Change and control go hand in hand. Some changes fall easily into your scope of control, whereas others remain just outside it. You can’t control the weather no matter how much you wish that sunny January morning was actually sparkling snow. But there are other times when it doesn’t feel like you have control over a situation when you really do — and your personal financial health (and money mindset) is certainly one of them. People often fixate on the money aspects they can’t control, like the market or returns, instead of focusing on what they can control like savings, spending, investing, goal-setting, and more.
When it comes to personal finance, whether or not you feel in control has everything to do with perspective. Your financial perspective is also known as your money mindset. What is a money mindset and do you have the power to change it? Let’s find out.
What’s a Money Mindset?
Similar to a money script, a money mindset is the unique attitude, perspective, and narrative you weave using your thoughts, actions, and beliefs toward money. Your money mindset extends beyond the bounds of your personal life and enters into your general feelings toward finances.
Your money mindset informs the way you manage, save, spend, and invest your money. When you better understand your perspective toward your money, you begin to see where your financial habits come from. A money mindset influences your thoughts and actions, which can have both positive and negative consequences.
Someone with a healthy money mindset likely feels confident, secure, knowledgeable, and energized about their financial life. Someone with a negative money mindset might feel anxious, guarded, or uncomfortable about their financial situation. Not sure where you fall? Ask yourself some questions to help shed light on your money mindset:
How does your financial situation make you feel?
Are you comfortable talking with your spouse, parents, friends, etc. about money matters?
Do you like your financial habits?
Are you secure in your financial future?
Do you often compare your financial situation to others?
Are you confident you can achieve your financial goals?
These questions help reveal how you view money. It illustrates how you see your debt, whether you make healthy financial choices, how confident you are in your financial future, and so much more.
How is Your Money Mindset Formed?
Your money mindset is formed from your distinct lived experiences. Everyone has a different story and relationship with money because everyone has had different experiences with it throughout their lives. Someone who worked during high school and college might have a different perspective on saving than someone whose first job was well into their 20s.
Along with your personal experiences, your mindset is also formed by how money impacted the people closest to you.
Was money a taboo topic in your house?
Were your parents or loved ones constantly stressed about money?
Did your family prioritize charitable giving?
Was financial literacy a core topic of conversation in your house?
All of these past experiences likely influence your attitude and approach toward money today. Someone who grew up in an environment where money was a sore spot might not like managing their finances (or might always worry about having enough money to support themselves and their family).
Your attitudes and perspectives are shaped by the people around you, and those closest to you tend to profoundly influence your thoughts and beliefs. As the saying goes, you are who you spend time with,
Why Care About Your Money Mindset?
As noted earlier, your money mindset is directly connected to your current financial habits. It affects how you approach money, the way you view and use debt, how you think about your future, and how you view the financial habits of others.
When you know how you approach money, you’ll be more equipped to make intentional decisions that push you in a positive direction. After reflecting on this concept, you may realize you lean on your credit cards too often for purchases you don’t need and that don’t further your goals. You may also discover your propensity for giving comes from a long line of generous role models.
Your money mindset also reveals both your positive and negative traits regarding financial management. This concept isn’t inherently intuitive. It’s critical to spend some time thinking through these questions and being honest with yourself about your attitude toward your money.
The best thing about a money mindset? Like perspectives, they can shift. Here’s a few ways you can change your mindset to improve your financial outlook.
5 Steps to Change Your Money Mindset for the Better.
Personal finance fluctuates and changes, which always leaves room for improvement. Remember, your money mindset is something you can control. Here are some ways you can evolve and make progress:
1. Believe You are Destined and Deserve Success
Too often, a negative mindset leads people to give up on their financial goals. It’s important to approach your money from a place of openness, curiosity, and excitement. Believing that you can reach your goals and find success is the first step. Once you have that foundation, you’ll be able to construct habits that support those beliefs.
This doesn’t mean your entire financial road will be paved with rainbows and sunshine, but it does mean you’ll allow yourself to find success. How can you shift this perspective? Spend some time setting new financial goals. Your goals are the foundation of your financial plan. Once you have your goals, set some key milestones to celebrate as you work toward them.
Starting from a positive headspace will help you make choices that are aligned with those productive thoughts.
2. Picture Your Future Self
Sometimes it’s crucial to flip this tough interview question back on yourself. Where do you see yourself in 5, 10, 20, even 30 years? Where have you grown? What have you accomplished? What do you want for your future self? Picturing your future can be a telling exercise as it can reveal if you’re on the right path to attaining it.
Maybe starting your own business is a critical milestone in your life. You might suddenly realize you haven’t started saving for this venture or really thought about the type of business for you. Fill in those missing pieces so you can set yourself up and bring that future vision to life.
