Budget for taxes, savings and life

Let's get straight to it, some sobering news for you...when you add up the taxes you pay to the feds, payroll tax, Georgia state, etc., you’re probably paying more than 30 percent of your income to some form of government. And this doesn't even include property, sales, gas, and ad valorem taxes. I don’t advocate moving to Canada or Europe -- unless you want to pay even more taxes. What you can do is educate yourself and adopt what I call a TSL-driven budget. That's a budget containing the three buckets where most of our dollars go: Taxes, Savings and Life.

Your day to day budget and your retirement planning will be a whole lot easier with my TSL guidelines:

Taxes: 40 to 50 percent

Pro golfer Phil Mickelson recently got in hot water when he complained 62 percent of what he earns goes toward taxes. Few of us feel sorry for a guy who makes close to $50 million a year. But his complaints weren’t that far off the mark, even though CNBC reported his estimate was a little high.

Consider the new federal tax bracket that’s nearly 40 percent on families with annual income north of $450,000, add California’s 13 percent  income tax, and you almost start to feel sorry for Lefty.Almost.

Taxes take a huge bite out of all our paychecks. So budget 40 percent of your income for taxes (closer to 50 percent for really high income households), and you’ll have a good sense of what’s left for your Savings and Life buckets.

Savings: 20 percent

For many years Vanguard recommended saving between 8 and 12 percent of your gross income to guarantee a happy retirement. Recently, they upped that guideline to 12 to15 percent, thanks to lower return expectations in the future. I advise clients to try to save 20 percent of their gross income.

Twenty percent is a significant number, but take into consideration the many tax-advantaged ways to save -- such as a 401(k), 403(b) or a SEP IRA -- and you can get there a lot faster than you might think. And you may be able to retire a lot sooner than you think.

If 20 percent seems unrealistic right now, just start somewhere and work up to it.

Life: 30 to 40 percent

Now, we’re at the truly discretionary spending. The remaining 30 percent (40 percent if your tax bite is lower) of your income goes here. Spending just 30 to 40 percent of your income during your working years on living (food, shelter, transportation, insurance, kid-related costs, entertainment and the like) will allow you to maintain your lifestyle once you retire.

For Mickelson, that’s means limiting his Life spending to about $15 million a year.

My TSL formula may seem harsh at first, but who ever said getting to Easy Street (and a happy retirement) was going to be easy?

9 Most Important Things To Know About Personal Finance

There are so many crappy lists on the Internet, most of them designed to get advertising in front of your eyeballs. We have our own non-crappy list to share. It's our list of fundamental truths of personal finance and investing. 

1. It Ain’t Rocket Science – Money guru Dave Ramsey has observed that “80% of personal finance is behavior” not education. You don’t need to be an expert on the stock market or high finance to start building for the future. All you really need is a solid plan and the commitment and discipline to stick with it over the years.

2. Start Early – Time can provide a powerful tailwind for your investments. The sooner you start saving for retirement, the more time your money has to take advantage of compound interest – a process in which the interest on your savings earns more interest. We should start saving for retirement from Day One of our first job. If you haven’t started yet, do it today! Waiting just 8-10 years to launch your savings program can really slow your growth and reduce the size of your potential retirement nest egg.

Related: Entrepreneurs - Why They Need Financial Planning Too

3. Set Goals – If you don’t know where you’re going, you’ll never get there. Carefully define your savings objectives, whether it’s a house or retirement. Visualize them in detail. Then, figure out how much you need to reach that dream. Use that information to craft a plan to reach your goal.

4. Budget – We too often think of a budget as a straightjacket or prison cell. But it’s actually an empowering tool that allows you to see where your money is actually going, better control your spending and stay on track towards your goals. If you don’t have a budget, you are flying blind in one of the most important aspects of your life – your finances. We guarantee you will get at least three significant surprises when you start analyzing your spending. “I spent how much at Starbucks last month?!

5. Spend Less Than You Make – Common sense, right? But it’s incredibly easy in this easy-credit, consumer-driven world to live beyond our means. Try to save at least 15% of your income.

6.  Pay Yourself First – You can’t spend money you never see. Arrange to have your savings deducted from your paycheck via the 401k plan and/or direct deposit into a brokerage account.

Related: Why Investing In Your 401k Is A No-Brainer

7. Always Take Free Money – If your employer offers to match a percentage of your 401K contribution – and most do -- maximize that benefit by contributing to the match limit.

