Year in Review

Credit: Danilo Rizzuti

Assuming the Mayans are wrong, and thankfully we know they are (leap year wasn’t a part of their calculation, so the apocalypse date has already passed), it’s time to start thinking about New Year’s resolutions. I love coming up with resolutions, and frankly, I think it’s important to periodically consider aspects of your life and reflect on how they could, and should, be better.

I have 3 resolutions for 2013:

1. Lose the remaining 14 lbs of my 2012 goal- Hey, I lost 11 lbs. this year, but I didn’t quite make my goal of 25 lbs. Comfort food is so good, and exercising in the cold weather is so hard…
2. Do less- Many of my friends and family often compare me to the Energizer Bunny, but I saw the bottom of my fuel tank a couple of times in 2012. I need to get a little more rest and set aside a little more time to do what’s important with the important people.
3. “Attack” the mortgage- My wife and I are going to still contribute to our retirement plans, but we are going to make a conscientious effort to pay as much extra principal in 2013 as we possibly can. This will strengthen our financial position, give us a guaranteed rate of return (our mortgage interest rate), and allow us to work towards lowering our fixed monthly expenses.

I wouldn’t begin to tell anyone (well, at least most people) what their personal resolutions should be, but I thought I’d take this last 2012 blog post and offer a few financial resolutions that might help you in 2013:

• Attack any long-term debt you may have by making an “extra” payment in 2013. As this example shows, if you make this resolution a habit, you may be able to cut substantial costs and shorten how long you will be in debt by more than you might think. I’m talking like $56,000 and 6 years off a $200,000, 30-year mortgage!
• Save an extra amount from each of your paychecks. Maybe this is $50 a paycheck, maybe it’s $500. The amount does not matter; the action does. Do something as simple as putting this extra money in an envelope or as complicated as setting up an automatic deposit to a different account, but give this a try. If you keep this resolution, you will have a nice, little sum set aside at the end of 2013 that can create or strengthen a “rainy day fund,” be used to fund an IRA contribution, or be used as a “jump-start” towards a major purchase.
• Increase your contributions to your employer’s retirement plan. You are probably having to fill out a lot of 2013 enrollment and benefit election forms anyway, so you might as well adjust your retirement plan contributions and add 1% to whatever you are already contributing. 1% more coming out of your check probably won’t hurt much now, but 1% more invested compounding year after year in a tax-deferred account could end up being a pretty sweet sum when you finally head towards your retirement home on the beach.
• Collect your change. It depends how often you pay with cash, but if you throw all your spare change in an old shoebox, a chic-looking jar, or even a very manly looking piggy bank, you may be surprised what you end up with by the end of 2013. It sure would be nice right about now to have a jar full of change to help buy that perfect Christmas gift for my wife…

I hope you will try one of my suggested resolutions or come up with at least one financial resolution on your own, but before I sign off for 2012, there are a few more things I want to mention:

First, I’d once again like to thank Kenny Wuerstlin for designing my banner and logo, Andrew Davis for helping me edit my content, and my lovely wife, Lindley Presley, for her grammatical editing and blog expertise.

Second, I’m very proud that, in its first year, 2MuchCents.com had a little more than 6,600 page views from 10 different countries. Let me assure you though, we’re just getting started! In 2013, we’ll unravel technical topics like family gifting, long-term care insurance, and the risks of a fixed income portfolio. We’ll also take a look at how rational investors are (or aren’t), why I don’t think you should always let a “tax tail” wag your dog, and how you can spend everything (though I don’t advise trying).

Finally, let me thank you for checking out my weekly ramblings. I appreciate your questions, your ideas, and your encouragement. I hope that at least a little of what I have shared has been interesting, educational, and maybe even helpful. Please continue to let me know how I can use my training and experiences to try to help, please keep telling me what financial topics you are interested in, and pretty, pretty please keep sharing your favorite posts with your family and friends. There’s no telling where 2MuchCents can go in 2013!

I hope you and your family have a healthy, happy, and financially successful 2013!

-Tom

Changing Jobs

Credit: jscreationzs

December is an important month for many reasons: it’s the end of the year, there are a lot of holidays and days off from work, a lot of things go on sale, a lot of people receive their annual reviews from their employers, and it’s your last chance to eat what you want to before you try that truthfully disgusting diet of beets, tofu, and sit-ups in the New Year to shed those pesky pounds. Directly related to a lot of people receiving their annual reviews from their employers in December is the fact that a lot of people also consider changing jobs because of the feedback and future outlook they receive in those year-end review meetings. I’m not having the itch to change jobs this holiday season, but I know many people who are. Today, let’s take a look at four considerations I believe a potential job-changer should ponder before they take a leap of faith.

1. Your Potential New Role
       a. What would your day-to-day activities and responsibilities be?
       b. What hours and how many hours would you be expected to work?
       c. Will you have to work from home or check your phone after hours?
       d. Who would your boss be? Who would your subordinates be? Can you meet them?
       e. What’s your position’s typical career path? How would you advance?

2. Your Potential Compensation and Benefits
       a. What would be your pay? Is it commission-based, hourly, or is it a salary? How will it increase over time?
       b. What retirement plans (401(k), 403(b), etc.) does the potential employer offer? Does the company match your contributions?
       c. Would you be eligible for a bonus your first year?
       d. Would you and your family receive health insurance, disability insurance, and/or life insurance? How good are the potential benefits?
       e. How many vacation days would you be allowed? Do you have to work for a period before you receive days off?

3. What’s Being Left Behind?
       a. Would you be forfeiting any bonuses, company matches, or vacation you would have had with your old job? Would your new company be willing to make up for what you would be leaving behind?
       b. Would you or your family be losing any insurance coverage or quality of insurance coverage? If so, what can your new company do to make up for your reduction in benefits?

4. The Happiness Factor
       a. Would your potential job make you be more or less energized when you wake up in the morning?
       b. How would your commute be? Would you have to travel a lot?
       c. How stable is your potential position and potential employer? In what direction is that stability headed - more stable or less stable?
       d. Would you be an addition, or are you replacing someone? If you are replacing someone, what happened?
       e. What does your spouse/family think?

If you are thinking about changing jobs and have considered all these questions, and where you are currently employed ends up looking pretty sweet, stay! You need to realize that in the current environment, there are a lot of people out there who would gladly take your job and its shortcomings.

If you are thinking about changing jobs and have considered all these questions, and you are ready to jump ship, proceed cautiously. Realize that no matter how favorably a new role or a new employer can look, you’ve only seen their best side, and changing jobs will be scary. The uncertainty, the simultaneous fear and excitement, the feeling that you are betraying your current employer and coworkers, and the nervousness about being the new guy or girl on your future employer’s campus are all emotions you are going to have to wrestle with. You should also know that there are very few social situations more awkward than finishing your last few days or weeks after you have given your resignation. However, all of my warnings being said, life is too short not to have a job you love, or can at least mostly like, 40, 50, or 60 hours a week for possibly thirty or more years.

The grass isn’t always greener on the other side, but it can be. Please pass this on to anyone you know who is considering changing jobs.

-Tom

The Fiscal Cliff

Credit: papaiga2008

In recent weeks, there have been a lot of people talking about a little something called the “Fiscal Cliff.” Some people seem to be worrying a great deal about it; other people don’t think it’s that big of a deal. I’ve had several friends and readers of this blog ask me about it, so today I thought we’d take a look at this so-called “Fiscal Cliff” our country is scheduled to fall off of on January 1, 2013.

The “Fiscal Cliff” gets its name because of the tremendous tax increases and spending cuts that are currently scheduled to happen all at the same time: the beginning of 2013. Some compare the immediate effect of these substantial tax increases and large spending cuts to jumping off a cliff. Personally, I think it's a better comparison to imagine yourself sitting by the side of a tranquil pool watching a hippopotamus on the diving board that is going to jump when the clock strikes midnight on New Year’s Eve.

