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Monthly Archives: November 2016

4 Steps to Merging Finances with Your Partner

1. Focus on Joint Goals, Not Joint Accounts

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

Ignore all of that. It doesn’t matter. At least not at the start.

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

This communication is the real key to successfully merging your finances. All the rest is just logistics.

2. Create a System

There are two main ways you can start sharing those expenses.

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

3. Establish Shared Expenses

Now, about those logistics…

One easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

4. Plan for Extra Money

Here’s something my fiance and I have done that’s helped us a lot.

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.

Consultant of Financial Planner

On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.

There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.

I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.

By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.

Plant Power Investing

Low-cost index investing has become a popular approach to achieve market returns and will continue to be used by more individual and institutional investors. On the other hand, sustainable investing is also a growing trend, as more investors recognize that an “all-of-the-above” index investing strategy conflicts with their worldview. Index investors are accepting the status quo by owning companies as they are. Sustainable investors are driving change by using fund managers who engage with companies to adopt positive changes or by simple divestment (i.e. avoid investment in the company or sector).

I envision three groups of individuals who would find plant power investing attractive – vegans, vegetarians and advocates of a healthy eating / living lifestyle (ironically, HE/LL for short). The majority of individuals in this category, however, are not in a position to take on an extraordinary amount of investment risk. Investing in “pure play” meat or egg substitute start-up companies is beyond their financial reach.

The growth in the number of mutual funds that divest from fossil fuels provides an example that plant-based investors might want to follow. Why not simply avoid companies that are in obvious conflict with your worldview? Truth is, there are sufficient large, established companies to choose from in order to develop an investment portfolio that may satisfy both financial and personal goals.

As I point out in my book, Low Fee Vegan Investing, there are currently no mutual funds targeted to plant-based investors. This is unfortunate since, without this option, most investors are not in a position to take on the effort or cost to implement a strategy that would otherwise meet their needs.

I believe there are two easy steps plant-centered investors can take to encourage the development of a suitable investment tool (e.g., mutual fund, plant-based index fund). The first step would be to contact their investment professional and state an interest in having a portfolio which reflects their worldview. If sufficient demand develops, this will be noticed by financial service providers (again, recall what happened with fossil fuel divestment – many mutual funds and ETFs options were developed in a fairly short amount of time). Second, participate in the short “Plant Power Survey” that I developed to start counting the number of plant-based investors interested in this concept and, equally importantly, develop a consumer preference data set that might help the community of portfolio managers generate a set of filters for use until investor demand warrants the expense of more rigorous research.

5 Ways to Trim Your Investing Taxes

1. Tax reporting methodology

Tax-reporting methodology refers to how your capital gains from asset sales are reported for tax purposes. There are 12 methodologies; which one your financial services company uses will directly affect the amount of taxes you will owe. Many custodians use the “average cost” or “first in first out” (FIFO) methodologies. But there are other options, such as “high cost long term” (HCLT), that can help you save on taxes.

For example, let’s say you bought five shares of stock at $20 a share. Later you bought five more at $25 a share and then five more at $30. Two years later, the share price goes to $47, and you need to sell three shares to rebalance your portfolio.

You would have the following capital gains using the given tax reporting methodology:

  • Average cost: $22 gain per share. (Your gain is based on the average price of all the shares you bought, which was $25.)
  • FIFO: $27 gain per share (The first shares purchased — for $20 — are the first ones sold.)
  • HCLT: $17 gain per share (The most expensive shares held for more than a year — those you bought for $30 — are sold first.)

Clearly, the HCLT method would result in the lowest taxable gain. Your taxes would be highest with the FIFO method.

Not all custodians make more tax-efficient options available, so be sure to check how your financial services company reports your gains.

2. Tax-loss harvesting

Selling securities at a loss to offset capital gains on other securities is referred to as tax-loss harvesting. Investors often use harvesting to limit the recognition of short-term capital gains, which are taxed at higher rates than long-term capital gains (at least on the federal level). This applies only to taxable accounts, not to tax-deferred accounts such as 401(k), IRA or Roth accounts.

Here’s an example. You have a diverse portfolio of U.S., international and emerging-markets mutual funds. With the recent decline in emerging markets and the stronger U.S. gains from last year, you find your portfolio’s asset allocation is off target. You need to sell some U.S. holdings, which will trigger some gains. At the same time, though, you can sell your emerging-markets funds at a loss to offset the gains. You then buy a different emerging-markets fund in the amount you need to get back in balance. (Check with your custodian to be sure you will not be violating the 30-day wash sale rule.)

3. Asset location

As people build assets for the future, most have a mix of equities (stock) and fixed income holdings (cash and bonds). Many people have a tax-deferred account such as an IRA, 401(k), or 403(b). Some have tax-free Roth accounts, and many have taxable accounts. Where you hold assets among these three types of accounts can make a big difference in your tax burden, particularly if you are in a higher tax bracket.

It is most tax-efficient to have the assets with the greatest growth potential in Roth accounts, so you never pay income tax on all the growth. The next-best option is taxable accounts, so you can take advantage of lower long-term capital gains tax rates rather than the ordinary income taxes you would pay on distributions from a tax-deferred retirement account. Fixed income assets should be in tax-deferred accounts, so that the investment income you are saving for the future isn’t taxed on top of your earned income.

Another reason to keep equities in taxable accounts: Upon death, there is a “step up” in tax basis that can save your spouse or heirs a substantial amount on their tax bill.

Unfortunately, many folks do not even know their target asset allocation, and of those that do, many will have that same allocation in all of their accounts. This can result in a greater taxes bill than if they had strategically located different asset types in the most tax-efficient accounts.

4. Passive vs. active funds

Some equity funds see very little turnover of the securities in the fund over the course of a year. Actively managed funds buy and sell with greater frequency. The added trading often results in capital gains; those gains are reinvested, but you still get a tax bill for them at the end of the year.

For instance, the Fidelity Spartan 500 Index Fund (FUSVX) has a 4% turnover rate per year and since October 2014 has generated only 43 cents of long-term capital gains per share. Meanwhile, the Fidelity Disciplined Equity Fund (FDEQX) has a 191% turnover rate and in the same time period generated $1.16 per share in long-term capital gains and $1.33 in short-term capital gains, which are taxed as ordinary income. Ouch! Avoid actively managed funds in your taxable accounts!

5. Exchange-traded funds vs. mutual funds

Exchange-traded funds (ETFs) are more tax-efficient than mutual funds when held in taxable accounts because of a difference in accounting. When a mutual fund investor sells his or her shares, the fund company must sell securities to generate the cash to fund the redemption. This creates capital gains in the fund for the other shareholders.

However, when an ETF investor wants to sell, the fund company simply sells the shares to another investor like a stock, and thus there is no capital gains transaction for the ETF. (This difference does not apply for a tax-deferred retirement account.)