8. Don’t Go House Crazy – There is nothing worse than being ”house poor.” A too-big mortgage payment can really limit your ability to save – and spend on other things you need and want. So, when shopping for a new house is careful not to over-buy. Think very carefully about what you actually need in a home. How many square feet? How many bedrooms? How big a yard? How important is it to live in that trendy neighborhood? Stick to those parameters in your search. And remember: You don’t have to spend every dollar the bank is willing to lend you.

Related: How Do I Know How Much To Spend On My House?

9. Protect Yourself – A complete personal finance plan includes provisions to protect the life and future you are building. Life insurance and estate planning are key to making sure your obligation to your loved ones is met, even after you are gone. If you don’t have life insurance start shopping for it today. (If you haven’t reviewed your policy in a while, do that. Make sure your benefit reflects any changes in your situation.) As soon as that’s done, make your will and get it filed. You can use an attorney or an online legal service like LegalZoom.com.

Related: Do You Need a Will?

So, there you have it – the most useful, least misleading list in the history of the Internet.

Have questions? Not to worry. Just Click the button below. 

How to Build your investment portfolio to meet your retirement needs

There are any number of core investment philosophies, each with it own merits and uses. How do you decide which strategy or philosophy works best for you?

At Wela, we believe both growth and income investing have important roles to play in a successful retirement portfolio. During the front part of your wealth-building years, we recommend a growth strategy in which you invest heavily in stocks that will gain in value over the years (and decades), allowing you to reap significant profits when you cash out.

But as you near retirement we believe in transitioning to an income-driven portfolio consisting largely of assets that generate a steady cash flow that can provide you with a “paycheck” in retirement. That income comes from stock dividends, bond interest and income from alternative investments, such as preferred stocks, real estate investment trusts (REITS) and royalties from energy trusts.

One thing I love about income investing is that a well-crafted income portfolio can meet your retirement spending needs for years while limiting the drain on your capital.

 

Working Years: To understand the benefit of income investing, it might help to think of your retirement portfolio as a house. During your working years, you build your portfolio brick-by-brick -- dollar-by-dollar, asset-by-asset. It begins as a starter home -- functional but not fancy. Over time, you add rooms and amenities; a second floor, basement media room and a deck. With luck, the house appreciates over the decades until it’s worth, say, a million dollars.

Retirement: Now it’s time to retire. How do you get your money out of the house? Well, if it’s a growth “house,” you sell it off piece-by-piece and use the proceeds to fund your retirement. When the last piece is sold, the money is gone.

But if it’s an income house, it generates “rent” in the form of that asset income from stocks, bonds and other investments. That income, previously reinvested while you were “building the house” can now be used to cover your expenses. You may well have to sell some parts of the house over the years, but at a slower rate than the owner of a growth “house.”

How much slower? Well, imagine you have a portfolio at retirement worth $500,000 that can generate $20,000 in annual income. Assuming you can live on that money (plus Social Security, pensions, et cetera) after 10 years you would have derived $200,000 from your portfolio but it would still be worth about $500,000, depending on how the market moves.

In order to derive the benefits of both growth and income investing, we recommend the “bucket” approach to creating an effective retirement investment portfolio. As the name suggests, your investments will fall into one of three categories or “buckets.”

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal. To maximize your return over time you will need to diversify these holdings.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend “owning your age” in bonds. When you are in your 30’s, bonds should make up 30% of your portfolio. When you are 50, that percentage should be 50%.

Stocks – This is where growth comes into play. During your working career this bucket will contain mostly shares in companies that have large growth rates, but don’t pay much of a dividend. Think Netflix or Amazon. Ideally, these stocks will significantly appreciate in value over the years. When you retire, you will shift your holdings into income stocks – shares that show some growth but pay a nice dividend. Apple and Disney are good examples. There are several excellent growth ETFs that allow you to tap into the appreciation of a whole basket of companies.

Alternative Income – This smallest bucket holds income-generating assets that are neither stocks nor bonds. This includes real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

While income investing isn’t the only way to saving for the future, in our experience it’s a way to have your “house” provide safety and warmth during your retirement years.

Interested in learning more about investing? Read how an average family retired with 1 million dollars in savings. Download our free eBook on investing here

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

What The Finance Is Up With Video Games?!

Take a stroll down memory lane as the guys take a look back at the evolution of video games. The graphics, controls, and characters may change, but the strategies remain the same - and the same is true for investing. Matt and Eddie also look into how a video game company that hasn't produced any games sold for a billion dollars. Find out what the finance this has to do with your investing strategy and more.

