6 Things to do With Your Tax Refund

Ah, tax season. Most people dread filing taxes, but what about the sweet, sweet victory of earning a refund at the end of it? Because most of us look at tax season as a negative thing, we often forget that it typically comes with some extra money that we need to be smart about. It’s so easy to blow all of the money in the first week or two simply because it hasn’t been included in this month’s budget.

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the basics of income investing

As an investment advisor, I’m constantly answering the question, “How do I cut through the clutter of bad investment strategies?” Everyone wants a strategy that makes them feel confident about investing in the future, especially in times of distress when everyone seems to be holding their breath.

Although there are many strategies investors believe in such as pure growth and value investing-with each having their own set of benefits and set-backs-my answer to this is a strategy that I preach to pretty much anyone who will listen, income investing. I even dedicated a whole chapter to it in my book, You Can Retire Sooner Than You Think.

Related: Warren Buffett’s Take On Value vs. Growth Investing

Let's get into what Income Investing is and why I believe it's the correct approach for long-term financial success.

What is income investing?

Income investing is a way to generate consistent cash flow from your liquid investments.

What this really means is that you are collecting the cash flow from dividends from stocks, interest from various types of bonds and distributions that come from a variety of investments (investments that pay distributions but don’t fit neatly in the stock or bond category). Adding the three of these together gives you a personal portfolio yield.

Income investing focuses on the production of a steady cash flow from the yield of your stocks, bonds and other investments, which can be reinvested in your portfolio or used to fund your spending needs if you need the cash flow.

Related: How The World Of Personal Investing Has Changed Over The Past 30 Years

This is different from pure growth investing in that pure growth investing relies on a rising stock market to build value. Income investing allows you to diversify your investments and collect a steady stream of income along the way. If this still seems confusing, let me explain this approach using a system I believe to be effective and easy to implement, if you take the time and energy to research and plan. I’ve named it the “bucket system.” (They’re buckets because you put your liquid net worth into them. Get it!?) All of the money you invest will fall into one of these four buckets and these groups work together towards your financial goals.

Cash Bucket – This bucket is your emergency fund; the money that lets you sleep well at night. To be safe, you should have about six months of living expenses stashed in money markets, CDs or savings.

Income Bucket – Contributions to this bucket are invested in various types of bonds — Treasury, corporate, municipal, high yield, TIPS, international, and floating rate. They will provide you with a steady interest income. A well-diversified bond portfolio should protect your principal, as well. To maximize your return over time you have to diversify within this bucket.

Growth Bucket – This bucket will hold different stocks for people in different stages in life. Younger investors who are still working typically invest in more growth-oriented stocks. These are shares in companies that have large growth rates, but usually they don’t pay much of a dividend. Their focus is on capital appreciation through growth in their revenue and earnings.
On the flip side, retirees typically focus more on dividend-paying stocks. These are companies that aim to give you some capital appreciation and pay you a nice dividend along the way.
Dividends accounted for 44 percent of the total return of the S&P 500 over the last 80 years. This is one reason I’m such a believer in income investing.

Alternative Bucket – This will be your smallest bucket. It holds investments that don’t fit neatly into either of the above buckets. For example, this bucket holds investments in energy royalty trusts (publicly traded oil and gas trusts), real estate investment trusts, preferred stocks, and MLP stocks (pipeline and energy storage companies). These are traded like normal stocks on the open exchanges, but they don’t pay traditional dividends or interest…they pay distributions. This type of investment is often considered riskier, hence why it is the smallest bucket.

The idea of using the bucket approach to income investing is that you can diversify your liquid savings and use them to either supplement your income in retirement or reinvest the portfolio’s income to accumulate more wealth over time.

All that being said, this is obviously not the only functional investment method in the world. However, I’ve found it to be effective for those who are looking for a low cost, transparent, and consistent investment strategy built for the long-run. Keep in mind it is important to check up on your bucket performance and make necessary adjustments as needed.

You can learn more about this method by reading my Wall Street Journal article on it here, or by picking up a copy of my book, You Can Retire Sooner Than You Think.

