Surviving the Holidays … Financially Speaking

Black Friday…the biggest shopping day of the year. Thanksgiving officially kicks off the holiday season that will be filled with parties, gathering of friends and family and the sharing of gifts. It’s also a time to remain vigilant over your personal finances so that you don’t begin the new year with new debt. A recent survey suggests that nearly 30% of shoppers are planning on using credit cards to fund holiday purchases. It’s way too easy to get caught up in the shopping mania of this season and find yourself in a freshly dug hole in January. Here are my tips for surviving the holidays…financially speaking:

  1. Decide how much you’ll spend. Take a moment to decide just how much you’re willing to spend, overall, on gifts during this holiday season. I strongly suggest that you focus on cash that you already have in savings, money market or checking accounts. Avoid thinking in terms of credit card spending that must be paid off from future paychecks. Your goal should be to begin the new year with no new debt as a result of holiday spending.
  2. Make a list. Now that you have your budget, make a list of all the people you’d like to give gifts to and then, beside each person’s name, put a dollar limit on the maximum amount you plan to spend taking care to make certain your individual totals don’t exceed your overall budget. It’s ok to use credit cards for your purchases as long as you have the cash to pay off the full balance when it arrives the following month.
  3. Focus on the children. With the current state of the economy, many families are being very conservative with their finances. If your resources this year are more limited, consider establishing a ‘moratorium’ on gifting between spouses and focus on gifts for your children for they are the people who are most excited and have the greatest expectations during this holiday.
  4. Give something back. The economic turmoil of the past couple of years has spawned financial hardship on more families than any time in our lifetime. Use this holiday season to teach your children the importance of giving to others who are in need. There are many ways to accomplish this. You can donate clothing, food, money or you can spend some time working in one of the many shelters located in your home town.
Don’t forget that there are lots of gifts that show you care without spending a fortune. Some of my favorite gifts are a spicy cheese ball one friend gives us each Christmas and home baked sugar cookies from another. Or it can be as simple as a personal note expressing what one’s friendship has meant to you.
If you’d like to have your financial question answered in The Birmingham News, email me and place Bhm News in the subject line.

Financial Independence Day!

On July 4th we celebrate our country’s independence, a freedom that was won through the blood, sweat and tears of many brave Americans.  Why not use our country’s Independence Day as a symbol for declaring your own financial independence?  If the heroes of American Independence can achieve greatness, so can you.  Here’s how to get started:

Start with a movie. As children we had dreams, many of them.  We dreamed of becoming an astronaut, a cowboy, a fireman, a movie star, a ballerina, a fashion model, a nurse, a teacher.  Somewhere between childhood and adulthood, we quit dreaming as we began dealing with the reality of day-to-day life.  But today, you should make the time to pick up pen and paper and write down your dreams…what you would do, where you would go, who you would become if money and time was no object?  Play a movie in your mind of what your life would look like if you were financially independent.  What would you do with your leisure time?  Would you continue to work?  Would you change careers? Would you split your time between two homes?  Would you spend more time in community service?

Decide what you want. Now, write down exactly what financial independence means to you.  It is critical that you be as specific as possible when declaring your intentions.  Don’t settle for, “I want to have enough money to retire”.  Vague intentions will bring mixed results at best.  Instead, craft a specific goal such as, “I will generate $50,000 per year passive income by age 50”.

Create your ‘Action List’. Once you know exactly what you intend to create, make a list of at least five actions that you can take in order to begin moving toward fulfilling your intention.  Again, it is imperative that these actions be specific and measurable.  For example, one could be to increase your contribution to your company’s 401-k plan to the maximum allowed.  Another might be to revisit your current investment allocation and increase the amount you are investing in stock mutual funds versus bond funds.

Get moving! Once you have written down both your intentions and your initial action steps, begin executing your game plan.  As you complete one action, move to the next but also be sure to add a new one to your list. Your goal is to always have a minimum of five action steps on your list.

What stalls many people is that they don’t know all of the actions needed to achieve their ultimate goal so they simply do nothing.  This is one of the primary differences between self-made multimillionaires and everyone else.  Successful people realize that you rarely are able to see the ‘entire’ plan in your head.  Instead, you know where you want to go and you can see a path that you think is the right one. Therefore, you begin your journey with an expectation that as you move forward, the path will continue to unfold before you. Successful people also don’t expect the path to be a straight one and they expect to encounter obstacles along the way.  Determination and perseverance are their keys to success.  They never allow anything to take their focus away from their destination and they continue to move forward until they arrive.  Happy Financial Independence Day!


