Transferring a Large Cash Sum? Don’t Forget the Exchange Rate!

Getting the very best exchange rate might not be top priority when you are exchanging your vacation money for the local currency, but if the value of the transfer is substantial, a poor rate can mean losing literally thousands of dollars.

One of the main reasons for making large personal transactions is to buy property abroad, and whether you are paying in installments for an off-plan property or need to transfer the total amount, the sums of money can often be considerable.  While some people feel safer with simply making the transfer directly from their regular bank account in their home country and risking the exchange rate on the day, others prefer to use a specialist foreign exchange service.

A couple of the benefits of foreign exchange services are that they typically allow you to fix good rates of exchange in advance of the transaction being made and they give you the option to specify the rate that you want (obviously this has to be a realistic one) and wait in the hope that it will be achieved within the timespan that you have available.

The charges made by foreign exchange services obviously vary, so it is always worthwhile to shop around.  If you are considering using such a service, also make sure that you do your homework thoroughly to ensure that the organization is one that is both reputable and financially secure.

Questions Which Might Affect Your 2011 Tax Bill

I have a few questions for you, which won’t take very long to answer, but can help US help you keep your taxes down, even for this year.

There may be a few moves we can make that can help your tax hit before we’re forced into “reaction mode” — which is the only mode out of which after-the-fact tax work can be done. So, if at all possible, I’d like to change that paradigm for you by having you answer a few short questions…

So, without further ado — some questions for you:

1.      Have you had a significant change in your wage income this year?

2.      Have you taken capital gains or losses this year? Are you planning to?

3.      Did you start or sell a business this year?

    BONUS QUESTION: Do you know anyone who did, that would like input on their tax situation?

4.      Did you purchase real estate?

5.      Did you make your full contributions to retirement accounts?

6.      Have you considered a Roth IRA?

7.      Did you withdraw from retirement accounts, and for what purpose?

8.      Have you sent your family and friends our way — and, if not, is there something which we can help you with to make this easier?

9.      Are there any other issues you think we should know about?

Now — the answers to these questions form the “tip of the iceberg”, and they will help us to know which direction to take as we work with you over the next two months to prepare for year-end.

5 Top Tips for Keeping Your Belongings Safe When Traveling

Although it would be nice to think that we could all travel safely without the fear of being separated from our belongings en route, airports, train stations and bus stations make easy pickings for the light-fingered.  Here are a few top tips to ensure that you arrive at your destination with all of your belongings in tow:

1. Attach a few small bells (like the ones on Christmas decorations) to your hand luggage so that if anyone tries to move it while it is stowed, you will hear instantly.

2. Invest in a few items of clothing with concealed pockets, and wear them while traveling and while out and about in busy places when you reach your destination.

3. Whether you are seated during your journey or waiting around to board planes, trains or buses, place your foot through the handles of your luggage, if possible, to ensure that it doesn’t stray.

4. Don’t let any type of commotion distract you from your luggage.  Thieves often use distraction techniques to buy them the few vital seconds that they need to grab and run.

5. Avoid removing your wallet from a purse or from your person when in public, otherwise would-be thieves will know exactly where to target.  Go somewhere private such as a restroom to remove whatever cash you need, and immediately hide your wallet again.

Buying Organic Without Breaking the Bank

As anyone who has checked out the prices of organic produce in his or her local supermarkets knows, switching to foodstuffs that are free of pesticides and chemicals can be a very expensive business.  With these few simple tips, you can eat more healthily for less:

1. Don’t assume that supermarkets offer the best value for organic produce.  Check out natural food stores too, because they can often be cheaper overall or for certain items.

2. Instead of shopping for the ingredients for a particular recipe, buy the cheapest organic ingredients and devise meals around them.  Also, adapt traditional recipes so that they use the cheapest organic produce.

3. Design your meal plans around seasonal produce, because it is always less expensive.

4. If you have relatively easy access to local organic growers, then buy directly from them to cut costs.

5. Remember that organic produce that is frozen is still better than nonorganic produce that is fresh.  Consider buying frozen if the ingredient that you want is out of season.

6. Some foodstuffs are more heavily contaminated with pesticides and chemicals than others, and it is estimated that we can reduce our exposure to contaminants by 90% simply by buying the organic versions of these alone.  Even if you can’t afford to go fully organic, try cutting out nonorganic apples, strawberries, peaches, nectarines, grapes, blueberries, spinach, celery, sweet peppers, potatoes, lettuce and kale, because these are the worst offenders.