You might also try picturing your dream retirement. Where are you living? How are you spending your time? Are you fulfilled? When you can see your future self, you can find the motivation you need to get there. Maybe this year commit to maxing out your retirement accounts or increasing the contributions to your other investments.
3. Give Freely and Generously
Your comfort level with giving back to causes, organizations, and people you care about says a lot about your money mindset. In general, those who intentionally make space for giving feel more confident, secure, and fulfilled with their money.
Every person will have a different capacity for giving, but when you feel comfortable giving away some of your money, you’ll move from a space of scarcity to one of abundance.
A scarcity mindset is a dangerous narrative, one that leaves you constantly chasing the idea of “enough”. Abundance, on the other hand, is about setting yourself up for financial success and structuring your money in a way that brings meaning and fulfillment.
4. Immerse Yourself in Knowledge
One of the best ways to combat negative habits is to learn healthier ones. Financial management isn’t simply intuitive, it’s something you need to work toward and spend time with to get right.
Take some time to read books, blogs, and articles. These resources can broaden your perspective and help you improve the areas where you’re struggling.
Talk with family and friends about the questions you have. They might be able to share their wisdom or perhaps just open a line of conversation.
Seek out a professional. A financial advisor can help address your money mindset and give you practical tools to improve it.
Knowledge is power and making the most of the resources available to you will help you shift your perspective.
5. Know Where You Are and Where You Want to Be
To change something, you need to understand two elements:
Where you are.
Where you want to be.
Let’s use investing as an example. When you know you veer into a scarcity mindset when the topic of investing comes up, you can use the tools and resources around you to overcome those feelings. If you want to reach your financial goals, odds are you’ll have to embrace investing.
To embrace the role investing plays in your finances, do some research on what investing means to you. Understand your risk tolerance, set goals, and work with someone you trust. All of these elements will help you build a positive and fulfilling mindset.
Your money mindset powers your thoughts, attitudes, and perspectives toward your finances. Remember, you can control how you view, approach, and manage your money. By understanding your current money mindset, you’ll be able to create positive habits that help you accomplish your goals.
We love talking about money around here. If you want to learn more about your money mindset, give us a call.
Episode 119: Are You Better or Worse off Financially in 2020?
Are You Better or Worse off Financially In 2020?
One of the fun parts of being a financial planner is getting to field and answer questions from clients and readers all around the country. In these Work Your Wealth episodes I’ll be taking time to address and answer questions I’ve come across from readers and clients throughout my career. Today I’m answering the above question.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
Why the end of the year is my favorite time of year for clients
Questions I consistently receive as the year is closing out
A way to gauge if you are better or worse off financially this year
First step in measuring your financial progress
The measurement to use when evaluating your financial health
How to calculate your net worth
A good way to evaluate your debt situation for the year
The check you should be doing on your debt every January
Why you should review your spending throughout the year
How your savings goals play into your financial health
Different savings vehicles you can utilize to grow your net worth
A few things you should consider when talking about your retirement savings
The role a change in income can play in figuring out if you’re financially better off this year
How “lifestyle creep” could potentially hurt your financial health
Episode 116: What Do I Do After I Max out my 401k with Ariel Ward
Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of 2019, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
Options to save after you’ve maxed out your 401k
401k limits for singles and married couples
The definition of a backdoor Roth IRA and some considerations around it
Income limitations for Roth IRA
What you should have set up before doing a backdoor Roth IRA
Why you should work with a financial planner if interested in the backdoor Roth
Tax considerations when utilizing the backdoor Roth IRA
When to begin contributing to a 529 Plan and how much
What to look for when investing in a taxable account
What capital gains taxes will look like based on income and time
How to take advantage of a Health Savings Account (HSA)
Some ages to keep in mind if you are utilizing an HSA
How you should prioritize your savings goals
GET SOCIAL WITH ARIEL AND LET HER KNOW YOU HEARD ABOUT HER HERE
Welcome back to the second part of our investment lexicon series.
By now you have a good understanding of what the market is, how the stock market works, and different methods of tracking market performance. Now it’s time to look at some key tools to keep in mind when investing in the stock market.
Remember, each strategy has its pros and cons so the best way to maximize them is working with a financial planner who’ll help your portfolio reflect the right risk with your financial goals. Let’s jump in.
Diversification is a risk management strategy that seeks to ensure your portfolio isn’t over- or underexposed in a certain area. The goal of diversification is for your portfolio assets to balance each other out by maximizing profit and minimizing risk. This is done by ensuring the securities in your portfolio react differently to market conditions in order to maintain that balance.