Three Questions For Retirement Planning

Check out Stewart’s New eBook, “Marrying Finances” coming soon. Visit the store section at for more information!

Good Debt-Bad Debt

Recently, Lawrence, a reader from Canada, asked about the advisability of borrowing money to buy an electric car.  Lawrence read one of my books where I explain the debt rule: Don’t borrow money to buy a depreciating asset.  However he reasoned that the thousands that he would save on gasoline would make it worthwhile.  This got me thinking about when, and under what circumstances, there might be an exception to the debt rule.

First, let’s start with the concept of ‘good’ debt.  Good debt would be any debt used to purchase something that would provide a current and future benefit and have a reasonable chance of appreciating in value.  Perhaps the most obvious example would be the purchase of a home.  Certainly buying a home meets the ‘present and future benefit’ test.  However, the collapsing housing market may have people wondering if purchasing a home meets the ‘appreciation’ test.    On a short-term basis the answer is situational…meaning that, depending on your particular situation, you may find that your home is worth less than what you paid.  However, long-term home ownership remains a worthy financial strategy and, while it may take several years, we’ll see rising values in the future.

Borrowing money for investment can also meet the test of ‘good debt’.  Consider purchasing a duplex for $100,000 cash where net income is $15,000…or a 15% return on your investment.  If instead of paying all cash, you borrowed $65,000 at 6%, your return jumps to about 30%!

Borrowing money for education is another area that could qualify as good debt if the result is a better paying job.

Let’s get clear about what bad debt looks like.  My favorite example would be borrowing money, typically on a credit card, to pay for a vacation.  While ‘fun’ might be considered a current benefit, this will fail the ‘future’ and ‘appreciation’ tests. The same applies for borrowing for entertainment, furniture, clothes or gifts.  Clearly, you’ll want to figure out how to save and pay cash for these types of purchases.

So how should we advise Lawrence who’d like to purchase an electric car but will need to borrow money to do so?  If you are going to knowingly violate the rule, make sure that you have a source of income to pay for it.  In this case I’d advise Lawrence to finance the car over no longer than twenty-four months and plan to keep the car for a long time, say ten years.  This will give him more time for the ‘savings’ from the electric car to bear fruit.  I do have a couple of concerns he should consider:

  • The driving range for an electric car is 75 to 100 miles on a single charge so its usefulness is limited.  If he has longer trips in mind, he may need two cars and this may negate any savings.
  • An electric car will depreciate just like any vehicle, but I have a concern the electric car may depreciate faster than its gasoline counterpart.

My best advice for Lawrence is to see if he can purchase a used electric car…one that still is in manufacturer’s warranty.  He’ll likely shave a minimum of 20% off the purchase price and still reap the lion share of the future benefits.


New Opportunities Under New Estate Tax Law – Part 2

In my last post I began a discussion of the new estate tax law and how some of the provisions my affect you.
  • Make Gifts During Your Lifetime. At death, you can leave up to $5 million in trust or outright to heirs free of estate taxes. You don’t have to wait until you die to make use of the new $5 million exemption. The new law allows you to apply that limit either during life or at death. It’s like rollover minutes for your cell phone…any of the unused $5 million gifts during your lifetime rollover at your death! This lifetime gift exemption is in addition to the annual gift tax exclusion of $13,000 per recipient. Planning point: If you are a small business owner who would like to make certain the business stays in the family, now may be an excellent time to gift some of your business ownership to children. You may get a double benefit due to timing the gift at the end of the recent Great Recession whereby business valuations are low. Then as the economy recovers the appreciation of the transferred business interests will accrue to the new owners which helps you reduce your future estate as well. And this is not just for business owners. If you have an estate that significantly exceeds the exemption amount, you may want to consider making tax free gifts to family members using assets that you believe will appreciate in value in the years ahead. This may be a disappearing opportunity since this $5 million tax free gift is set to expire. If congress takes no action, this limit will drop to $1 million on January 1, 2013.
  • Heirs receive a new tax basis for transfers at death. This is not new but is a point worth making. For example, many times people will hold a stock in which they have a low tax basis so as to avoid paying capital gains taxes if sold. If they die still holding that stock and you inherit it, you receive what’s called a stepped-up tax basis, meaning you could immediately sell it and owe no taxes. Planning point: You face a trade off in deciding whether to make transfers during your lifetime (as in my point above) versus transfers at death. The recipient of a gift during your lifetime gets your same tax basis so that a future sale would be potentially subject to capital gains taxes.
  • Lower transfer tax rates now. For gifts or death transfers in excess of the $5 million limit, the new tax rate is 35%. It is set to go to as high as 55% in 2013 if congress fails to take action otherwise. This tax rate applies to lifetime gifts or transfers at death in 2011 or 2012.   Planning point: If you have a very large estate and would consider making gifts that exceed the $5 million lifetime gift limit, you’ll likely never have a chance to do so at a lower tax rate.
Whether you feel your estate is large enough to take advantage of any of these strategies, be clear that, at a minimum, you need at least a basic estate plan which would include a will, durable power of attorney and advanced healthcare directive.