This hippopotamus is made up of tax increases and spending cuts. The scheduled tax increases include:

• The end of the Bush tax cuts (if you are in the 10% tax bracket, you’ll be in the 15% tax bracket, if you are in the 25% tax bracket, you’ll be in the 28% tax bracket, if you are in the 28% tax bracket, you’ll be in the 31% tax bracket, if you are in the 33% tax bracket, you’ll be in the 36% tax bracket, and if you are in the 35% tax bracket, you’ll be in the 39.6% tax bracket),
• The end of the 2% 2011 and 2012 payroll tax cut,
• Sharp adjustments in the estate tax rate from 35% to 55% and in the estate/lifetime exemption amounts from $5.12 million to $1 million,
• The end of the distinction between ordinary dividends (now taxed at your ordinary income tax rate) and qualified dividends (now taxed at 15%), and
• The end of the special tax rate on long-term capital gains for investments you've held for more than a year (now taxed at 15%, scheduled to be 20%).

The second part of the hippopotamus is the automatic spending cuts that are scheduled to take place because Congress failed to reach a debt-reduction deal in August of 2011. These cuts will eliminate $1.2 trillion in projected federal spending over ten years, with about half the cuts coming from the defense budget and about half the cuts coming from other government programs like education, air travel safety, and food inspection. Discretionary spending limits are also supposed to be formally capped.

Before we talk about how we get the hippo off the diving board, let’s take a minute to figure out how the hippo got there in the first place. From an economist’s standpoint, when a country’s economy is slowing, or not growing at a fast enough pace, its government can do two things to try to encourage growth: cut taxes and/or spend more. The theory behind cutting taxes is that individuals will have more money to spend in the economy if they owe less in taxes, which will stimulate the economy. The theory behind the government investing more money into the economy is that the increased spending will lead to more jobs, more products, and new growth that will get the economy moving again, and eventually the revenue generated will be worth the government’s initial investment. Our government has tried both of these option in recent years, and people will argue over the results, but either way, less tax revenue and more government spending has caused our national debt to skyrocket.

The funny (or not-so-funny) thing about the “Fiscal Cliff” is that our leaders purposefully scheduled these tax cuts to expire eventually and knew our government could not sustain its recent spending sprees when they provided stimulus. They were trying to do what they could to get our slowly-growing economy going again, but they really can’t afford to try much longer. What I mean, is that the hippopotamus represents the conundrum our government now faces: if they keep the tax cuts and keep on spending, our national debt could turn into a national security issue, but if they allow taxes to return to their previous norms and cut their spending, our economy could slow or even contract.

The “Fiscal Cliff’ is the scenario where Congress does nothing and allows the scheduled tax increases and spending cuts to occur. Essentially, the hippo jumps on New Year’s Eve. Sure, the impact on the economy could be dramatic, but I truly believe the tax increases and spending decreases need to happen to fix our national debt problem. If Congress does nothing and the hippo jumps, it is surgery by chainsaw, so to speak, but it is surgery we need. Some politicians, economists, and people are actually rooting for this to happen.

If Congress does act, other scenarios such as “Fiscal Ramps,” “Fiscal Ladders,” and “Fiscal Ledges” are out there. Under these proposals, some of the tax increases and spending cuts will go into effect, but not all fully or all at once. The theory is that these options would begin to address our national debt issues, but could avoid a possibly huge negative splash in our still slowly-growing economy. Under these scenarios, the hippo is essentially off the diving board and gently getting in the shallow end. Some politicians, economists, and people are actually rooting for this to happen.

I, nor anyone else, know what Congress is going to do (or not do), but I do know our national debt situation is as serious of an issue as our still slowly-growing economy. I don’t know what the short-term impact will be if the “Fiscal Cliff” scenario plays out, but I do know it will finally address some of our nation’s long-term concerns. The short-term impact will be less severe if a slower-instituted series of fiscal reforms is adopted in the next few weeks, but I don’t know how well it will address our nation’s long-term budget deficit. I do, however, believe that the longer Congress and our leaders remain indecisive, the more volatile markets, businesses, and individuals will become with anticipation.

So, how do I tell you all of this and still sleep? Easy - NyQuil. Seriously though, the important thing to remember is that, even if a hippopotamus jumps into a pool, the water will eventually settle. No matter how, if our country takes steps to reform its budget and lower our national debt, our country and our economy will be stronger in the long-term. As an investor and an American, I’m more interested in the long-term.

-Tom