Hidden Financial Mistakes … And How To Fix Them

You pay your bills on time. You try to save as much as you can. You even follow the advice which you read in books and hear on the radio about how to keep your finances in check. But you’re still not getting ahead. Well, sometimes, it’s the unchallenged assumptions about how we’re handling our money which rise up and bite us in the keister.

Hidden Mistake #1: Inappropriate Mental Accounting

Definition: Tendency for families to divide money into separate accounts based on subjective criteria.

Typical Example: Treating $100 you received as a gift from Grandma, differently than a $100 bill earned.

Typical Example #2: Having money languishing in a savings account earning 0.25%, while carrying high-interest debt to pay off at 12%.

Cure: Funnel income, no matter the source, into one savings account.

Any “found money”, such as a tax refund or gift from Grandma, quickly decide where that money is best utilized. As for expenses, occasionally change how you pay. If you always pay with a credit card, try cash. This will get you remembering that all of it, for the purposes of your mental “books”, should be lumped into one, monthly bucket.

Hidden Mistake #2: Manipulative Price Anchoring

Definition: Our tendency to relate the value of a purchase to a price point which, rationally, should have no bearing on the amount spent.

Typical Example: The “rule of thumb” to spend two months’ salary on an engagement ring.

Typical Example #2: A realtor will tell you that “in 2007 this house was going for $500,000 and is now listed at only $350,000!” … causing you to think this house is undervalued.

Cure: For big ticket purchases like a house, car, or engagement ring, ask a friend whose financial values you respect for their input.

For everyday purchases, avoid looking at the MSRP or sticker price. Ask yourself:

Can I afford this today?

What do I really want to spend?

What is this really worth to me?

Marketers are experts at this sort of price-anchoring, and we really should know better … but yet we still fall prey to it. Try not to let outside sources set up the comparison by which you should be considering such large purchases.

Hidden Mistake #3: Loss Aversion Costing You

Definition: Our consistent tendency to avoid loss, rather than acquiring gain.

Typical Example: An investor is more likely to sell a stock which has increased in value, rather than selling stock that decreased. Over time, her investment portfolio is made up of investments that have decreased.

Cure: Don’t think of selling a stock for less than you paid for it as being a loss. It can actually work as a gain for two reasons:

* Tax deduction (which can really help!)

* The other side of opportunity cost: opportunity GAINED (i.e. you can better utilize that money elsewhere)

So, don’t check your portfolio so often. If you don’t know you’ve lost money, you don’t experience the pain. (And riding the roller-coaster of your portfolio’s value is a waste of emotional space.) Since stock prices go up in the long-run, the longer you go without looking at your portfolio, the greater chance of seeing a gain. Sometimes taking that loss really is the best thing you can do.

Hidden Mistake #4: Following the Herd

Definition: The tendency for us to want to do the same thing as a large group of others, with no thought to whether that action is rational or irrational.

Typical Example #1: Buying when prices are high because everyone else is.

Typical Example #2: Selling when prices are low because everyone else is.

Cure: Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”

Keep this in mind when making your next financial decision. If everyone is telling you to buy this or buy that (i.e. gold, silver, real estate) do the opposite. In the financial investment world, if it’s too good to be true, it usually is. Write up an investment policy statement or contract. Include factors such as:

* Investment objective

* Investment goals

* Desired asset allocation and diversification

* Summary of your risk tolerance

* Rebalancing schedule

Before making any changes, consult with this contract. You can also take advantage of this inherent tendency to do what’s approved by others to affect positive behavior. For example, let’s say you trying to pay off debt. Tell your 3 closest friends, make an informal contract, sign your name at the bottom, and then email it to them. The pain you would incur from breaking that contract is high relative to the pain of breaking your behavior if you went about it alone.

Happy 2012!!

Happy New Year!!

Click the picture to view my New Years Message

Three Lessons in Work and Life

Business icon Jack Welch once told Reader’s Digest what he’d learned from three jobs he had growing up: caddying, punching holes in a piece of cork, and selling shoes.

• Caddying. The future CEO of General Electric loved being out on the golf course hearing all about the big deals being made by the businessmen and the affluent. “It was like being a fly on the wall at a meeting.”

• Cork. Punching holes into a sheet of cork for a Parker Brothers game called “Dig” was his first glimpse into monotony. “It lasted about a month,” he says, “and I concluded that I never wanted to do anything like that again—ever.”