Reducing Your IRS Audit Risks

The good news is that, because of limited resources, the Internal Revenue Service audits only about 1% of the tax returns filed each year. The bad news is that they use a very sophisticated computer system to ‘red flag’ returns that have the best odds of containing errors. Here is a list of the top targets of their search engine:

  • Home office deduction. Most of us don’t get a deduction for our homes but if you run a business out of your home you are entitled to deduct that portion of your home and expenses (utilities, maintenance, insurance) that is dedicated to your business.   The key to this deduction is that the home office must be used ‘exclusively and regularly’ for the business. If it’s also used as the family TV room or only used occasionally, it will likely not qualify.
  • Business auto expense. Lots of people use their vehicle for their business and the IRS allows you a deduction for business use provided you follow strict guidelines and maintain accurate records. You can elect to use either the standard mileage (0.50 cents) or actual expenses. The key to this deduction is detailed recordkeeping. There are any number of tracking systems available including the basic logbook to sophisticated GPS mapping and recording systems. Try taking a 100% auto expense deduction and plan on a personal visit from an IRS agent!
  • Charitable deductions. If our itemized deductions are out of line with the norm, you may get red flagged. One way this often happens is through large charitable deductions. For example, if you’re deducting $25,000 and your income is $100,000 you’re likely to get flagged…no matter that the deduction is perfectly legitimate. Another area the IRS closely monitors is non-cash charitable deductions. Why? They’ve found that people often think their used clothing, furniture and personal items are worth much more than the law will allow and people tend to have poor recordkeeping to substantiate values.
  • Math errors. Making a mathematical error is one of the surest ways to trigger an IRS inquiry. There’s an old carpenter’s saying, “Measure twice, cut once!” In IRS speak it’s, “Check your math twice, file once!” Included under this category would be unreported income…a careless mistake tax filers often make.
  • Large deductions for business travel, meals and entertainment. Whether you own your own business or are a W2 employee, this is a category that the IRS loves to audit. They love it because there is so much abuse and often recordkeeping is very poor. Your best defense is excellent records including who you met with, the business purpose, basic content of your discussions, where the meeting took place as well as receipts for all expenses.
  • First-time homebuyers tax credit. The IRS is concerned that people may play a little loose with the rules which are quite specific in order to qualify for the first-time homebuyer’s tax credit program that was part of the Obama economic stimulus program rolled out in 2009 and 2010. A special form 5405 is required plus lots of documentation.   If you participated in this program, you’ve got your homework cut out for you.
Your overall best strategy: Don’t be afraid to take legitimate deductions but for any deductions that are out of the ordinary, maintain excellent records and documentation.


