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I RECENTLY LEARNED a new expression, TL;DR, which stands for “too long; didn’t read.” Twitter users and bloggers use it when they want to summarize an idea for readers who are short on time. It’s the modern equivalent of saying, “Here’s the executive summary.”
Coincidentally, this week, two people separately asked me what I see as the most important principles in personal finance. In other words, they wanted the TL;DR version, without too much commentary.
IF THERE’S ONE NUMBER that drives our financial lives, it’s our fixed living costs. We’re talking here about regularly recurring expenses that are pretty much unavoidable, such as mortgage or rent, car payments, property taxes, utilities, insurance premiums and groceries.
Why are fixed living costs so important? There are five reasons:
1. The lower our fixed living costs, the easier it is to save. I believe many Americans would love to save more, but simply can’t,
SOME OF MY CLIENTS are political junkies; others don’t follow politics. Either way, they’re mostly aware that the Affordable Care Act, a.k.a. Obamacare, overhauled the rules for medical insurance. But lots of them are unaware that ACA’s overhaul also significantly changed some tax laws—and those changes adversely affected their pocketbooks.
I remind my clients that ACA included a provision that increased Medicare taxes for employees with high incomes. Similarly, it increased self-employment taxes for freelancers with high incomes.
MANY SENIORS needlessly incur hefty penalties or overpay their taxes. The reason: They don’t understand the strict rules that govern removing money from their tax-deferred retirement accounts.
The IRS sets the year you turn age 70½ as the deadline to begin taking RMDs, short for required minimum distributions. (For 2020 and later years, the starting age is 72.) The feds allow some leeway for the first of your RMDs. But this is a tricky exception.
WHEN IT COMES TO your home, ignorance about taxes isn’t bliss—and it could be disastrous. I often field tax questions from homeowners. Most don’t understand how they’re affected by continuously changing tax rules. Even worse, they’re totally unaware that the rules have changed.
Want to save thousands of dollars? What follows are reminders of how to sidestep tax pitfalls and take maximum advantage of frequently missed—but perfectly legal—opportunities:
Mortgage points. Do you plan to purchase a new dwelling around year-end?
YOU’VE PROBABLY already asked yourself this question: Is it better for my credit score to have just one credit card—or many?
There’s no magic number, because it isn’t really about how many credit cards you have. Rather, what matters is your financial situation and how you handle your cards. For example, if you are just beginning to build a credit history, it’s best to have a single card. Try to follow three rules:
Pay your bills on time—and avoid late payments at all costs.
WHAT’S THE BIGGEST challenge facing investors? Forget politics, low interest rates or high stock market valuations. I would argue there’s an even bigger challenge: How do you find financial advisors who are worth their fee?
On offer are brokerage firms, insurance companies, banks, mutual funds, accountants and independent advisory firms, all of them employing charming people who would love to help you. Problem is, there isn’t a lot of uniformity in the products and services they offer,
IN THE 1990S, WHEN I started working fulltime, conventional wisdom suggested two possible routes to a comfortable retirement: Find a public sector job that offered a traditional pension plan or, alternatively, join the private sector and set aside 10% of my salary each year in my employer’s 401(k) plan. I was led to believe that if I followed either recommendation, I could sit back, let compound interest do its magic and achieve a financially secure retirement.
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SINCE THE EARLY 1990s, Jonathan has written a novel and eight personal finance books—or nine, if you count the two editions of the Jonathan Clements Money Guide. All can be found on Amazon. But his latest book isn’t a solo effort, but rather a collaboration with 29 others: My Money Journey: How 30 People Found Financial Freedom—And You Can Too, published by Harriman House in April 2023.
Meanwhile, his 2018 book,
TODAY’S FINANCIAL advice: Just say no. You can probably think of instances when an individual ought to ignore one or two of the suggestions below. Still, if most folks followed these rules, they’d be far better off financially. Want a brighter financial future? Here are 51 things you shouldn’t do:
Don’t buy cash-value life insurance.
Don’t envy hedge fund investors.
Don’t write frequent checks against bond funds held in a taxable account.
Don’t carry a credit card balance.
TOWARD THE END of the year, financial advisors often advocate tax-loss harvesting. The notion: You sell losing investments—usually stocks and stock funds—in your taxable account, and then use the realized capital losses to offset realized capital gains and up to $3,000 in ordinary income, thus trimming your tax bill.
Sound like a smart strategy? If you trade individual stocks actively—or you’re a really bad investor—you should be on the lookout for tax losses, and not just at the end of the year.
YOU MIGHT HAVE HEARD financial experts claim that IRAs, 401(k) plans and other retirement accounts are terrible assets to bequeath because the government will end up with more than 80% of the money. This is just a scare tactic by financial advisors trying to drum up business: Unless you’re subject to federal estate taxes and the account’s beneficiaries are in the top income tax bracket, the tax bill will be considerably smaller.
Still, your beneficiaries will have to pay income taxes as they draw down the traditional retirement accounts you bequeath.
IF YOU HAVE MAXED out on 401(k) loans and you have an urgent financial need, you may be able to take a hardship withdrawal from your employer’s plan. Hardship withdrawals are typically allowed for unreimbursed medical expenses, college bills and funeral expenses, to prevent foreclosure or eviction, or to buy or repair your principal residence. Similar rules apply to 403(b) plans.
While hardship withdrawals are legally permissible, your employer isn’t obligated to allow them.
IF YOU HOLD YOUR investments in a margin account at a brokerage firm, you can typically take out a margin loan equal to 50% of the account’s total value. This is the so-called initial margin requirement, and it effectively allows you to control investments worth twice as much as you could otherwise afford.
A margin loan doesn’t have to be used to purchase additional investments. Some folks use margin loans to buy cars or pay the kids’ college bills,