How to Teach Your Kids About Money

Before the year’s end, in the midst of the holiday events, travel, and overall busyness, the last thing you want to think about is tackling your finances. But considering how finance-related resolutions are the third most popular New Year’s resolution, why don’t you give yourself a head start on next year’s financial goals by finishing this year strong? Here are ten critical financial actions you’ll be glad you took when the ball drops on New Year’s Eve!

1. Amp Up Your Retirement Savings

If possible, max out your contributions to your 401(k) by the end of the year to make the most of your retirement savings. For 2018, you can contribute as much as $18,500 (or $24,500 if you are age 50 or older). You might also consider contributing to a Roth IRA. For 2018, you can contribute as much as $5,500 (or $6,500 if you are age 50 or older). Keep in mind that if your income is over $199,000 and you’re married filing jointly, you won’t be eligible to contribute to a Roth IRA.

2. Use Your Medical And Dental Benefits

Did you have good intentions of taking care of some dental work, blood tests, or other medical procedures? Now’s the time to take advantage of all your healthcare needs before your deductible resets. Dental plans in particular often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.

3. Verify Expiring Sick And Vacation Time

Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, fit in a last-minute vacation, a staycation, or trips to the doctor to use up these benefits.

4. Use Your Flexible Spending Account

Like your health insurance benefits, you’ll want to use up your FSA (Flexible Spending Account) dollars by the end of the year. Your benefits won’t carry over and you’ll lose any unspent money in your account. Check the restrictions for your account to see what the money can and cannot be used for.

5. Double-Check RMDs

If you’re retired, review your retirement accounts’ required minimum distributions (RMDs). An RMD is the annual payout savers must take from their retirement accounts, including 401(k)s, SIMPLE IRAs, SEP IRAs, and traditional IRAs, when they turn 70½. If you don’t, you may face the steep penalty of 50% of the distribution you should have taken. To calculate your RMD, use one of the IRS worksheets.

6. Stay On Top Of Charitable Contributions

If you made a charitable contribution in 2018, you might be able to lower your total tax bill when you file early next year. It can be especially advantageous if you donated appreciated securities to avoid paying taxes on the gains. Along with your other tax documents, find and organize any receipts you have from your donations to charities, whether it was a cash, securities contribution, or another type of gift.

7. Review Your Insurance Coverages

A lot can happen in a year. As you experience life changes, from the birth of a child to marriage to a new career, it’s important to regularly review your insurance coverages and your designated beneficiaries. Now is the ideal time to review your current insurance policies and make sure they are up to date. You might also want to evaluate your need for other types of insurance you may not currently have, such as long-term care insurance.

8. Prepare For A Market Correction

We are currently in the longest bull market in history2 and the stock market just keeps hitting record highs3. But we know that what comes up must eventually come down. Prepare yourself and your money by sticking to a long-term strategy, rebalancing your portfolio, and keeping your emotions in check. As long as you are following sound investment principles, only investing long-term money, and keeping your assets within your risk tolerance, you should have no reason to panic when we experience a market downturn.

9. Talk To Your Kids About Money

The holidays are usually a time for families to get together and reconnect. Use this time intentionally by talking with your kids about money. No matter how old they are, you can give them sound wisdom that will set them up for success. Make sure they understand the importance of saving for retirement and having the proper amount of insurance coverage. Another way to help your kids financially is to create an estate plan to make sure you leave a legacy and avoid passing down a significant tax burden or legal headaches to your kids. If you’ve already taken the time and energy to create an estate plan, you’ll want to check in periodically to ensure all the documents are up to date and no major details have changed.

10. Give Without Gift Tax Consequences

It’s never too early to start planning for the legacy you want to leave your loved ones without sharing a good portion of it with Uncle Sam. You may want to consider gifting. Each year you can gift up to $14,000 to as many people as you wish without those gifts counting against your lifetime exemption of $5 million. If you’ve yet to gift this year or haven’t reached $14,000, consider gifting to your children or grandchildren by December 31st.

