

Financial literacy goes well beyond the basic blocks of wealth. As life gets more successful and complex, working with a financial advisor can help you ensure you have everything covered.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

April Market Commentary What a Long, Strange Trip It’s Been

March Recap and April Outlook

Among the more interesting bits of Jerome Powell’s testimony to Congress last year was his admission that he’s been a Grateful Dead fan for 50 years.

In his comments at the press conference at the March FOMC meeting, he affirmed that we will see rate cuts this year, even if the timing is, as of now, uncertain. If rates do fall, it will mark the end of a monetary policy tightening regime that started out weird as Powell delayed rate increases in the face of spiking inflation, and then quickly became almost surreal as the Fed raised rates higher and quicker than has been seen in decades. All of this has been accompanied by intense speculation around rates, which led to a lot of market volatility.

The carnage in both the equity and bond markets that we saw as inflation continued to spike and rates went ever higher has reversed somewhat, as performance in equities and bonds has responded to the prospect of rate cuts, even if the timing continues to be delayed.

As to when rates will be cut, as Powell continues to reiterate, it will depend on incoming data. The Fed is seeing recent stickiness in inflation as a bump in the road but has been clear that inflation needs to be lower before it declares victory. Strong labor markets are also making it difficult to justify a rate cut.

Let’s get into the data:

  • CPI was still over 3%. CPI rose 3.2% for the 12 months through February. Core CPI, excluding food and energy, rose 3.8%, slightly down from January
  • Core inflation is now projected to peak at 2.6% in 2024. The Fed’s Summary of Economic Projections number is now higher than the 2.4% projected in December 2023.
  • Growth is projected to be 2.1% in 2024. The SEP’s March projection is up from 1.4% in December.
  • Non-farm payrolls increased by 303,000 jobs in March. The Labor Department’s Bureau of Labor Statistics report was well above consensus expectations. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000

What Does the Data Add Up To?

The markets are having a goldilocks moment, as both equities and bond markets continue to anticipate rate cuts, if cuts seem to be perennially pushed further into the future.

The expectation of many economists, investors, and observers was that the first rate cut would be enacted at the June FOMC meeting. The very strong labor market data in March has made that a little less likely. However, the report did have some counterbalancing data that could be reassuring to the Federal Reserve. Average hourly earnings rose 0.3%, and are up 4.1% over the last year. This is slightly lower than January and shows moderate wage growth.

However, the election year does complicate matters. One school of thought is that the Fed will get at least one rate cut done, even if it decides to hold steady as the election gets underway.

Chart of the Month: A Look at Fed Rate Cuts in Election Years

The Fed has usually held rates steady in election years over the last thirty years. Of note – the only two times the Fed cut rates was in 2008 during the Global Financial Crisis, and in 2020 during COVID.

 

Source: Barron’s

Equity Markets in March

  • The S&P 500 was up 3.10%
  • The Dow Jones Industrial Average rose 2.08%
  • The S&P MidCap 400 gained 5.39%
  • The S&P SmallCap 600 was up 3.03%

Source: S&P Global. All performance as of March 31, 2023 

All eleven sectors of the S&P 500 gained again in March, and for the quarter ten of eleven sectors posted gains. Energy was the top performer on the month, up 10.43% Last month’s winner, Consumer Discretionary, went to last place and was barely positive at 0.01% The index saw eight new closing highs for the month, and has achieved 22 year-to-date.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.21%, down from 4.26% the prior month. The 30-year U.S. Treasury ended March at 4.35%, down from 4.39%. The Bloomberg U.S. Aggregate Bond Index returned 0.92%. The Bloomberg Municipal Bond Index was flat at 0.0%.

The Smart Investor

The first quarter is behind us. What should investors focus on?

