What You Need To Know About NFTs

With NFTs and baseball mania taking over the news, some of you may be wondering: What actually are NFTs? 

Blockchain technology has opened up new markets for investment and consumption. And one of the hottest recent trends in this space has been the production and sale of non-fungible tokens (NFTs). NFTs are one-of-a-kind, authenticated digital files, such as artwork or collectibles. The reason gain and retain such high value is due to the fact that they cannot be easily copied. 

The hype around NFTs has been so strong that some have sold for millions of dollars. So, is this an emerging asset class that you should be jumping into? Let’s dive a bit deeper into NFTs to see if this is something you are interested in. At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs. It is worth noting that other blockchains can implement their own versions of NFTs. 

So what types of companies are selling NFTs? The NBA has NBA Top Shot – a way of selling digital collectibles in the form of trading cards embedded with iconic moments from the game. With a plan to add virtual jewelry, accessories and clothing that can be used across social media, the NBA is seeking to find ways to expand this revenue stream as far as it can go. And Topps now wants to do for Major League Baseball (MLB) what Dapper Labs did with NBA Top Shot. And now, even tweets hold value, with Twitter co-founder Jack Dorsey selling off the first-ever tweet for a massive $2,915,835.47. Musicians are also selling the rights and originals of their work, as well as short videos to clips of their music, and you can even buy digital real estate and 3D assets like furniture. 

NFT’s are definitely the craze right now, and may only just be getting started. If you have any questions on what NFTs are or how it may impact your financial planning or tax situation, please email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here. 

Why You Need To Understand The Tax Implications of Capital Gains 

With tax season in full speed and the recent influx of DIY traders, it’s a great time to discuss the tax implications of capital gains in the market and how to better educate traders who are lacking the knowledge of the implications when trading the stock market. 

In a recent twitter thread, tweeters were discussing the lack of education platforms like Robinhood provide on capital gains and wash sale rules. With the recent short squeeze stocks and bitcoin craze, people have been seeing enormous gains in the market, yet do not know what to do with the gains once they make them.

Pictured above is a snippet from a NAPFA forum where a guy started with $30,000 in his Robinhood account, transacted $45,000,000 in 2020, for a net profit of $45,000. However, when he received his 1099B, he had accumulated 1.4 million dollars in capital gains and a $800 tax bill. Because of his lack of knowledge about wash sale rules and the tax implications of capital gains, he saw a huge tax hit. 

With financial literacy month just days away, this example is extremely timely and important to bring light to. As you can see, there is such a large gap in financial literacy in this country, especially surrounding the implications of trading and behavioral biases involved. Please inquire with a financial professional before making major moves in the market. It’s important to fully understand the implications of your decisions and how they will affect all aspects of your portfolio. If you have any questions, please reach out to us at info@shermanwealth.com or schedule a 30-minute complimentary appointment here.

Here’s How Bitcoin Will Affect Your Taxes

Getting swept up in the crypto-currency craze? Thought so. Since the coronavirus pandemic took its toll on the world in March, bitcoin has rocketed towards the sky. Hovering at approximately $5,000 in March, bitcoin broke its record high at $50,000 this week as you can see in the chart below.  

With the increase of interest in meme stocks and crypto-currency in recent months, we want to bring light a facet of these stocks that you may not be thinking about. With tax season beginning as discussed in our previous blog, you should take a second to look at the tax implications involved with bitcoin and meme stocks. If you are to get swept up in day trading on Robinhood or other platforms, you should know the difference between short and long term tax rates. It’s important to note that some of these alternative coins cannot convert to cash, which could cause some complications when it comes to your taxes. Most people are not aware that if you hold onto any asset for less than 365 days, it will be taxed as ordinary income, which can get quite expensive for some individuals, as you can see in the chart below.

No matter what asset class you are investing in, keep in mind that it’s either most tax efficient in a retirement account or to hold onto for more than a year. If you are day trading or thinking for the short term, be very aware of the tax implications and how that affects the overall return of said investment.  If you do not plan on selling your investments or are thinking about selling, it is important to understand  these tax implications as well. As always, make sure you understand the risks involved before investing  and only risk what you can afford to lose. When listening to the media and the Dave Portnoy’s of the world, it’s easy to swept up in the hype; however, these influencers do not usually discuss the serious tax surprises that these investments can have. Sherman Wealth is charitably inclined, and if you are as well you might want to consider setting up a donor advised fund or donating your gains right to charity if you are sitting on gains before selling. 

While it may be exhilarating and increasingly popular to get involved with meme and heavily shorted stocks, keep in mind the complications and volatility involved. At Sherman Wealth, we always encourage you to keep a diversified portfolio that will benefit your financial future and goes along with your individual risk tolerance and financial plan. If you have any questions about anything discussed in this blog or need help finding the right tax professional to help you with your tax return or discuss donating assets to charity, please reach out to us at info@shermanwealth.com or schedule a 30-minute consultation here

 

Avoid These Costly Money Mistakes when Rolling Over a 401(k) to an IRA

As we kick off 2021 and you begin thinking about money moves you want to make this year, we want to provide you with some insights on a common rollover and some costly mistakes associated with it. 

First, we want to distinguish the rules that differ between 401k plans and IRA’s. If the rollover process is done incorrectly, it could be considered a distribution, which would make it subject to taxation and, possibly, an early withdrawal penalty. If you’re not careful, you could make costly errors or lock yourself into a move that can’t be easily undone.

Both 401(k) plans and IRAs have the common purpose of letting you put away tax-advantaged money savings for retirement. However, there are some rules that differ between the two. Even the rollover process itself can come with snags if you’re not careful.

Here are some things to be aware of before initiating a rollover. These apply to traditional 401(k) plans and IRAs, whose contributions are generally made pre-tax.

The rollover process

Once you’ve decided to move your retirement money to an IRA, it’s best to avoid receiving a check made out directly to you from the 401(k) plan, even if it is sent to you.

Assuming you have the rollover account set up and ready to receive the funds from the 401(k), the check should be made out to the IRA custodian or the benefit of you. In this case, there is no tax withholding.

If the check is payable to you, though, it is initially considered a distribution. That means your 401(k) plan is required to withhold 20% for taxes. Otherwise, that withheld amount is considered a distribution and potentially subject to an early withdrawal penalty if you are younger than age 59½.  You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control.

Next, make sure you are specifying that you want to do a direct rollover. Some retirement savers hold company stock in their 401(k) alongside other investments. In that situation, if you roll over all those assets to an IRA, you lose the potential to get a more favorable tax treatment on any growth those shares had while in your 401(k).

It gets a bit confusing, but the idea is that if the company stock has unrealized gains, you transfer it to a brokerage account instead of rolling the money over to the IRA along with your other 401(k) assets. Upon transferring, you are taxed on the cost basis (the value of the stock when you first acquired it in your 401(k).

However, when you then sell the shares from your brokerage account — whether immediately or down the road — any growth the stock experienced inside the 401(k) would be taxed at long-term capital gains rates (0%, 15% or 20%, depending on the rest of your income). This could be less than the ordinary-income tax treatment you’d face if the stock went into a rollover IRA and then were withdrawn.

The rule of 55

If you leave your job at age 55 or older and want to access your 401(k) money, the Rule of 55 allows you to do so without penalty. Whether you’ve been laid off, fired or simply quit doesn’t matter—only the timing does. Per the IRS rule, you must leave your employer in the calendar year you turn 55 or later to get a penalty-free distribution. (The rule kicks in at age 50 for public safety workers, such as firefighters, air traffic controllers and police officers.) So, for example, if you lost your job before the eligible age, you would not be able to withdraw from that employer’s 401(k) early; you’d need to wait until you turned 59½.

It’s also important to remember that while you can avoid the 10% penalty, the rule doesn’t free you from your IRS obligations. Distributions from your 401(k) are considered income and are subject to federal taxes.

What spouses should know

If you are the spouse of someone who plans to roll over their 401(k) balance to an IRA, be aware that you’d lose the right to be the sole heir of that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver. Once the money lands in the rollover IRA, the account owner can name any beneficiary they want without their spouse’s consent.

Here’s another potential misstep: Making a withdrawal from your 401(k) to give to your ex-spouse as dictated in a divorce agreement. That won’t work — the money will be considered a distribution to you, subject to taxation, as well as potentially a penalty if you’re under age 59½. 

In a divorce, retirement assets that are awarded to the ex-spouse can only be distributed penalty-free via a qualified domestic relations order, or QDRO. That document is separate from the divorce decree and must be approved by a judge.

When rolling over money to an IRA, there are many steps and factors to think about. In many instances, it may be best to consider seeking the guidance of a financial professional. If you find yourself in this situation, we would be happy to help and walk you through your rollover. To inquire more, schedule a free 30-minute consultation on our site. 

 

Attention Robinhood Power Users: Most Day Traders Lose Money

It’s easy to get swept up in the rush of day trading and the ability to trade money at the tip of your fingers. And over the course of the last few months, we’ve seen “TikTok” investing and day trading increase in popularity, especially amongst young investors. But according to a CNBC article, despite what some might think, in reality day traders often have terrible track records. While we think investments and long term ownership is a great way to build wealth, we want to raise light to be careful when day trading and understand the tax implications and risk tolerance there. 

Academics who study stock pickers have long observed that the vast majority of professional money managers – about 85% – underperform their benchmarks over a multiyear period.

Now those professionals are turning their sights on retail day traders, warning that the same poor results apply to them as well. 

“I don’t confuse day traders with serious investors,” Princeton professor Burton Malkiel, author of “A Random Walk Down Wall Street.”  “Serious investing involves broad diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments such as ETFs, with rock bottom fees.  Don’t be misled with false claims of easy profits from day trading.” He also added, “Large increases in Robinhood users are often accompanied by large price spikes and are followed by reliably negative returns.” 

Why did that happen? The authors noted that most Robinhood investors are inexperienced, so they tend to chase performance. The layout of the app, which draws attention to the most active stocks, also causes traders to buy stocks “more aggressively than other retail investors.”

Finally, the ease of use of the site, and the fact that it is commission-free, may also encourage trading. “As evidenced by turnover rates many times higher than at other brokerage firms, Robinhood users are more likely to be trading speculatively and less likely to be trading for reasons such as investing their retirement savings, liquidity demands, tax-loss selling, and rebalancing.”

As young and inexperienced individuals begin day trading more and more, it’s important to spread the message about behavioral and investment biases that are present in investment management and financial planning, and oftentimes persuade one’s decisions about when and what to purchase and sell. Day trading may or may not have a piece in your portfolio, but if it does make sure to understand the whole picture and take your risk tolerance into consideration. Long term stock ownership and appreciation is a great way to build wealth but it’s important to be aware of the biases that are hidden within day trading. In our previous blog, we discussed ways to identify these biases and use that knowledge to make the best decisions on behalf of your investments. If you would like to discuss this day trading trend or behavioral biases that pertain to your portfolio, please reach out to us at info@shermanwealth.com and schedule a free 30-minute consultation here

 

IRS Finalizes ABLE Account Regulations: Here’s What to Know

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The IRS recently published final regulations for Achieving a Better Life Experience, or ABLE, accounts for disabled Americans. ABLE accounts aim to help people with disabilities and their families save and pay for disability-related expenses. Even though the contributions aren’t deductible, distributions such as earnings are tax-free to the designated beneficiary if they’re used to pay for qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services, along with other disability-related expenses.

The regulations come in response to and finalize two previously issued proposed regulations from the IRS. The first proposed regulation was published in 2015 after enactment of the ABLE Act under the Obama administration. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made some major changes to ABLE. 

Eligible individuals can now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. In addition, some contributions made to ABLE accounts by low- and moderate-income workers can now qualify for the Saver’s Credit.

The new regulations also offer guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account.

In addition, before Jan. 1, 2026, funds can be rolled over from a designated beneficiary’s section 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, along with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) can’t exceed the annual ABLE contribution limit.

Lastly, the final regulations offer guidance on the record-keeping and reporting requirements of a qualified ABLE program. A qualified ABLE program must maintain records that enable the program to account to the Secretary with respect to all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must report to the Secretary the establishment of each ABLE account, including the name, address, and TIN of the designated beneficiary, information regarding the disability certification or other basis for eligibility of the designated beneficiary, and other relevant information regarding each account. 

For more information about ABLE accounts or if you have any questions regarding these regulatory changes, please contact us at info@shermanwealth.com or check out our other relevant blogs

Top 6 Tax Tips To Know

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2020 has certainly been an eventful year so far and one that will be remembered for decades to come. Despite the negative impacts of the coronavirus globally, in the world of tax and retirement planning, 2020 has brought opportunities that should be taken advantage of before year’s end. Here are some tax planning ideas to consider before 2020 comes to a close.  

1) ROTH CONVERSIONS

As 2020 winds down, this is the optimum time to project the tax cost of a Roth conversion because most people by this time will have a reliable estimate of their 2020 income and this year’s tax benefits may be the highest ever because of historically low tax rates and possibly lower income due to the pandemic.

Once funds are converted, today’s low tax rates are locked in, plus the funds in the Roth grow income tax free forever and Roth IRAs have no lifetime required minimum distributions (RMDs). Any IRA funds converted will lower these tax-deferred IRA balances and in turn lower the amount of future RMDs that could be exposed to higher taxes.

Some may think they will be in a lower tax bracket in retirement, but that doesn’t often happen, especially after a spouse dies and the surviving spouse sees their tax bills increase when they begin to file as single.

The bottom line here is that a Roth conversion removes the risk and uncertainty of what future higher tax rates can do to your retirement income. Though Roth conversions will still be available in the future, you should still consider doing them in 2020.

2) IRA DISTRIBUTIONS

In 2020, you aren’t even required to take money from your IRA distributions. The Coronavirus Aid, Relief, and Economic Security Act waived required minimum distributions for the year. But even though they aren’t required, you should look into making voluntary IRA distributions anyway because those taking money out of these tax-deferred vehicles in 2020 might be able to do so at lower tax rates.

Since the required minimum distributions are waived for 2020, this presents a one-time opportunity for those subject to the minimums to convert RMDs instead to Roth IRAs (something you can’t normally do). 

Even if you aren’t subject to required minimum distributions, it might pay for you to begin taking taxable distributions to get into the lower tax brackets and begin reducing the future IRA debt that’s building for Uncle Sam. The funds could be used either to convert to Roth IRAs or for gifting or estate planning. For example, the IRA funds withdrawn can be used to purchase permanent cash value life insurance, which after the SECURE Act will prove to be a better estate planning vehicle than inherited IRAs. Like Roth IRAs, life insurance will grow tax free and the eventual proceeds to beneficiaries will be tax free as well which is a good use of IRA funds now. IRA or plan withdrawals taken this year can also be used for gifting to family members.

3) QUALIFIED CHARITABLE DISTRIBUTIONS

Qualified charitable distributions are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances at no tax cost. The name refers to a direct transfer of IRA funds to a qualifying charity.

The only downside here is that the QCD is only available to IRA owners and beneficiaries age 70½ or older. The distribution is not available from company plans and not permitted to go to donor-advised funds or private foundations. Qualified charitable distributions are limited to $100,000 per year for each IRA owner, not per IRA account. 

Although the SECURE Act raised the required minimum distribution age to 72, the QCD age remains at 70½. This gap means the charitable distributions can begin before RMDs kick in. Even though RMDs were waived for 2020, you can still make these QCDs nonetheless since the charitable distribution still allows you to remove IRA funds at a zero tax cost. If you are giving to charity anyway, and qualify for QCDs, then this is the way you should be doing your giving.

With qualified charitable distributions,  you receive both the standard deduction and the tax benefit in the form of an exclusion from income. An exclusion is better than a tax deduction because it reduces your adjusted gross income, a key figure on the tax return. QCDs are the most tax-efficient way to reduce taxable IRA balances, because they reduce the balances to a zero tax cost.