Related: TSL: How To Budget For Taxes, Savings & Life

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.

Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for AJC.com. You can find his original article here.

Editor’s Note: This post was originally published in July 2014 and has been completely updated for accuracy and comprehensiveness.

Financial New Year's Resolution: Creating Your Budget

Part three of our Financial New Year's Resolutions Series tackles ol' faithful: the budget. The beginning of the year is a great time to create and implement a budget, or to reevaluate your current budget and tweak it so it better suites your current lifestyle. Start off 2017 with our steps to your best budget. 

Step 1)  Define your income

For this step you’ll want to list the amount and sources of your gross income. This step is important because you need to know every dollar that is coming into your hand so you can give it a purpose in your budget. This should be your gross income, meaning before any taxes or savings. You might know this number off the top of your head, or you might need to go back and look over your past year’s bank statements to learn exactly how much you earned.

Even if you have your budget together, you’ll want to still take a minute to think through anything that might have changed, like receiving a raise or changing jobs. If you earn money from a hobby or side gigs you’ll want to include this income in this step as well.

Related: Your Budget Workout

Step 2)  List your expenses

Start with your reoccurring monthly obligations like your mortgage or rent, gym membership, car payment, cable, student loan, etc. From here you’ll move to your more amorphous expenses like food, entertainment, utilities and gas. Then think through your expenses that you pay either irregularly or annually like insurance, dental bills, haircuts, shopping, etc. Once you’ve gotten everything written down with a dollar amount next to it, we suggest you look back at the last three months bills to double check if there are any expenses you might have miscalculated.

Related: Spending and Budgeting

Step 3)  Find the difference

Subtract your monthly gross income from your monthly expenses. This is the step that can surprise people. Are you spending more than you’re earning each month? Do you have enough cash flow left for taxes and savings? If you’re looking at a negative number, remember that you can change bad habits. Don’t focus on the negative. Instead, focus on what you can do to improve.

Step 4)  Plan for the future

Now that you understand where your money is coming in, where it’s going out, and what you need to do moving forward, it’s time to put together your budget. Look through your expenses and determine what you need to remove, lower, increase or keep the same with your spending in order to reach your financial goals. On the flip side, you might need to brainstorm ways that you can increase your income. Take some time to write out a realistic budget for yourself next to your current spending habits so you can quickly see what you’ll need to change.

At Wela, we are working to release a new budgeting tool which blog readers can beta test by creating a Wela account and then inside the portal visiting www.yourwela.com/budget. This tool will help you think through what categories you’ll need to include in your budget along with giving you a suggested monthly amount. It can also help you track your budget moving forward. Take this tool for a test drive, and let us know what we could do to improve it.

Suggested New Years Resolution:

I will calculate my current income and spending habits by _____(date)_____. I will put together and implement my new budget by_____(date)_____. I will work with Wela to track and optimize my new budget by _____(date)_____. I will review my budgeting progress every __(week/month/quarter)___.

So now you can budget better. Need help with consistency?

Financial New Year's Resolutions Series  Part Two: Organizing Your Finances

The Surprising Question That Will Answer If You Should Invest Or Pay Off Debt

Invest This past week I was reading an article talking about reasons to pay off debt or invest your money. It inspired me to actually drill down on some scenarios to determine the mathematical answer. (I know, I’m a nerd.) Based on my calculations, it seems that despite wanting to calm your psychological demons, at a certain point it makes more sense to believe in the longer term game of investing as opposed to the short term win of paying off a little extra debt… But it’s dependent on where you are in your life.

Everything with finance is based on individual situations. There is no one-size-fits-all answer for finances, and that's simply the truth. When I'm working with someone facing this same choice of investing or paying off debt, the answer always rests on exactly how close this person is to retirement. The reason it's such a pivotal part of the equation is because you don’t want debt in retirement. So, someone that is 55 or 60 years old would see a greater “personal financial plan” impact by paying off more debt because they would be closer to retirement and having no debt gives them greater freedom with their monthly cash flow. The person that is 40-years-old, though, may see a greater impact by investing the money instead of putting it towards debt because they have a longer amount of time for the invested money to grow and compound.