  • Strong performance in the equity markets may mean that portfolio allocations have strayed from their original risk parameters. Tuning up your portfolio to ensure you are not taking excess risk can keep you calmer when volatility hits.
  • Interest rates are likely to remain higher, and even if they do come down this year, it may not be as much as originally projected. Paying off high-interest debt remains a priority.
  • If you have set up 529 plans for education savings, the end of the school year is good time to review them. As your student gets closer to college, should you revise the risk parameters? If you haven’t set up 529 plan – there’s no better time to start, as the SECURE 2.0 Act changes went into effect this year.

Keeping your finances on track with your goals is something you don’t want to think about all the time, but focusing on it can ensure you create the flexibility you want throughout your financial journey. If you have questions, we’re always here to help.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

 

 

529 Plans and SECURE 2.0: More Flexibility

The cost of college has skyrocketed, and it raises the question of whether the cost/benefit assumptions of a college education should be revisited. The Federal Reserve did just that, with a web feature called “The Labor Market for Recent College Graduates.” This is an interactive, consistently updated series of charts that look at 20 years of economic data for unemployment, underemployment, and wages and outcomes by major.

All measures show the benefit of attending college, with lower rates of unemployment and underemployment. But wage data is particularly compelling. As of 2023, the median salary for a high school graduate is $36,000. The median salary for a college graduate with a BA is $60,000. The Fed defined recent college graduates as those aged 22-27 years and compared the same age group of high school graduates.

While investing in a college education does pay off, financing college now requires a lot more planning and saving than it used to. The 529 savings plan allows for money to be earmarked for education and then invested so that it grows tax-deferred, and as long as it is used for qualified education expenses, it is tax-free when withdrawn.

There are several other key benefits of 529 plans, but that part about “qualified education expenses” was one of the downsides. It was a risk to save for years, and then have to take a tax hit on the funds if the child did not attend college.

The SECURE 2.0 Act, passed in 2022, included a provision allowing unused 529 funds to be contributed to the beneficiary’s Roth IRA. This provision went into effect in 2024.

 

Potential for Tax-Advantaged Growth

The federal tax benefit of the 529 plan is that it offers tax-deferred growth of investments, similar to a retirement plan. The earlier you start it the better, and over time the funds accumulate from both contributions and the power of compounding.

As long as the funds are spent on education expenses such as tuition, books and school supplies, and room and board, no taxes are due.

529 plans are typically operated by states. You don’t have to invest in your home state’s plan, but some states offer a state income tax deduction or tax credit for contributions to the state plan.  When making the decision of which state plan to invest in, you should consider your goals, the investment performance history, and the fees and costs.

 

The Gift Tax Advantage

Unlike retirement plans that have yearly contribution limits, 529 plans have aggregate limits. These are different for each state, but in 2023 they were typically between $235,000 and $550,000.

While the plans may not have limits, if you contribute more than the gift tax exclusion of $18,000 in 2024, you may trigger a gift tax. There is a workaround for this, called the 5-Year Election. This allows for a lump sum contribution of up to $90,000 in 2024, if it is treated for tax purposes as though it were spread over a five-year period. This will require the contribution to be reported on Form 709 for each of the five years.

Contributing the funds all at once, or “superfunding” can be a way to build the account balance more quickly, and it can also be a good estate planning strategy as it shelters the funds from estate taxes.

 

The SECURE 2.0 Act Changes

Allowing for some of the unused funds in a 529 plan to be converted into a Roth IRA for the same beneficiary is a significant positive change. Contributing diligently for years, only to have to take a tax hit to reclaim the funds if they were unused, was a significant risk. There are some rules to follow to ensure that the transfer goes smoothly.

You’ll still want to start as early as possible. The 529 plan must be open for a minimum of 15 years before the 529-to-Roth transfer takes place. Contributions made during the five years before the transfer are not eligible to be converted tax-free.

The Roth IRA annual contribution limits apply, and you cannot contribute more to the Roth in any year than the beneficiary makes in income for the year.

The maximum amount that can be converted is $35,000.

 

The Bottom Line

 Education is one of the biggest financial investments you can make in your child’s future. Taking advantage of tax-advantaged savings vehicles, and starting early, can help you pay for it.

 


 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA