Housing, budget deficits and your future

Depending on who is approving your new home purchase or refinance, your housing debt to income ratio can range from a 28% to over 50% of your total income. The thing to remember is that the debt to income ratio is calculated on Before Tax Income. That figure does not take into consideration your Federal or State Income Tax Rate, Your Cost of Insurance or Your Contributions into Your Retirement Plan.

This illustration shows the Debt-to-Income ratio for an average, middle class family.

Basic DTI Calc

As you can see based on these figures this family is well within the range for being approved based on income alone. But lets look deeper into the possibilities this family co

uld be facing after signing the mortgage and loan documents.

 

If they are in an average tax bracket with average benefits the take home pay for this family could be

 $3240 per month. After the First Mortgage payment is paid they would have $1740 per month. Which means they are spending over 45% of their take home pay in mortgage payments alone.

What if they are like this couple from Florida that wrote the following on Edmunds.com? Thank you! We took delivery of our 2013 Odyssey EX-L, black with truffle leather (no nav. or rear ent.), from Crown Honda in Pinellas Park, Florida, last Saturday. We walked out paying only our first month’s lease payment: $408.88/mo, 36 months, 12,000 miles/year. Total we’ll be paying over entire lease is $14,719.68! Residual value $19,030 (give or take). I think we came out good on this deal! Their $1740 a month is now $1331 and they sill have to purchase insurance and fuel for the vehicle. With gas prices in the $3.50-$4.00 a gallon price range the average full tank of gas costs around $48.00. If that is the price per week this vehicle will add $211.00 a month to the budget.

Not mentioning utilities for the house, groceries, entertainment and emergencies that can pop up as a homeowner, I think you can see that budget deficits can be controlled in our own homes. I keep hearing people talk about the US Debt, the economy and other factors that honestly we personally have no direct control over. What if we start with us?

It seems easy to justify spending $50 for an evening meal when we don’t feel like cooking. What about the price of a night out? What about that insurance deductible due after a minor fender bender?

Thoughts? I’d love to hear them.

Compared to what?

Just because things are called the same doesn’t mean they are the same.  It depends on the rules or the game as to whether they are the same.

Look at the following scenario with a little more information. The game of golf keeps score a lot differently than the game of basketball. Though in both sports, a final score of 70 can be considered a good thing. It may not be enough win in the game.  The score is equal in both games. However the accounting and scoring of the points is dramatically different.

The same is true with the ROTH IRA. Yes, the ROTH IRA is a retirement strategy. But there are a variety of plans that fall under the heading of ROTH IRA. The structure and rules for scoring can separate greatly and still be considered a ROTH IRA under the IRS Guidelines. In the same way that golf and basketball are both sports, the similarities between the 2 sports is evident once we start to understand all the rules and nuances of the games.

Don’t assume that your ROTH IRA will give you an adequate return until you understand the rule of the plan and compare them with others available. What happens when the stock market goes sideways? Will a 10% gain continue to sustain and grow your money? Maybe.  But what if the market changes negatively?  What if if goes up 10% this year, Down 10% next year and follows that pattern over a 10 yr period. If the loss can never be more than 0% on your ROTH IRA plan, you will be money ahead.

Thank you for reading and sharing.

Net Disposable Income and Residual Income. What’s the difference?

Investopedia defines Disposable Income as:

The amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.
So your disposable income is the amount of money you have on your paycheck. I have a question for you. Does your take home pay (disposable income) cover everything you need to pay for? Things like food, housing, entertainment, clothing? Do you need more money?

How much money are you generating that can be added to your disposable income? How much money are you making with your residual income?

What? Residual income? What is residual income?

Well, Residual income (also called passive, or recurring income) is income that continues to be generated after the initial effort has been expended. Compare this to what most people focus on earning: linear income, which is “one-shot” compensation or payment in the form of a fee, wage, commission or salary.

In his article titled What is Residual Income and Why Do You Want it? Craig Dewe says that Residual income comes from building an asset that continues to pay you after the work has been done. What about building your own fortune?

As Jim Rohn was famous for saying:

“I’m working full-time on my job and part time on my fortune. But it won’t be long before I’m working full-time on my fortune. Can you imagine what my life will look like?