You can diversify your portfolio across asset classes, within assets, and also geographically (think both domestic and foreign markets). The easiest way to view diversification is in terms of asset classes. Just think, your portfolio could be a mix of stocks, bonds, commodities, real estate, exchange-traded funds (ETFs), and more. Adding another layer, the stocks in your portfolio can be across economic sectors like pharmaceuticals, finance, and petroleum.
Building on diversification, asset allocation is an investment strategy that builds your portfolio by weighing an adequate amount of risk for your goals. Asset allocation evaluates how your portfolio is created and the specific securities you are investing in. For example, a more aggressive portfolio might have 80% stocks and 20% bonds.
These stocks and bonds can also be diversified across industries and other markets — so asset allocation and diversification are not mutually exclusive, rather, they work in harmony.
This strategy helps curb a bad financial habit: timing the market. Dollar-Cost Averaging (DCA) allows an investor to divide the total amount of investment money into smaller, periodic purchases. The goal is to avoid market timing, harness volatility, and hopefully see a better return.
DCA is a great long-term strategy that helps investors build wealth over time. One prime example is a 401(k). You make payroll contributions to this account on a cyclical basis which distributes funds to your portfolio and increases your savings over time. But this strategy can also be used outside of retirement savings accounts like mutual funds or ETFs.
High-Level Investment Strategies to Keep in Mind
Investment strategies are really the fun part. They allow you to customize a plan based on your unique needs and let you approach investing in a way you’re most comfortable with. Let’s review a few that are ideal for new investors.
Active vs Passive Investing
These are two completely different approaches to money management. Each has its pros and cons, though many professionals today encourage the lower-cost passive form of investing.
Active investing is what it sounds like: it actively approaches buying, selling, and trading securities to earn maximum return. This type of investing requires a portfolio manager and often a team of analysts who alter, adjust, and move securities in real-time with the goal of a larger return.
But this type of investment philosophy has some significant downsides. To start, the management fees alone are often overwhelming, not to mention the added fees for buying and selling assets. There are also important tax considerations with this approach which usually results in a higher tax bill.
Passive investing, on the other hand, is a sound alternative that has been proven to match or outperform its active counterpart. Whereas active investing is attuned to short-term market fluctuations, passive investing is a long-term plan. With a passive investment approach, the actual buying and selling of securities is limited and investors rely more on long-term projections than market timing.
Passive investing has many benefits including low cost, increased transparency, and tax efficiency. But critics say it isn’t as flexible and doesn’t offer as great of returns. Active investing gives the investor more freedom to potentially see larger returns, but it also incurs much higher fees and risk.
Growth vs Value
Another dichotomy in the investment world is the difference between growth and value approaches to investing. While both growth and value are desirable aspects of any portfolio, many investors lean one way or another depending on their needs.
A growth investment strategy focuses on companies that are predicted to grow faster than the rest. The hope is the company will grow through additional hires and acquisitions which will lead to added profit, but that isn’t always the case. This style of investing carries more risk and is better suited to investors with a high-risk tolerance and a long investment time horizon.
Value investing takes a different approach. This type of investment looks for companies who fly under the radar, meaning their stock price might not actually represent the true value of the company. Value stocks tend to be safer investments and usually pay dividends to shareholders.
Essentially, growth stocks, since they are more established and more expensive, carry greater risk. Value stocks tend to be more cost-effective and have less risk attached. The type of stock that is right for you comes down to your risk tolerance, investment goals, tax plan, and investment horizon.
Building Your Strategy
There are many different investing strategies out there, and you need to find one that supports your unique goals. Each person’s investment needs may change, so it’s important to know the different ways you can invest. Remember, you can always alter your investment plan as your needs evolve.
In fact, it’s important to update your plan as you move through significant life stages. This is where working with a financial planner helps. Together, you can evaluate short- and long-term goals and adjust strategies based on your current life stage. Want to learn more? Reach out! We’d love to talk to you.
Stay tuned for our next series installment, where we’ll explore the different types of investments in your portfolio!
Disclosure: Abacus Wealth Partners, LLC (Abacus) is an SEC registered investment adviser with its principal place of business in the State of California. Abacus may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This brochure is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Abacus with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Abacus, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
This is not an offer to sell any type of security, and there is no investment currently available through Abacus. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
For additional information about Abacus, including fees and services, send for our disclosure brochure as set forth on Form ADV from us using the contact information herein. Please read the disclosure brochure carefully before you invest or send money.
Taxes play an important role in your financial life. Their reach extends far beyond the dreaded April 15 (now July 15th for 2020) date and come into play much more than once per year. Taxes are actually involved in nearly every financial decision you make, chief among them being investing.
Taxes are to investing as textbooks are to education—you can’t have one without the other. So how do taxes work when you are investing and in what ways can they impact and inform your investment strategy?
Let’s find out!
What Accounts are Taxable?