1. http://www.statisticbrain.com/new-years-resolution-statistics/
2. https://www.cnbc.com/2018/08/22/longest-bull-market-since-world-war-ii-likely-to-go-on-because-us-is-best-game-in-town.html
3. https://www.usatoday.com/story/money/2018/08/21/stocks-hit-record-highs/922315002/

FIRE, an acronym for “Financial Independence, Retire Early” is trending as a new financial lifestyle.  In a nutshell, FIRE promotes extreme savings in your 20s, 30s, and 40s, with the goal of being able to live off passive income from the accumulated nest egg much earlier than typical retirement age.  Some proponents suggest saving 70% of your income until you have collected 25x your annual salary, cutting your working years in half.  Extreme saving is not a new idea, but the phrase has taken off in the last couple of years, creating a cult following online.

Putting aside additional savings to fund a “work optional” lifestyle is a fantastic idea in theory, but most Americans would find it quite difficult to only live on 30% of their income without making DRASTIC changes.  If you are willing to downsize, live with roommates in a cheaper part of town, eat beans and rice, drive an old car/take the bus, and limit purchases, you could be successful at FIRE.  However, this level of deprivation may cause unintended sacrifices that impact your social life and happiness.

Our take on FIRE is to find your happy medium.  For example, you absolutely should increase your savings rate incrementally every year if you can afford to do so, but initially choose an amount that’s attainable.  To help you get started, these are the questions we encourage clients to consider:

1) What is your current cash flow?

Do you have a firm grasp on how much you spend on monthly groceries?  Going out to eat? Gifts at the holidays for friends and family?  The key here is to consider all expenses, not just big-ticket fixed items like your car payment or mortgage.  Once you have an idea of how much you are spending compared to household income, you can then evaluate your current savings rate.

2) Where can you cut back to increase your savings rate?

Can you meal prep on Sundays to avoid going out for lunch during the week?  Can you stay in to watch a movie instead of going to a theater for date night?  Are you willing to have a “no-spend” week?  Some people use tracking software (our firm provides EMoney to our clients) to help set up electronic budgets to alert you when you are close to going over set categories of spending. Alternatively, can you bring in additional income via a side hustle?  Can you work additional hours at work to qualify for overtime pay?  Make an honest assessment to determine where you could potentially improve your cash flow on a monthly basis.

3) Are you debt-free, or leveraging debt appropriately?

A mortgage with a low-interest rate is an appropriate means of financing a lifestyle you want, while potentially building equity via real estate.  If you still have student loans or credit card debt, though, your increased cash flow should go towards paying this off ASAP. Just make sure you have 3-6 months of living expenses built up in an easily accessible emergency savings account as well.

4) Outside of your emergency savings, are your accounts keeping pace with inflation?

Historically, inflation rates average around 3% annually.  This means that your purchasing power decreases, as the cost of goods increases over time. Remember when you could buy a Coke bottle out of a vending machine for a dollar? Your parents or grandparents may even recall purchasing a soda for a quarter!  That’s inflation at work. If you’re planning to retire early, this means you need to account for inflation over several decades. The best way to maintain your purchasing power is by investing excess savings in the stock and bond markets and taking advantage of compounding interest over time. A Financial Advisor can determine the best investment strategy for you.

5) Are your investments in a diversified portfolio in line with your risk tolerance?

Trying to time the market to buy and sell holdings is incredibly difficult to do.  Diversification via broader index funds and investing consistently (to take advantage of pullbacks) has proven to be a more successful investment plan for most Americans.  The concern with the FIRE movement is knowing how risky you can or should be with your asset allocation depending on your time horizon to retirement.  For example, if you are closer to reaching your retirement goal, you don’t want 100% of your assets invested in the stock market.   A comprehensive financial planner can help determine how much risk you should be taking on by looking at your finances holistically, and ensuring portfolios are rebalanced regularly according to your needs.

The road to early retirement is still a long one, so you’ll need to regularly evaluate your progress, reassess as needed, and don’t forget to acknowledge small victories!

Our advice is to push yourself to save more, without going to the extremes of the FIRE lifestyle.  If you would like additional accountability, Trilogy offers progress checks through our Decision Coach process more frequently than annual reviews.  And if you need a road map to help find your path to success, reach out with any questions here.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.