Wela Whip - Chick-Fil-A Cows Are Pissed, An Uber Problem, and The Cupcake Fad Crumbles

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Roosters are impotent and the Chick-Fil-A cows are pissed! A key breed of rooster is having fertility problems that would trouble us all. The world's largest chicken breeder has discovered a genetic issue (without a solution at the moment) that is reducing the roosters' ability to reproduce. However, the problem for all of us is that it has led to a rise in chicken prices... which spells trouble for the Chick-Fil-A cows! Read More

An Uber problem For a company that relies on social media going viral, this turns the age old adage "any press is good press" on its head! A recent DC Uber ride went bad... really bad. The Uber driver got into a high-speed chase and put the passengers in real danger. Thankfully no one was hurt. Up to this point, people have been trusting in Uber's screening process for drivers, but this may cause a rumbling... a rumbling that Uber needs to quickly chase away. Check out the passenger's account of the event. Read More

We are all smarter than a 15 year old...right?! The Organization of Economic Cooperation & Development is conducting research to discover how financially competent today's youth are with this 10 question quiz. Thankfully we were able to pass the test (see our results here). Take a stab at it and let us know, on our Facebook page, how you did. This has television show written all over it... right Jeff Foxworthy? Read More

The cupcake fad crumbles Monday morning was a sad day for cupcake lovers. Crumbs cupcakes closed the doors to all their bakeshops after defaulting on their debt. The company was the poster child for the cupcake fad, so it will be interesting to see the ripple effect. Nevertheless, this hasn't stopped people from trying to sell 'supposedly' the stores last cupcake... for $250! Seems like a bit much for a stale cupcake... Read More

The $44,000 potato salad A Kickstarter campaign of potato salad has raised over $44,000 and the campaign has 22 more days on it. What's the money going to be spent on? Actually it's going to be spent on a Labor Day party in Columbus, Ohio. Although we do love potato salad, we didn't think it could help us raise enough money for a down payment! Read More

The significance of today's date: 7-11 For us 7-11 means the gas station with awesome Slurpees. Here is a commercial that helped us bring back the memories. Read More

Get Out Of Debt

We’ve all been there. Things get crazy in life, and you think, “Well, I’ll just put this on my credit card for now. It won’t take me too long to pay off.” Then expenses just seem to keep popping up, and it gets harder and harder to pay off your initial debt, and you may even keep adding to the pile.Well it’s time to stop this downward spiral, and get out of the debt trap. Below are several steps you can take to become debt free.

1)      Assess the situation

It’s time to sit down, and take a good hard look at all your expenses (not just your debt). Pull up your bank account(s), any debt that you have, and any reoccurring monthly expenses. Get all this information in front of you and your significant other. Now look and see exactly where your money is going. Create a T-chart with one side for income (what you’re actually taking home) and the other for required monthly payments. This should include expenses that you can’t adjust, like mortgage or rent, the electric bill, etc.

Subtract the expenses from the income and circle this number.  This is how much free cash flow (FCF) you have on a monthly basis.  We are going to use this to pay down debt along with enjoying life!

Reduce your circled number above (FCF) by your minimum debt payments.  Then start listing your “Nice To Have” expenses such as entertainment.  After reducing your FCF by minimum debt payments and entertainment.  Hopefully you end with a positive number, and your expenses don’t outweigh your income.

 

2)      Set realistic goals with a time frame

If there is money left after reducing FCF for “Nice To Have”s, we can put those funds to work paying off your debt.  If not, or if you would like to put more towards debt, cut excess:

For example, maybe you can cut your entertainment budget, and put some of that money towards paying off your credit card. It can be hard to cut back on things like going out to eat with friends, but you can always get creative when finding a way more budget friendly way to hang out, like hosting a potluck at home where everyone brings a dish.

Now that you know exactly how much you want to put towards your debt, figure out exactly how long it should take you to pay off your smallest debt amount outstanding. Once you’ve figured out these numbers, write it down. Congrats! You’ve set your first goal.

 

3)      Take action

Now, each month, you’ll know where to cut your expenses so you can put the money you’re able to save towards paying off your debt! Watch your progress as your debt shrinks. This can really help motivate you to continue paying it off, and keep your debt from feeling overwhelming.

Remember that if you miss one month, that it doesn’t mean you should miss the next month. Don’t beat yourself up if you didn’t reach your goal for one month. If you couldn’t make the full payment of your goal, try and make a partial, and if you can’t do that, just remind yourself that this is a marathon and not a sprint. Building debt takes time, and so does paying it off.