Thank you,

#LivePowerfully

 

What to consider for your 401k

It is always a good thing to save money for the future. You will never be able to predict exactly when you will need to use it and I can tell you it is never a good thing to need money and not have  any set back when a need arises.

Here are a few things to keep in mind when saving for the future.

* Tax Deferred Accounts (401k, Fixed Annuity) should not be the first place to save for the future.

* Pay yourself first and put that money in a safe but liquid account for easy access.

* Establish a few accounts that offer a range of flexibility of earnings, safety and liquidity.

* Don’t over deposit into the 401k.

* Do take advantage of the maximum deposit your employer places into your 401k.

* Alternative Investments are not bad

* Alternative Investments are not All Good.

* Hire a coach that only has Your Interests in mind. Use your coach as a mediator when looking at new plans. Remember, Agents are Salespeople and Most Advisers are too.

* Understand Completely how your money will be used to cover FEES and Taxes.

To recap, never go alone when it comes to you money and you future and Always employ the time of a person who understands the maze of financial options available, understands your goals completely and works with you to insure that you have the Best plan to acheive your dreams.

 

What Is Residual Income And Why Do You Want It?

You have probably heard the expression that “the rich get richer while the poor get poorer.” It’s often used to explain the unfairness when it comes to money.

Take the time to read this great article explaining residual income and why it’s important. If you would like to learn about some of my residual income streams you can always make a request in the comments section below.

Click here and enjoy reading this  article.

Retirement pitfalls to avoid

The reason that many Americans tend to struggle financial during retirement is because it has been an accepted idea that low wage earners will struggle to live financially secure, most Americans have never taken the time to calculate how much money they will need to save for retirement and most people fail to see the importance of contributing to their employers’ retirement plans even though they will spend nearly 20 years in retirement. (U.S. DOL n.d.)

The way to change the mindset that high wages are the highest priority is to, at an early age; emphasize the importance of spending money on items that are needs instead of wants. People who prioritize on needs such as food, housing and health develop the skill of controlled spending as opposed to those that buy on a whim or spending money frivolously. People that have adopted this foundational mind set have a healthy finance life and reap huge dividends later in life. As a former financial consultant I witnessed this first hand hand. A retired school teacher was struggling to deal with a loss in her investment account after the 2008 market drop. She lost over $250,000 at the age of 84 years old and was concerned about going broke. The irony of the situation was that she had over $800,000 in the same account after the loss. She had no bills other than food, utilities, medical and transportation. When I assured her that things were fine I asked her what she did to save the kind of money she had. She told me that she never increased her lifestyle after getting her teaching job and in fact took every raise and added it to her retirement account. She lived her live like she only earned a meager income, adjusted her budget and income to cover inflation and worked like money didn’t matter. She retired with $2,000,000 in her account.  Putting money away for retirement is a habit we can all live with. Remember…Saving Matters!

  • How much money is needed should be calculated. While working it is important to maintain a budget and stick to it. Budgeting that includes reasonable live expenses such as room; board and food are the first places to start. By selecting a home that costs no more than 30% of the take home pay, a person can then look at the remaining 66% for items such as food, clothing, saving and more. In 1901 households spend an average of 23.3% on housing according to the Bureau of Labor statistics. (Bureau of Labor Statistics: 1901)

A good rule of thumb is to choose a home that is not so large that is costs more for utilities and upkeep than necessary. There is no logical reason for a single person to live in a home with 3 bedrooms, 2 bathroom and potentially more than 1000 square feet. In fact, a person living alone in this type of home is spending money for luxuries as opposed to needs.

When we looked at the housing costs being no more than 33% of take home pay, it is important to be contributing to your employers retirement account before your take home pay is calculated. By putting the maximum amount of money possible in the retirement plan a person insures that they have funds started that will be there in later years. The example earlier illustrates this fact.

The reason that many Americans tend to struggle financially during retirement is because it has been an accepted idea that low wage earners will struggle to live financially secure, most Americans have never taken the time to calculate how much money they will need to save for retirement and most people fail to see the importance of contributing to their employers’ retirement plans even though they will spend nearly 20 years in retirement. The teacher did all of the right things. She established the mindset that living a lifestyle she could afford with her first job was sufficient. She prioritized what were needs as opposed to wants, did not live beyond her means, set back the money she received on every raise, adjusted her budget to account for changes in the cost of living and retired with a large fortune.