• Shoes. It was through his third job, selling shoes, that he learned the basic tenet of business: Close the deal. “If they didn’t like a shoe,” he says, “I always tried to be thinking ahead to a pair they might like better.” Every time someone walked into the store, he said, he felt he was stepping up to the plate to swing for a home run.

“Today I believe that the worst sin in running a big company is to manage its size rather than using that size,” he says. “The advantage of size is the resources it gives you to go to bat often. You have to take risks in business. If you take a risk and fail, get up to bat and swing again.”

Always Question the Premise

After World War II, Gen. Dwight D. Eisenhower served for a time as president of Columbia University. According to one story, a committee of faculty members once asked him to issue a rule prohibiting students from walking on the grass in the main quadrangle.

Before issuing a statement, he asked, “Why do they walk on the grass?”

“Because it’s the shortest way to the central hall from the main entrance,” the committee answered.

“If that’s the way they are going to go,” he said, “then cut a pathway there.”

Eisenhower understood that telling people what not to do isn’t always the best course of action.

Borrowing from Your 401(k)

With the current economy, people are borrowing from their 401(k) plans at record levels.  When times are tough that particular pool of money begins to look very attractive.  But, deciding to access that pool might not be as easy or straight-forward as you think.

While every 401(k) plan is different, most will let you borrow as much as 50% of your vested balance up to $50,000.  The loan is paid back through your paycheck, with interest.  Most plans have competitive interest rates and the loans can be carried for up to 5 years.  If you use the proceeds of the loan to purchase a primary residence, that pay-off term may be extended.

When you are making payments back into the loan, you are paying yourself interest on the money you borrowed.  This is where it gets a bit foggy.  First, when you draw your paycheck, you pay taxes on the earnings.  Then you pay the interest on the loan out of what remains.  At a later date, say retirement, you begin drawing from the plan.  Those distributions are taxable income, therefore taxed again.  You are paying income taxes twice on the funds you use to pay interest on the loans.  (Special tax rules apply to Roth 401(k) contributions).

There is an opportunity cost with taking a loan from your 401(k) as well.  If those funds are not invested, they are not continuing to grow tax deferred.  So, what is the opportunity cost?  Well, you need to compare the interest you are paying yourself and the future tax implications previously discussed with the lost opportunities of tax deferred investment returns.

There are other considerations as well.  For instance, if there is a separation from employment, the plan may require that the loan be immediately repaid.  If you don’t have the funds to repay the loan, it is treated as a taxable distribution.  If you are not age 59 ½ or more, a 10% early withdrawal penalty may also apply to the taxable balance.

Whether or not you can afford to pay back the loan and still make contributions to the plan should be carefully considered.  Would the circumstances that have lead you to look at borrowing the funds as an option impair your ability to repay the loan?  If so, this might not be considered a viable option.

The interest you pay on alternative financing options may be tax deductible.  For example, the interest on a home mortgage often qualifies for a tax deduction.  However, the interest on a plan loan repayment often is not.  Be sure to weigh the comparisons of tax deductibility for both alternatives before making a decision.

Every plan is different and will have various restrictions.  Consult with your plan administrator before deciding to borrow from your 401(k).

Taxes and Social Security

   If you are looking forward to retirement and tax-free Social Security income, you might be surprised when the IRS comes around for a bite. Yes, way back when Social Security was a young program, President Franklin D. Roosevelt promised no income taxes would be exacted, but that promise ran out in the 1980s for some people whose income exceeds certain levels.

Now the federal government considers the retirement entitlement as taxable income when your other income plus half of your Social Security exceed an amount based on your filing status ($32,000 if you filed jointly, $25,000 for single filers). First, only 50 percent of your benefit above a certain threshold is taxable. When you exceed the first threshold, up to a maximum of 85 percent of your benefit can be taxed.

You can continue to work and still receive retirement benefits. Your earnings in (or after) the month you reach your full retirement age will not reduce your Social Security benefits. But your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.

If you work for someone else, only your wages count toward Social Security’s earnings limits. If you are self-employed, the federal government counts only your net earnings from self-employment.

Income from other sources is not counted, such as other government benefits, investment earnings, interest, pensions, annuities and capital gains.

If you work for wages, income counts when it is earned, not when it is paid. If you have income that you earned in one year but the payment was made in the following year, it should not be counted as earnings for the year in which you received it. Some examples are accumulated sick or vacation pay and bonuses.

If you are self-employed, income counts when you receive it—not when you earn it—unless it is paid in a year after you become entitled to Social Security and earned before you became entitled.