 

4)      Remember you are not alone

Most people are more motivated when they have a partner. Whether it’s at the gym or a group project at work, it can help to motivate you when you’re being held accountable to your goals. Wela wants to be your personal finance partner. Our debt tool will help you write out your goals, and help hold you accountable to paying off your debt. Don’t worry, Wela’s personal financial advisors have seen it all when it comes to debt, and we never judge.

You can sign up for your Wela account here to get started taking the above steps to start paying off your debt today.

 

Teachers: A Raise That Should FINALLY happen

Remember that teacher that you always loved or possibly hated. I remember many of my teachers. My fourth grade teacher was a big kayaker and loved to tell us stories of her weekend outdoor experiences. At that age, she was the coolest person. On the other hand, I remember the teacher that gave me all that homework in the fifth grade because she was trying to prep us for middle school; she was one stern person. Although she had good intentions, I still think my workload in the fifth grade was more than any time in middle school.

Whatever the memory may be for others, we all have those memories. The likely reason is because we spend our most influenced years with these people, they have some sort of hand in our direction. And the price of the influence is constantly being debated.

Brace yourselves, because I am going to provide a new way to think about the teacher comp dilemma.

Pensions are the problem, but also a key piece to the solution

#1 Problem with Pensions: Ineffective tool to attraction

Retirement seems like eternity for a new teacher. A 22 year old out of college is more concerned about living a fun lifestyle today, rather than worrying about what cruise they will be going on when they become empty nesters.

So, enticing a new graduate that ranks within the top third of their class (which is one thing America is awful at, we are only recruiting 23% of our teachers from the top third academic cohorts) seems a bit difficult when the enticement used is for a great retirement. The desire to teach should be driven by one’s desire to impact others’ lives, but as seen by the professions attracting top talent, current pay and the opportunity to increase pay in a career is a top desire.

#2 Problem with Pensions: Costing our cities a BOATLOAD of money.

The NCTQ estimates that cities have a pension unfunded liability that equals $325 billion! Yes, that’s billion with a “B.” Data from 2012 showed that Georgia’s pensions are unfunded by over $9 billion.

Unfunded pension liabilities impact everyone. In order to help solve this problem, cities must divert funds from other projects to the pensions causing development to be retarded and then this also leads to teachers being impacted based on future pay increases and possible furloughs.

Here is Your $20,000 Raise

Being a teacher has the extreme benefit of receiving a pension in retirement. Companies have been stopping pensions as fast as they can because of their extreme cost.

Currently, a teacher within Fulton County (a main county in Atlanta Georgia) is getting paid $3,763.88 per month. This is just based on the amount of pension benefits being paid relative to the number of retired teachers. This equates to $45,166.56/year.

When we sit down with a client and set goals for what needs to be obtained by retirement, we are looking to save enough money for a retirement nest egg. We want to get to a lump sum amount that allows for us to draw a percentage (4-4.5%) every year that covers their annual living expenses, without depleting the initial balance.

So, we can apply this to what a city SHOULD do for a teacher’s pension. It would mean that the city would need to have over $1.1 million set aside PER teacher who retires after 30 years. {For the math geeks, here is the math: $45,166.56 (annual pension benefit) / 0.04 (withdrawal rate in retirement)}

By using a simple calculation, we could see that the school system would need to save more than $18,000 per year for every teacher. Also, they would need to grow this asset base by 4.5% per year in order to attain a lump sum level at the end of 30 years of over $1.1 million.

Two Problems, One Solution

States got into a lot of trouble with the pensions due to bad projections in terms of how much the assets would grow, along with projections of how long they would pay out benefits.

It’s time for school systems to follow the lead of the private sector and look to reduce the burden of these long term liabilities.

Utilize the funds that would be necessary to create a lump sum equivalent to a current pension and give this to the teachers today.

This solves two problems. First, it reduces the pressure on states’ budgets with these unfunded liabilities; and, secondly, it makes the teacher profession more attractive to those top third academic cohorts. The current average salary for a teacher ranges between $40,000-$45,000. By adding in the dollars going towards a pension and getting the salary levels to $60,000-$65,000, this aligns more with what we are seeing. The Compare tool on www.yourwela.com currently shows people in their 20s are making about $65,000 on average. Some of those new teachers we are trying to attract are in that age range.

This solution isn’t perfect, but it has logic. Unfortunately, many things the government does isn’t logical to some.