With the holiday, it’s the perfect time to spread some love to the people that matter most, our PLJ community.
No matter your plans, we hope today is filled with lots of fun and laughter.
More importantly, we hope you’re celebrating the most important person in your life… yourself!
Love yourself first and everything else falls into line.
-Lucille Ball
Understanding financial matters can be difficult if you don’t understand the jargon. Becoming familiar with these 10 financial terms may help make things clearer.
1. Time value of money
The time value of money is the concept that money on hand today is worth more than the same amount of money in the future, because the money you have today could be invested to earn interest and increase in value.
Why is it important? Understanding that money today is worth more than the same amount in the future can help you evaluate investments that offer different potential rates of return.
2. Inflation
Inflation reflects any overall upward movement in the price of consumer goods and services and is usually associated with the loss of purchasing power over time.
Why is it important? Because inflation generally pushes the cost of goods and services higher, any estimate of how much you’ll need in the future–for example, how much you’ll need to save for retirement–should take into account the potential impact of inflation.
3. Volatility
Volatility is a measure of the rate at which the price of a security moves up and down. If the price of a security historically changes rapidly over a short period of time, its volatility is high. Conversely, if the price rarely changes, its volatility is low.
Why is it important? Understanding volatility can help you evaluate whether a particular investment is suited to your investing style and risk tolerance.
4. Asset allocation
Asset allocation means spreading investments over a variety of asset categories, such as equities, cash, bonds, etc.
Why is it important? How you allocate your assets depends on a number of factors, including your risk tolerance and your desired return. Diversifying your investments among a variety of asset classes can help you manage volatility and investment risk. Asset allocation and diversification do not guarantee a profit or protect against investment loss.
5. Net worth
Net worth is what your total holdings are worth after subtracting all of your financial obligations.
Why is it important? Your net worth may fund most of your retirement years. So the faster and higher your net worth grows, the more it may help you in retirement. For retirees, a typical goal is to preserve net worth to last through the retirement years.
6. Five C’s of credit
These are character, capacity, capital, collateral, and conditions. They’re the primary elements lenders evaluate to determine whether to make you a loan.
Why is it important? With a better understanding of how your banker is going to view and assess your creditworthiness, you will be better prepared to qualify for the loan you want and obtain a better interest rate.
Source: http://blog.lendingclub.com/survey-says-americans-not-making-the-most-of-hard-learned-credit-lessons/
7. Sustainable withdrawal rate
Sustainable withdrawal rate is the maximum percentage that you can withdraw from an investment portfolio each year to provide income that will last, with reasonable certainty, as long as you need it.
Why is it important? Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio.
8. Tax deferral
Tax deferral refers to the opportunity to defer current taxes until sometime in the future.
Why is it important? Contributions and any earnings produced in tax-deferred vehicles like 401(k)s and IRAs are not taxed until withdrawn. This allows those earnings to compound, further adding to potential investment growth.
9. Risk/return trade-off
This concept holds that you must be willing to accept greater risk in order to achieve a higher potential return.
Why is it important? When considering your investments, the goal is to get the greatest return for the level of risk you’re willing to take, or to minimize the risk involved in trying for a given return. All investing involves risk, including the loss of principal, and there can be no assurance that any investing strategy will be successful.
http://en.wikipedia.org/wiki/Federal_Reserve_System
10. The Fed
The Federal Reserve, or “the Fed” as it’s commonly called for short, is the central bank of the United States.
Why is it important? The Fed has three main objectives: maximum employment, stable prices, and moderate long-term interest rates. The Fed sets U.S. monetary policy to further these objectives, and over the years its duties have expanded to include maintaining the stability of the entire U.S. financial system.
Important Disclosure
As you prepare your financial strategies, it’s important to spend some time considering beneficiary arrangements. Whether it’s through an IRA, life insurance, wills or trusts, anytime you want to leave money to others, you want make sure that you have in your mind a good understanding of how you want to designate the beneficiary.
For example, let’s say you’re a husband and a father and you have money in a retirement account — an IRA. Typically, your primary beneficiary will be your wife. What does that mean? It means that if you die and your wife is still alive, your wife will receive all the proceeds of that account. The wife in this scenario is considered a primary beneficiary. But what if your wife dies before you?
Or what if you and your wife die at the same time? In this scenario you may want what are called secondary or contingent beneficiaries. Let’s say you and your wife have three children: child one, two and three. These children can be named as a second line of beneficiaries, or contingent beneficiaries, so just in case your wife dies before you do, or you and your wife die at the same time, you’ve got the second line of beneficiaries, the three children. You may choose to divide the proceeds of your retirement account evenly between the three children — a third/a third/and a third.
But here’s something else to consider. What if your children have children of their own, your grandchildren? Let’s say child No. 1 has 3 children child No. 2 has no children at all and child No. 3 has two children — meaning you have a total of five grandchildren. Now, you may want to start asking some additional questions about designating beneficiaries.