Reference:

U.S. Dept of Labor (N.D.) http://www.dol.gov/ebsa/publications/10_ways_to_prepare.html

Bureau of Labor (1901) http://www.bls.gov/opub/uscs/1901.pdf

Don’t focus on the raise, focus on cash flow management

So many working Americans are living paycheck to paycheck. Stress, relationship and health issues are partially caused financial worries and pressures. What is the common practice that most people do when they get an increase of pay?

If you are like most successful people your answer is a simple one. Put the increase back and save it for a rainy day.  Others may also answer that is is prudent to add the increase to debt in order to lower the amount owed and potentially decrease the lending costs of interest.

Guess what. Either answer is a smart one. Paying yourself first is always a great idea. This creates a pool of money that is available when the cash flow decreases or an emergency comes up.

Lowering debt makes great sense in the long run. By paying extra on the smallest balance to get it to zero is not only good for the budget. It feels great for the ego. After the smallest balance is gone, take the amount that was being paid on the smaller account and add it to the next smallest account. Dave Ramsey refers to this as the Debt Snowball. I consider this a great method to win in the cash flow game.

At the end of the day financial success shouldn’t be measured by the money we make but rather the money we keep. And we get to keep more of our money by controlling our cash flow. And when we are in control of cash flow we have the freedom to make sound financial decisions.

What a concept.

 

Housing, budget deficits and your future

Depending on who is approving your new home purchase or refinance, your housing debt to income ratio can range from a 28% to over 50% of your total income. The thing to remember is that the debt to income ratio is calculated on Before Tax Income. That figure does not take into consideration your Federal or State Income Tax Rate, Your Cost of Insurance or Your Contributions into Your Retirement Plan.

This illustration shows the Debt-to-Income ratio for an average, middle class family.

Basic DTI Calc

As you can see based on these figures this family is well within the range for being approved based on income alone. But lets look deeper into the possibilities this family co

uld be facing after signing the mortgage and loan documents.

 

If they are in an average tax bracket with average benefits the take home pay for this family could be

 $3240 per month. After the First Mortgage payment is paid they would have $1740 per month. Which means they are spending over 45% of their take home pay in mortgage payments alone.

What if they are like this couple from Florida that wrote the following on Edmunds.com? Thank you! We took delivery of our 2013 Odyssey EX-L, black with truffle leather (no nav. or rear ent.), from Crown Honda in Pinellas Park, Florida, last Saturday. We walked out paying only our first month’s lease payment: $408.88/mo, 36 months, 12,000 miles/year. Total we’ll be paying over entire lease is $14,719.68! Residual value $19,030 (give or take). I think we came out good on this deal! Their $1740 a month is now $1331 and they sill have to purchase insurance and fuel for the vehicle. With gas prices in the $3.50-$4.00 a gallon price range the average full tank of gas costs around $48.00. If that is the price per week this vehicle will add $211.00 a month to the budget.

Not mentioning utilities for the house, groceries, entertainment and emergencies that can pop up as a homeowner, I think you can see that budget deficits can be controlled in our own homes. I keep hearing people talk about the US Debt, the economy and other factors that honestly we personally have no direct control over. What if we start with us?

It seems easy to justify spending $50 for an evening meal when we don’t feel like cooking. What about the price of a night out? What about that insurance deductible due after a minor fender bender?

Thoughts? I’d love to hear them.

401k Basics

It is always a good thing to save money for the future. You will never be able to predict exactly when you will need to use it and I can tell you it is never a good thing to need money and not have  any set back when a need arises.

Here are a few things to keep in mind when saving for the future.

* Tax Deferred Accounts (401k, Fixed Annuity) should not be the first place to save for the future.

* Pay yourself first and put that money in a safe but liquid account for easy access.

* Establish a few accounts that offer a range of flexibility of earnings, safety and liquidity.

* Don’t over deposit into the 401k.

* Do take advantage of the maximum deposit your employer places into your 401k.

* Alternative Investments are not bad

* Alternative Investments are not All Good.