Good News Bad News Under New Credit Card Law

It’s been just over a year since the new rules under the Credit Card Act of 2009 became effective. What has changed and what does it mean to you?
The new law creates more clarity for consumers and ends many of the deceptive practices of the past. Here is a summary of the most important provisions:
  • No more retroactive rate increases. Picture this scenario: a credit card company entices you to apply for a new card and transfer your balance or offers you ‘free’ checks, encouraging you to create a balance based on interest rates you deem acceptable. Then they retroactively raise your interest rate. As a consumer, you just got caught in one of their most profitable ‘gotcha’s’! You’re forced to pay higher rates because you’re not in a position to pay off your balance. The new law prohibits this unless you’re over 60 days late; your interest rate is tied to a variable interest rate and that rate increases; or it’s the end of a promotional period. If you get caught in the ’60-day’ rule, the card company must restore the lower rate after you’ve made six consecutive months of on-time payments.
  • 45-day notice for rate increases. My first point refers to current balances. The card company can increase rates on ‘future’ balances but must give you 45 days notice and this cannot happen during the first 12 months of issuing your card. This means that you could end up with balances that have multiple interest rates attached to them. The new law requires that payments above the minimum payment be applied to the balance carrying the highest interest rate…very consumer friendly! Additionally, if you don’t like the new rate, you can elect to close out your account and you have up to 5 years to pay off your balance under the old terms. In fact, a 45-day notice is required for any significant changes.
  • No Over-Limit charges without your permission. In the past if you charged over your limit in any given month, the card company would charge you a fee. Now they cannot do this unless you elect this option and over-limit fees are restricted to a maximum of one per billing cycle. If you do not elect this option and exceed your limit, your charge request may be rejected. In addition, you’ll no longer face a fee for paying your bill through your bank or online.
  • More time to pay. Under the old law, your bill could be ‘late’ in as few as 14 days from the mailing of your statement. Now you must have a minimum of 21 days.
  • The end to double-cycle billing. Interest charges can only be attached to purchases made during the current billing cycle rather than including charges from the previous cycle as was often the practice under the old law.
New regulations almost always carry a cost. Owning a credit card is likely to cost you more in the form of mandatory annual fees and higher interest rates. In addition, those with lower incomes or poor credit may find they no longer qualify to own a credit card.


9 Secrets to Achieve Financial Freedom Pt VIII

As I conclude this series on the ‘9 Secrets to Achieving Financial Freedom’, let’s begin with a review of what we’ve covered so far. The Secret of Decision states that before you can accomplish any goal, you must ‘decide’ what you truly want. With the Secret of Total Commitment and the Secret of Clarity you commit to do, “Whatever it takes” to succeed and get very clear exactly what success will look like for you. Once you’re clear about what you intend to achieve, use the Secret of Decisive Action to both develop and execute a written game plan. Any goal worth achieving will likely involve many challenges and obstacles so you’ll need to fortify yourself by implementing the Secret of Perfect Attitude. With this secret you discover that while you may have little choice regarding your challenges and obstacles, you get to choose how you react to them. That choice allows you to respond in a positive, constructive and productive way…and will hasten your journey to success. Adopting the attitude of success allows you to incorporate the Secret of Financial Focus. Each day ask yourself, “What can I do today that will move me closer to my goal?” and then take a positive step. Most major goals are accomplished with hundreds of ‘baby steps’. The Secret of Passive Income states that to be truly financially free, you must create a source of cash flow outside of your own paycheck that is at least equal to lifestyle expenses. Think of it as a way of ‘automating’ your success. With the Secret of Leverage, you’re looking for ways to accelerate your success…to reduce the time it would normally take otherwise. In the world of personal finance leverage is available in many forms. Donald Trump and millions of other people use financial leverage to create personal fortunes with modest amounts of money. Business owners use ‘people’ leverage to magnify results. Just look at what Bill Gates has accomplished by assembling a group of highly talented employees. Our government provides tax laws that allow you to leverage returns through tax deductible retirement plans. And the list goes on and on.

This brings us to the final secret, the Secret of Team. Rarely have I met a Self-Made Multimillionaire who got there without a lot of help. In fact, built into most Self-Made Multimillionaires DNA is the intuitive knowledge that they’ll need to develop a Team; seek out mentors; and model others who have gone where they intend to go. You should do likewise. Whatever your goal, think about who you could get to help you achieve it. It might be a professional, a friend, a family member or someone you don’t know personally but will need to meet. You’ll find most people are willing to help you if you’ll just ask.

In my own Ultimate Fitness Quest, I used all of the above ‘secrets’ as I set out to lose 20 pounds of body fat in 40 days and cut my waistline from 37 inches to 34 inches. Each secret proved critical to success as each is interconnected. By day 40, I lost 20 ¼ pounds and cut my waistline to 33 inches. So where do I go from here? I’ll set a new health and fitness goal that builds on my current success. You can as well. Whether your goals are in the area of personal finance or fitness, take the first step today and visit