Let’s assume your wife dies before you. Now there is only you. Therefore, when you die, the proceeds are designated to go to your three children who you have named as contingent beneficiaries. Well, what if one of your children dies before you? Let’s say your third child, the one with two children, dies before you .Then what happens? Well, if you haven’t set up your beneficiaries appropriately, you could end up disinheriting those two grandchildren. All of the proceeds could end up going to child one and child two, cutting out your third child’s surviving children.
That’s generally not what people want. Instead, they may say, “We want this child’s share to go to his/her two children.” This is generally referred to as a per stripes distribution, meaning that each branch of the family is to receive an equal share. If that is your objective, you would want to incorporate that term into your beneficiary designations. Then, should both your wife and one of your contingent beneficiaries die before you, the beneficiary designation would direct that contingent beneficiary’s share of the proceeds to go to his/her heirs.
This content is provided for informational purposes only and should not be construed as advice designed to meet the particular needs of an individual’s situation. No statement contained herein shall constitute legal advice. Consult with your attorney about your personal situation.
If you’re considering tax planning to make the most of your asset allocations, you need to have a good understanding of how your assets are related to taxes. A good way to gain a basic understanding is by considering the concept of four tax buckets.
The first bucket is your taxable bucket, so any accounts or financial vehicles that you pay tax on each year, whether or not you pull the money out, falls in this bucket. So what does that mean? It might be bank accounts like CDs. It might be brokerage accounts, your mutual funds or bonds or even stock dividends. Anything that gives you a 1099 each year, even though you didn’t pull the money out – maybe you’re just reinvesting – that falls in this taxable bucket.
The second bucket is your tax-deferred bucket. Generally speaking, there are three primary vehicles that fall in the tax-deferred bucket: qualified retirement plans – that’s your 401k’s, 403b’s, 457s, IRAs. Non-qualified annuities also fall in this bucket, as well as savings bonds. Those are all tax-deferred, so those are in that bucket.
The third bucket is your tax-free bucket. There are three financial vehicles that are currently tax-free: municipal bonds, Roth IRAs and properly structured life insurance – notice I said properly structured life insurance.
Nothing else is tax-free. In fact, municipal bonds are not always tax-free, but for the most part they are.
Finally, the fourth bucket is income and estate tax-free, and that’s where you get into charitable trusts and other similar arrangements.
Here’s what you need to know. If you want to reduce taxes on your assets over time, you need to move assets to the right. A common mistake many people make if their objective is to reduce their tax liability is often right here. They have a majority of their assets in qualified retirement plans. This has the potential to create significant tax liabilities down the road. You may want to consider reallocating some assets to the right to help reduce the tax liability over time.
That is the concept of the four tax buckets.
No statement contained herein shall constitute tax, or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation.
If you made a New Year’s Resolution to get healthy, you may get more bang for your resolution buck than you bargained for. That’s because healthy habits can benefit your wallet as well as your body.
The link between health and money
According to the Centers for Disease Control and Prevention (CDC), chronic conditions–including diabetes, heart disease, and cancer–account for more than 75% of all health-care costs nationwide. Nearly half of all Americans have a chronic disease, which can lead to other problems that are devastating not just to health but also to a family’s finances. People with a chronic condition pay five times more for health care each year, on average, as those without a chronic disease.*
Many chronic diseases can be linked to four behaviors: tobacco use, excessive alcohol consumption, poor eating habits, and inactivity.* A closer look at each of these behaviors demonstrates the health-money connection.
http://www.forbes.com/sites/danmunro/2013/09/06/the-big-disruption-that-isnt-happening-in-healthcare/
Eating habits and activity level
Proper nutrition and regular exercise are vital to staying healthy, but they can also save you money. For example, reducing the amount of high-in-saturated-fat products, processed foods, and red meat in your diet can result in benefits to your heart and wallet. Replacing high-fat ingredients in some recipes with healthier, low-cost options–such as using beans instead of ground beef–can help trim your grocery bills. And replacing high-calorie meals eaten at restaurants with meals made at home using fresh, in-season ingredients can benefit both body and bank account.
Current guidelines from the U.S. Department of Health and Human Services recommend at least 2½ hours of moderate physical activity per week. Many opportunities exist in everyday life to both accumulate active minutes and save money. Instead of driving to your destination, walk or ride a bike. Do your own yard work or house cleaning instead of hiring help. Go for a hike or play ball with your kids rather than going to the movies or visiting an amusement park.
Long-term considerations
Chronic disease also has indirect long-term costs. Leaving the workforce for extended periods–or having to retire early–means fewer paychecks, less chance to benefit from workplace-provided retirement plans and health-care benefits, and lower earnings to apply toward Social Security benefits. In addition, chronic diseases often necessitate home renovations, the hiring of specialized care providers, or even permanent nursing care. When viewed over the long term, taking steps today to reduce your risks of getting sick down the road may make good health and financial sense.
*Sources: Centers for Disease Control and Prevention, the Department of Health and Human Services, and the Partnership to Fight Chronic Disease