Because I like you guys I thought I'd share some basic things I learned at Uni years ago. I copied this from a different forum and this class I took was probably over 7 years ago but much of the info is likely still good. But it also might be outdated so verify. I'd also look at /r/personalfinance and their Sidebar.The class covered the following areas: financial statements, expenditure and credit/debt management, time value of money, insurance (disability, health, liability, long-term care), investing and portfolio allocation, tax reduction, retirement plans and estate planning.I don’t remember everything, but the biggest tips and insights are tattooed into my brain. These are true for America, but might be able to do them in your own Western nation.Biggest Insight = The most significant factor affecting the health of your retirement plan/investments is…’which basket do you fill first’? After you pay all your fixed living costs, where do you put your money first, in what magnitude? This has a greater impact on your retirement/investments than “timing the market (when to invest or cash out)”, or “picking the correct stocks/bonds”.Example: You get paid. You pay your rent/MTG, taxes, (pension if required), health insurance, car pmt/INS, utilities, and minimum loan payments. You set aside a sensible amount for food/entertainment.The remaining cash is disposable income. Now the pertinent decision arises. What basket do you fill first? How much do you put in?If Loan Interest Rates > Deposit Account Interest Rates then Paying down your debt is your 1st bucket.If you cannot make a higher rate of return, guaranteed, than the rate your lenders are making off you, you eliminate this negative rate of return as soon as possible. This minimizes your debt cost while also reducing your debt load, which improves your credit score computation.If you’re one of the lucky few who can get a 100% matched 401K fund through your employer, then this 401K is your 1st bucket. You contribute the Maximum amount allowed. This is a 100% rate of return [assuming you stipulate it is invested sensibly (very diversified across industries/nations/continents, with a significant % into precious metals) and you avoid all penalties when cashing out].Your next bucket is to contribute towards a financial instrument that behaves like a Roth IRA. The money gets taxed going in, but it builds and builds until retirement age, and then you cash it out without incurring any additional taxes or penalties. There is a maximum that you can contribute, but I believe you can open 2 or 3 of these. This isn’t a problem unless you’re freaking loaded, as most of us won’t be able to throw $300,000.00 into three different IRAs each year (about $100K per IRA).Only now, with whatever disposable cash is remaining, do you contribute towards a purely speculative stock/bond trading strategy (timing the market and trying to pick the “Winners” all on your own). This is very risky, so you fill this basket last. This is you playing blackjack at the financial market casino.The difference between this last bucket and the 401K and Roth IRA is that, when you open the 401K and Roth IRA you get to choose a very diversified portfolio. This limits your risk if one industry, or nation, or continent tanks. 401Ks and IRAs are managed by, cough, professionals. The last bucket is just you researching on your own and trying to guess which stocks/bonds are good, and when to put in and when to cash out. You could diversify here as well, but that’s essentially what you did with your 1 to 3 IRAs (or their equivalent).Tip #1: Pay your kids. A very cool tip the Professor shared is how he and some of his rich friends pay their children for doing household chores, starting from the youngest age legally possible. Why? This is the best way to pass wealth/inheritance to your children.Your children are in the lowest possible tax bracket. So as soon as they are old enough, you start paying them for sweeping the floor, or mowing the lawn, etc. But you don’t hand them cash. You pay into a financial instrument on their behalf where the money is taxed going in (Lowest taxes possible), but then is allowed to grow and build until they cash it out. You need to keep paperwork for the payments listing what they did.I think the fund can be cashed when they need the money for college, or you can get them started on their retirement IRA super early. Either way, it’s a better way to bequeath wealth to your children than dying and having them pay the Estate Inheritance Tax. There is a maximum amount you can contribute, but you max that out. If you have children this becomes the Bucket that follows you paying into your own retirement IRAs, and before you speculatively play the stock market. This falls under ‘Estate Planning’, i.e. how your children inherit your assets and money with the smallest taxes and penalties.Tip #2: Protect yourself with a supplemental Umbrella insurance policy. Get an extra insurance policy that blanket covers you for a huge amount, say $2 million, for any and all unexpected circumstances. The idea is, why spend time, effort, and money to execute the best retirement/investment strategy if some accident will get you sued for all of your money? I’d hate to be 2 months from retirement only to have a car accident and get sued for all of my retirement accounts.Also on insurance…consider an insurance policy that covers you for lifetime disability, including fulltime medical care. If you have a catastrophic accident, that would pay for a nurse 24/7 to do everything. God I sound like an insurance salesmen, but this is what the class advised us to consider.Tip #3: Understand the tax rules. Rich people can afford to pay tax experts to figure it out for them. But us little guys can at least avoid the biggest and most obvious tax pitfalls. Avoid penalties, avoid double or triple taxation. Proactive Tax Reduction!Tip #4: Stipulate your children as the beneficiaries of all of your financial accounts and assets. The absolute worst thing you can do is allow your money or properties to fall into ‘Probate’ after you die. This is a huge pain in the ass for your kids to deal with. Easily solved by listing them as your beneficiaries.Tip #5: Understand how your credit score is computed. A mortgage and student loans are considered “White Collar” debt, and does not significantly affect your credit score calculation. The big factor is your “Consumer” debt ratio. How much consumer debt is available to you, and how much of that max are you using? If you have an old credit card that you never use anymore, do not cancel it. Just keep it and don’t use it, or hardly use it. This increases the amount of consumer debt you can access, and by hardly using it, this helps your credit score.My manager at my old job in the USA said her husband had a card from his early college days that he never uses. It now had like, a $50,000 credit limit. He was about to cancel it because he thought it was bad to keep it open and not use it. Nothing could be further from the truth.Tip #6: Die with a massive amount of debt. As long as your kids will not need to repay your financial obligations, the best thing you can do is to die at a ripe old age with a massive amount of credit card and loan debt. You never pay it back, and neither will your kids. ;)Tip #7: I can’t remember this one entirely so I probably shouldn’t even include it. But maybe someone else knows what I’m talking about.Keep buying a bigger and nicer vacation/2nd Home every few years. This might only work in America, because it is very specific. You have your primary residence, but then if you’re rich enough to buy a 2nd Home, you keep upgrading it. Each time you upgrade to a more expensive place, you keep pushing off the taxes. You continuously postpone the tax obligation. The idea is to push off the taxes until you die. You never pay the taxes, and your children don’t either. But they can take ownership of the home. Really foggy on this one, you should probably ignore this last one.Google search for Retirement Planning Excel Spreadsheets. Wouldn’t hurt to download one and plug in some numbers. You choose your desired target for Age of retirement, and how much money (adjusted for expected inflation) you need each year until you die. Plug in your tax rate, rates of your debt and investments, and it tells you everything. A very good tool to plan your retirement. Much better than going willy nilly. The ‘Quicken’ computer program was used for the course. I’d recommend using it. via /r/CCW http://ift.tt/2hY3fXw
No comments:
Post a Comment