You make financial decisions every single day, both consciously and unconsciously. Transform yourself into a better decision maker by knowing your numbers: your savings requirement, your tax rates, and your basis values. Then you can use those everyday decisions to improve your financial circumstances to live as fully and passionately as you can.
Know Your Savings Requirement
If your goals are important, you need to understand what it takes to achieve them.
Determine your long- and short-term needs and commit to a regular savings plan that will meet those needs. Next, calculate your living expenses and other commitments.
Then, enjoy the rest as discretionary spending. Know what you can afford to spend today; when you dospend it, don’t fret about it, enjoy it.
Know Your Tax Rates
Let’s just consider federal and state income taxes here. Many of the large dollars we spend are assoiated with a tax incentive. Examples include home purchases and sales, health insurance, education savings and retirement investments.
If you know your average tax rate (total tax divided by total taxable income) and marginal tax rate (the tax rate that applies to the next dollar you earn), then you can determine the value a tax incentive has to you. It may be worth more this year than next or worth more before retirement than after. This is tax planning.
The incentive may not benefit you at all because it detracts from your ability to achieve your financial goals or isn’t worth the restriction that it places on your life. For example, wait two years to move in order to qualify for the residential capital gains exclusion when the amount of tax saved is $5,000. Putting your life’s desire on hold for two years may not be worth $5,000 to you.
Know Your Adjusted Basis
Investments you hold, such as brokerage assets, collectibles and real estate, have what is known as an “adjusted basis.” It is the original price you paid plus and minus adjustments that occur over the time you hold the asset. Those adjustments include everything but changes in value — purchase costs, improvements, legal fees, selling costs, depreciation and casualty losses. (Record-keeping is important here!)
The sales price less your adjusted basis determines your gain or loss. There may be taxes due on the gain – you should know how much before you decide to divest of an asset. Some of any loss may be deductible. Understand the tax implications (calculate the number) before making a major decision regarding an investment.
Don’t let the desire to avoid taxes at all cost prevent you from selling an investment. Keep good records to support your adjusted basis so you won’t end up paying more in taxes than you have to.
We might cover these topics during our regular meetings, but remember to incorporate these numbers into your independent decision-making throughout the year. Clients know theycan call me anytime for help. Big or small, every decision you make either contributes or detracts from your financial circumstances — today and tomorrow.
Although I am always available for your questions, here are two websites with good, general information on these topics:
Feel free to review these websites. Once you find a topic of interest to you, I can help you evaluate your unique and personal situation.