Before we dive into the type of taxes to look out for, let’s review what type of accounts generate taxes.
Investment Accounts and Taxes
A taxable investment account, otherwise known as a brokerage account, is an account that is funded by after-tax dollars and allows the account owner to invest in nearly any type of security. Those securities could be
With taxable investment accounts, you will be required to pay taxes on any gain in the year that gain happened. So if you had a capital gain of $5,000 in 2020, that money will need to be claimed on your 2020 tax return.
But what happens if your investments lose money? If you sell an asset at a loss (less than what you paid for it) that is known as a capital loss and doesn’t require any taxes. You can work to balance your tax bill by strategically balancing your capital gains and capital losses in a year as these losses can be used to reduce your taxable gains. In addition, you can deduct up to $3,000 in capital losses each year on your tax return with an option to carry forward the remainder.
Your long savings journey to retirement won’t come without its fair share of tax responsibilities. There are a couple of accounts that are tax-deferred accounts, which means the accounts contribute and accrue gains tax-free until distribution in retirement. The top two tax-deferred accounts are 401(k) and a Traditional IRA.
Both of these accounts are funded with pre-tax dollars. All of the gains continue to grow tax-free and are only subject to tax when you take distributions in retirement as ordinary income.
A Roth IRA and Roth 401(k), on the other hand, requires you to pay taxes when you contribute the money but not when you take it out, making it a vital savings vehicle for retirement. Roth IRAs do have income thresholds so if you make over $139,000 for single filers or $206,000 for married filers your options are limited, but you may be able to still contribute to a Roth by initiating a Roth transfer or backdoor Roth IRA in which you transfer funds from a traditional IRA into a Roth.
What Taxes Will You Owe (And Why)?
If you are earning money on an investment, the IRS will want a portion of that gain. Below are three main types of tax you might deal with when investing.
Capital Gains Tax
Capital gains tax is triggered when you make money, or realize a gain, on an investment. This comes from the sale of an investment at a higher price than what you paid. Sounds simple right? Well, the IRS has come up with a couple of stipulations to determine the percentage of capital gains tax that you will owe.
Length of time you held the investment
These two factors work to determine the percentage of tax you will pay on a capital gain. The first factor is based on your household income and your ordinary tax bracket and this number really informs the second criteria of how long you held the investment.
If you retain an asset for less than a year, that is considered a short-term capital gain and will be taxed at a higher rate, anywhere 10%-39.6% depending on your tax bracket. But, by holding onto your investments for a year or more, you will be eligible for the more favorable long-term capital gains rate, which ranges from 0%-20%, though most people pay about 15%. Again, that percentage will depend on your tax bracket.
Since selling assets costs you money, why is it worth doing? There are many reasons for people to sell assets including
Rebalancing a portfolio
Desire to make a change to investment strategy
Changing risk tolerance
The bottom line here is that your investments aren’t stagnant. They are moving and changing as your needs change. It is important to keep up with your investment strategy and understand what your needs and goals from it are to better create a plan that works for you.
Ordinary Income Tax
The second type of tax that you will need to factor into your investments is the ordinary income tax. This tax comes into play when you earn income through your portfolio in the case of dividends and interest payments.
Dividends are an interesting category and another way for you to experience tax on your investments. Some investments pay quarterly or annual dividends to their individual investors which are basically just a check that goes into your account. Interest works in a similar way. As a shareholder, some investments will pay you regularly, resulting in income.
This income is taxed at your ordinary-income rate. There are, of course, exceptions to this rule. Interest from municipal bonds is exempt from federal tax and for those lucky to live in California, they are exempt from state tax as well. If a dividend meets certain IRS regulations, it can be a qualified dividend that is taxed at the capital gains rate.
How to Keep Taxes in Mind When Investing
Tax planning is an important step to get the most out of your investments. As you can see, they play a major role in your overall profits. When factoring in taxes into your investment plan there are a couple of strategies to keep in mind.
Asset allocation is a strategy that looks at the specific securities that you invest in, like stocks and bonds, as well as the balance between those securities. Based on your aggressive risk tolerance, one account might be allocated to have 80% stock and 20% bonds, as an example.
If asset allocation is the balancing of securities, asset location takes it a step further by determining the best place to house those securities in order to make them as tax-efficient as possible. Believe it or not, where your securities live makes a huge difference in your overall return. Creating a strong plan around the role taxes play in your investments can help you come up with a strong, balanced, comprehensive investment plan.
Your investment goals will change and evolve as you do, so don’t be afraid to make changes when you need to. A situation might happen when you want to rebalance your portfolio or the market fluctuations support a different allocation depending on your risk tolerance and investment horizon.
The most important thing is to remember the investment goals that you set and employ a level of flexibility so that your strategy stays in line with where you are at in your life now.