All this said, the answer is completely dependent on the amount of money you are considering investing or paying down debt, and the type of debt you have. Determining what to do with a $1,000 is different from $10,000. With $1,000, it'd likely serve you best saving  interest on your debt rather than invested in the stock market no matter your age. However, if you have a lump sum of $10,000 or something bigger, then the benefits of longer term compounding can be really beneficial to you, more so than the benefits to putting it towards debt.

Essentially, you have to ask yourself how much you can  earn on this money if you invest it versus how much interest you are going to pay on your debt.

It makes sense that larger amounts of money would see a higher impact by being invested than saving you on interest because interest is calculated on your principal amount of money. When you are paying down debt you are lowering your principal amount which means less and less interest. But when you are investing, your money continues to grow and the interest you earn on your money continues to get larger - that’s the benefit of compounding.

The biggest consideration about this specific decision, though, is still the amount of time on your side. You want to have a long period of time for your money to grow while invested. That is why if you are nearing retirement, it may be more beneficial for you to put that extra lump sum towards paying off debt rather than investing the money.

But if you are younger, then you may find it more powerful to continue making the monthly payments on your debt and put a lump sum amount towards your investments.

This gets back to what we always talk about regarding it’s about time in the market not timing the market. Every year that passes where you aren’t saving is another year that you can’t make up with regards to compounding.

So, basically investing larger lump sums at an early age can be more beneficial relative to putting that lump sum towards debt. As you near retirement, though, the benefit of having no debt is a more powerful use of your lump sum.

Like I said at the beginning, everyone’s situation is unique. If you'd like help with making a decision like this, go to yourwela.com and sign up for a free account. Then fill out your profile, securely add your financial institutions (bank, credit card, mortgage, etc.), and fill out a game plan. One of our advisors will review your specific situation and use this information to determine whether it makes more sense (and cents) to invest or to pay off debt with your extra savings. That can all be done while sitting at your desk at work or on your couch at home. That’s the benefit of leveraging technology to deliver financial advice… just like we are doing at yourwela.com.

Eddie Reflects On Taking The CFP® Exam

A few weeks back, we posted an interview on my experience of going through the CFP® designation process. The highs and lows and challenges that I had over the past 15 months. Well, I’m going to give away the end first (spoiler alert)…I passed the CFP® Board exam! Now that the last page of the book has been read, I want to share my experience with this test and feelings of relief that come with being finished with this process. So on Tuesday, July 28th at 8 AM, I went to a Prometric testing facility in Tucker, GA. The drive from my house in Atlanta to Tucker was anxiety producing to say the least. I told my wife, Rebecca, that this was the most unnatural feeling. Voluntarily putting yourself through a high-pressure and nerve-wracking six-hour exam. Nobody wants to do that, and to say I had butterflies in my stomach is to put it lightly.

To back track just a bit, the week leading up to the exam was filled with study sessions. I was doing two and three-a-day study sessions, to borrow a football term.  I filled every moment when I wasn’t in the office with practice questions, flash cards and review materials. I wanted the topics to be as fresh on my mind as possible, so I would get up early to be sure that my mind starting thinking about this stuff first thing. Considering the exam would be administered first thing, I didn’t want to feel groggy going into game day. I made sure to get plenty of rest in the days leading up to the test and drank lots of water…and no alcohol. I wanted my state of mind to be consistently on the CFP® material. I will tell you that the celebratory cocktail I enjoyed after the test never tasted so good!

I arrived at the testing facility a little early. In fact, they hadn’t even opened their doors yet, so I sat and watched the minutes tick by until they opened up. Luckily, I was second in line to get checked in which is quite involved. For security purposes (as well as maintaining the integrity of the test environment) they fingerprint you, verify your identity with your drivers’ license and wave a metal detector wand over your clothes to be sure you don’t have anything on you. The only thing allowed in the test center is your calculator (which must have the memory cleared), a #2 pencil and scratch paper, both of which the Prometric test administrators provide. They do give you a locker to store your keys and cell phone in as well as your lunch.