* Hire a coach that only has Your Interests in mind. Use your coach as a mediator when looking at new plans. Remember, Agents are Salespeople and Most Advisers are too.

* Understand Completely how your money will be used to cover FEES and Taxes.

To recap, never go at it alone when it comes to you money and you future and Always employ the time of a person who understands the maze of financial options available, understands your goals completely and works with you to insure that you have the Best plan to achieve your dreams.

Save Now or Save Later?

Most people have good intentions about saving for retirement. But few know when they should start and how much they should save.

Sometimes it might seem that the expenses of today make it too difficult to start saving for tomorrow. It’s easy to think that you will begin to save for retirement when you reach a more comfortable income level, but the longer you put it off, the harder it will be to accumulate the amount you need.

The rewards of starting to save early for retirement far outweigh the cost of waiting. By contributing even small amounts each month, you may be able to amass a great deal over the long term. One helpful method is to allocate a specific dollar amount or percentage of your salary every month and to pay yourself as though saving for retirement were a required expense.

Here’s a hypothetical example of the cost of waiting. Two friends, Chris and Leslie, want to start saving for retirement. Chris starts saving $275 a month right away and continues to do so for 10 years, after which he stops but lets his funds continue to accumulate. Leslie waits 10 years before starting to save, then starts saving the same amount on a monthly basis. Both their accounts earn a consistent 8% rate of return. After 20 years, each would have contributed a total of $33,000 for retirement. However, Leslie, the procrastinator, would have accumulated a total of $50,646, less than half of what Chris, the early starter, would have accumulated ($112,415).*

This example makes a strong case for an early start so that you can take advantage of the power of compounding. Your contributions have the potential to earn interest, and so does your reinvested interest. This is a good example of letting your money work for you.

If you have trouble saving money on a regular basis, you might try savings strategies that take money directly from your paycheck on a pre-tax or after-tax basis, such as employer-sponsored retirement plans and other direct-payroll deductions.

Regardless of the method you choose, it’s extremely important to start saving now, rather than later. Even small amounts can help you greatly in the future. You could also try to increase your contribution level by 1% or more each year as your salary grows.

Distributions from tax-deferred retirement plans, such as 401(k) plans and traditional IRAs, are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if withdrawn prior to age 59½.

*This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return involve a higher degree of investment risk. Taxes, inflation, and fees were not considered. Actual results will vary.save_now_or_save_later

New 3.8% Medicare Surtax: NOT Expected To Go Away!

While many are optimistic that Congress will address the “fiscal cliff” items of the Bush tax cuts, the sequester (automatic budget cuts to defense, etc.) and other miscellaneous items such as the Social Security withholding “holiday” and the alternative minimum tax, one new tax will NOT be going away anytime soon.
That tax is the new Medicare 3.8% surtax on investment income for those with Modified Adjusted Gross Income (MAGI) of over $200,000 (single) or $250,000 (couples). MAGI is your Adjusted Gross Income (AGI) plus any net foreign income that you excluded. So, unless you work outside the United States, MAGI=AGI. The surtax is on top of your dividends or capital gains rate, both of which are going up significantly unless Congress can get its act together.
Since taxes will be going up next year unless Congress can avoid the so-called “fiscal cliff,” life insurance proceeds will be there for the survivors no matter what happens with income, interest, dividend and capital gains tax rates.

Life insurance has always been a cost and tax-effective way to protect one’s family from the financial uncertainties of life. The income tax-free death benefit can provide the funds necessary for your loved ones to carry on after they’re gone.

Life insurance can be viewed as a self-completion program when there is no longer time to accumulate funds for the many needs of the family – retirement, college funding,
taxes, debt reduction, etc. One other factor in a family’s ability to provide for future needs is how effective they’ve been at minimizing taxes over the years so their assets
grow efficiently and to maximum value.

Cash value life insurance has a number of tax advantages, including income tax-free death benefit, tax deferred growth, tax-free access to policy values through policy
loans or withdrawals and other living benefits.
While life insurance is bought for the death benefit it provides to the family, we certainly don’t want to overlook the other tax advantages that it enjoys.

It’s an uncertain world out there. Plan now to help mitigate the many risks you and your family face in the new economic environment.