Monthly Archives: October 2016

The Fiduciary Standard for Investment Advice

What Does Pricing Carbon Have in Common with the New Fiduciary Standard for Investment Advisors?

The short answer: A lot.

The typical answer: These issues both seem very complicated to me, I’m already concerned where you are going with this, so let’s change the subject.

My answer: They both have the potential to alleviate human suffering, grow the economy, increase employment, and compel us to choose leaders willing to support policies that are not partisan in nature.

It is no secret that, as the use of fossil fuels has increased, carbon dioxide levels have been increasing at a rate of about 0.5% per year for the past several decades. The economic benefit of converting carbon locked up in fossil fuels for millions of years into instant energy, of course, has provided prosperity to many for the last century (e.g., inexpensive travel, food choices, home/office heating and cooling). Unfortunately, the last several generations have passed the true costs forward to the next many generations. Carbon dioxide traps heat energy in the atmosphere. The resulting disruptive impacts of excess atmospheric heat contributes to increasing human suffering (e.g., droughts, floods, wind damage). It is increasingly apparent that the true cost of burning fossil fuels has not been reflected in its price. Economists consider it a market failure when the true cost of a product or service is not reflected in its price.

If fossil fuels were now priced at their true cost, the fossil fuel age would be brought to a close and allow for a new era of sustainable energy to be established. Technology to make this happen is already in place. Improved policy making is needed to move us forward toward. A good example is the policy offered by the nonpartisan Citizens’ Climate Lobby (CCL). CCL’s carbon fee and dividend proposal was studied by an independent entity, Regional Economics Models, Inc. (REMI). The results of the analysis showed that a gradually increasing fee on fossil fuels at the source, where the collected fees are distributed as dividends to households, would transition society from an unsustainable dependence upon fossil fuels and grow the economy by generating 2,800,000 new jobs and avert 230,000 premature deaths over a 20-year period. Members of congress are aware of the CCL bipartisan proposal and are looking for signs of support from their constituents (surveys show 68% favorability of a fee and dividend approach to carbon pricing) in order to overcome the actions of the fossil fuel industry to delay the needed transition to clean energy.

Prior to 1980, most members of the middle class did not need an investment advisor – you paid off the mortgage, saved some extra cash and relied on a pension and your Social Security benefit to fund retirement. With the advent of 401k plans and the demise of pension plans, the financial services industry grew to a scale comparable to the fossil fuel industry in economic size. It took a relatively long time for policy makers to identify that excess investment management fees are a cause of significant avoidable financial loss to savers. For instance, a retired couple without pensions and a savings of $1,000,000 may expect to draw down $40,000 per year to supplement their Social Security benefits. If their investment advisor charges a fee of 1% or 2% per year over the true (i.e., competitive) cost of the service provided, the couple is getting by with $10,000 or $20,000 less per year –as little as half the amount they expected! Is this suffering? Let’s consider a single retiree who has $300,000 in savings and no pension. This retiree is sold an annuity with a 10% upfront commission ($30,000) and locked into an investment management contract he did not fully understand with an annual fee of greater than 2% per year for 10 years. Excessive, non-transparent, fees benefit few at the expense of many.

How to Estimated Tax Payments Online

Did you know it is possible to schedule your estimated tax payments online?  This is a very handy service for people who have to make Form 1040-ES estimated tax payments in April, June, September and January each year.  To make your payments, use the Electronic Federal Tax Payment System (EFTPS®).  The EFTPS® enables individuals and businesses to send their tax payments to the IRS by electronic transfer rather than writing a check and mailing it, or sending an expensive wire.

With the Electronic Federal Tax Payment System (EFTPS®), a free service of the U.S. Department of the Treasury, you schedule payments whenever you want, 24 hours a day, 7 days a week. You can enter payment instructions up to 365 days in advance.  This way when your tax preparer completes your taxes and calculates next year’s estimated payments, you can login online and schedule those payments.  Then you’re done.  The nuisance of mailing in those payments by check every few months has been removed.

Reasons to use the service include:

  • It’s fast. You can make a tax payment in minutes.
  • It’s accurate. You review your information before it is sent.
  • It’s convenient. You can make a payment from anywhere there’s an Internet or phone connection 24 hours a day, 7 days a week.
  • It’s easy to use. A step-by-step process guides you through scheduling payments.
  • It’s secure. Online payments require three unique pieces of information for authentication: an employer identification number (EIN) or social security number (SSN); a personal identification number (PIN); and an Internet password. Phone payments require your PIN as well as your EIN/SSN.