Once you go through the tutorial on how to use the system, which is pretty self-explanatory, you click “Begin Test” and immediately a timer pops up in the top right-hand corner of your screen while your question counter pops up on the left-hand side. The exam is broken up into two 85 question blocks, and you have exactly three hours to complete each block. So you know exactly how far you’ve gotten and how long it’s taken you. I had been warned that time will become an issue if you get stuck on a problem or two and the next thing you know 15 minutes have passed. Well, that turned out to be great advice because I finished my first block of 85 questions with 1 minute and 35 seconds to spare. At the conclusion of the first block, you have a 40 minute scheduled break. You can eat lunch, stretch your legs and try to relax for a bit. As you might expect, I took about 8-10 minutes of the 40 and had to go back in. It was hard to relax knowing I had 3 hours and 85 more questions to go before I was on the other side of this thing.

The second block of questions seemed to go by a lot faster and I actually finished with about 25 minutes to spare. Of course, you are allowed to go back and review your answer selection but I made very few changes. In fact, only one that I can recall because another lesson learned along the way was to not second guess yourself. Just go with your gut feeling if you aren’t sure. And if you’re really not sure, choose answer “C”. At the conclusion of the second half, you are asked to hit the final submit button. Once you do, you’re taken through an awkwardly long survey of about 11 or 12 question. They have nothing to do with your results and everything to do with your experience. Yet, you still don’t know the outcome of your test! So, as you can imagine, I flew through the survey as quickly as possible in order to see my results and sure enough, a “Congratulations!” popped up on the screen. I could feel my heart pounding out of my chest as I waited for the results to pop up and the wave of relief that rushed over me was indescribable.

Needless to say, I feel like the sky is a little bluer these days with no CFP® exam to study for. The feeling of being on the other side of this is such a relief. I’m glad it’s over and thankful to be on the other side. Happy to share my thoughts of preparation and experience with anyone who is considering going through this process so feel free to reach out to me.

The Best Financial Advice You've Ever Received

Each week on The Wela Show Podcast we ask our guests for their favorite piece of financial advice they've ever received, and we've gotten some fantastic answers. Here is a quick look at what some of our guests have said.  

Kevin Peak - Podcast 25

My financial advisor told me that we'd never be able to save enough money for our kids' college because they're so young. We don't know how much college will cost in 10 or 15 years. So save something, but don't let it dictate your lifestyle now or your retirement savings. Even if you're great at saving, be careful that you have balanced savings.

 

Allyson Kuper - Podcast 26

My dad's advice is that if you're responsibly paying yourself first and budgeting, it's okay to splurge. My big splurge is usually travel. I love to travel, but it's important to save up, and not extend yourself on something that's unnecessary. First off, it gives you the gratification of saving for something and the ability to spend without feeling guilty. But, it also keeps you from over-spending.

 

Joey Fehrman - Podcast 27

The book that changed the course for me was Rich Dad Poor Dad. In college I had no interest in finance. I thought the whole thing was stupid. Then I read the book, and it opened my mind and changed my perspective. I realized that this stuff was valuable.

 

Greg Corey - Podcast 29

No one dropped a bombshell on me, but the way my dad raised me was that we had to go cut the grass. We had to go make money, and we had to save money. There wasn't an option. We didn't have money struggles even though we weren't wealthy, and that resonated with me. Ultimately, it comes down to don't spend more than you make.

 

Alex West - Podcast 30

A good friend and a mentor of mine told me, "No one can pay you what your free time is worth." It took me a long time to really understand what that meant. It's easy to get distracted by what car we drive, what phone we talk on, or what zip code we live in. At the end of the day, Wela or wealth is really about what you're doing with your life, and the love you have, and the pride you have. So I think that keeping that definition of wealth at heart and the number-one priority is really important to be who you are, and live within your means to do what you want to do with this life.

 

Keep up with what our guests say is their favorite piece of financial advice. Subscribe to The Wela Show on iTunes!