One thing to be aware of is that you can’t wait until the due date to make your first payment!  Payments must be scheduled at least one calendar day before the tax due date by 8 p.m. ET to reach the Internal Revenue Service (IRS) on time.  On the date you select, the funds will be moved to Treasury from your banking account, and your records will be updated at the IRS.

There are a couple of other items to consider.  Obviously it is important you have the funds in the checking account you are transferring from.  The first time you use the system, you will have to enroll.  Also remember that the EFTPS® is a tax payment service.  You’ll need to already know the amount, tax form, and date when you schedule a payment.  This system doesn’t help you calculate your tax due.  If you want to cancel a payment, you must do so by 8 p.m. local time two business days before the scheduled date.

The Power of a Raise

Most personal finance advice misses a crucial point.

 

Lost amongst all the calls to cut coupons and skip your morning coffee is the fact that cutting costs isn’t the only way to get ahead.

 

In many cases, a raise can be far more powerful in helping you reach your biggest financial goals. And it may not be as hard to get as you think.

Let’s say you currently make $60,000 per year and you’re able to negotiate a 10% raise (more on how to do this below).

 

Assuming that 25% of that new income goes to taxes, that means you now have an extra $4,500 to save each year, which is almost enough to fully fund an IRA.

 

Looking at it another way, that extra $4,500 represents a 7.5% return on investment, which is right in the range of what experts expect from the stock market.

 

So by negotiating a raise, you’ve given yourself a stock market-like 7.5% return. And unlike the stock market, that 7.5% return will be consistent year after year.

 

And if you’re investing that $4,500 each year, you’ll earn additional returns on top of your contribution. Assuming a 7% annual return, that investment will grow to $197,393 after 20 years and $454,828 after 30 years.

 

Plus the increased salary sets a higher baseline for future raises and for your salary at future jobs, making it more likely that your income will increase even further over time.

 

And all of that comes with pretty much no risk. As long as you present your case respectfully, the worst that happens is you get a no. And even then you’ll have planted the seed, which may make it more likely that you’ll get a raise in the future.

 

How to Get a Raise

 

Of course, the trick here is knowing how to negotiate so that you actually get the raise you deserve.

 

This can be intimidating for a lot of people, myself included! But the good news is that there are some simple strategies you can follow to strengthen your position and even increase your value in the eyes of your employer through the negotiation process.

 

My favorite resource on this topic is Ramit Sethi’s Ultimate Guide to Getting a Raise & Boosting Your Salary. Yes, the title is a little hyperbolic, but the advice is practical and solid.

 

And remember, as long as you present your case well, the worst that happens is you get a no. There’s little risk in giving it a shot.

 

Side Hustle for Extra Income

 

Getting a raise isn’t the only way to increase your income. People are increasingly turning to side hustles as a way to make some extra money on top of their day job.

 

There are lots of ways to do this, from dog walking to freelance writing to website design. It doesn’t have to take a ton of time, and even a little extra income can go a long way.

 

J. Money at Budgets Are Sexy has chronicled over 60 different side hustles real people have used to earn extra money. You can also check out the websites Fizzle and Side Hustle Nation for ideas, inspiration, and practical advice on how to get started.

Merging Finances with Your Partner

I work with a lot of new couples who are in the midst of merging their financial lives for the very first time. In fact, my fiance and I are in the process of doing it ourselves too.

 

It’s not an easy thing to figure out. There are logistics to handle, habits to change, emotions to manage, and often it feels like there is never enough time in the day for any of it.

 

But successfully managing money together is key to creating a happy partnership, so here are four pieces of advice as you go through this process yourself.

 

1. Focus on Joint Goals, Not Joint Accounts

 

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

 

Ignore all of that. It doesn’t matter. At least not at the start.

 

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

 

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

 

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

 

This communication is the real key to successfully merging your finances. All the rest is just logistics.

 

2. Establish Shared Expenses

 

Now, about those logistics…

 

One easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

 

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

 

3. Create a System

 

There are two main ways you can start sharing those expenses.

 

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

 

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

 

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

 

4. Plan for Extra Money

 

Here’s something my fiance and I have done that’s helped us a lot.

 

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

 

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

 

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.