In addition, there is a provision in the CARES Act that allows for a $300 additional charitable gifting exclusion from income for non-itemizers (for cash gifts).

4) GIFTING

With the exploding deficits and expanding national debt, there is a new urgency for clients to make gifts now, before year’s end, because it may not be an option much longer. Gifts are lifetime transfers as opposed to inheritances received after death.

The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple). These figures are scheduled to go back to $5 million and $10 million, respectively, after 2025 (there will also be inflation increases). It pays to use them now or possibly lose them later. These limits apply to lifetime gifts as well as inheritances.

For those who will be subject to a federal estate tax, gifting is less expensive because gifts are tax-exclusive, as opposed to inheritances, which are tax-inclusive. If the funds are left in the estate, the full value of the transfer at death is subject to the estate tax, so the funds used to pay the estate tax are taxed themselves, whereas gift taxes on lifetime transfers are only based on the gift amount received.

There are three tiers of tax-exempt gifting:

  1. The first is $15,000 annual exclusion gifts. These gifts can be made to anyone each year and they do not reduce the gift/estate exemption. These annual exclusion gifts are always tax free—even if the exemption is used up.
  2. Unlimited gifts for direct payments for tuition and medical expenses. These gifts can be made for anyone, the amounts are unlimited, and they do not reduce the gift/estate exemption. These gifts are also always tax free—even if the exemption is used up.
  3. The $11,580,000 lifetime gift/estate exemption in 2020. The IRS has stated that there will be no clawback if these exemptions are used now, even if the exemption is later reduced, so you must use it or possibly lose it.

Gifts made now in 2020 lock in today’s gifting limits. There is no guarantee that these limits will hold up in the future.

5) UPDATING ESTATE PLANS AFTER THE SECURE ACT

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries. This is effective beginning with deaths in 2020, so it is imperative to check your IRA and company plan beneficiary forms to reveal what may be the largest single asset in your estate plan.

Most non-spouse beneficiaries will be subject to the new 10-year payout rule, meaning that the entire inherited IRA will have to be withdrawn by the end of the 10th year after the IRA holder dies.

This includes most trusts named as IRA beneficiaries, and you might need to make changes; for example, most conduit trusts will not work as originally planned since the entire inherited IRA will be left unprotected in trust after the 10 years. Many of these trusts will have to be upgraded to discretionary trusts to maintain the trust protection beyond the 10 years. But even then, the inherited IRA funds will still be taxed when that decade has passed, and that tax will be at high trust tax rates for any funds remaining in the trust and not distributed to the trust beneficiaries.

One solution here is to convert these IRAs to Roths to eliminate the post-death trust tax exposure or withdraw IRA funds now and purchase life insurance, which is a better and more flexible asset to leave to a trust.

You should review any IRA estate plans, which begins with a beneficiary form review. Check to make sure that contingent beneficiaries are named and up to date. Make sure that the estate plans will still accomplish your goals after the changes brought about by the SECURE Act.

6) W-4 UPDATES AND WITHHOLDINGS CHECK

The federal income tax is a pay-as-you-go tax. Taxpayers pay the tax as they earn or receive income during the year. Taxpayers can avoid a surprise at tax time by checking their withholding amount. The IRS urges everyone to do a Paycheck Checkup in 2020, even if they did one in 2019. This includes anyone who receives a pension or annuity. 

The best way to make sure you are withholding the right amount is to use the Tax Withholding Estimator on IRS.gov. The Tax Withholding Estimator works for most employees by helping them determine whether they need to give their employer a new Form W-4. They can use their results from the estimator to help fill out the form and adjust their income tax withholding. If they receive pension income, they can use the results from the estimator to complete a Form W-4P, Withholding Certificate for Pension and Annuity Payments PDF. To change their tax withholding, employees can use the results from the Tax Withholding Estimator to determine if they should complete a new Form W-4 and submit to their employer. Don’t file with the IRS.

These 2020 year-end retirement, tax and estate planning moves will enhance your retirement savings that will soon be exposed to potential tax increases after 2020. Given the current state of our economy, it is best for you to consider these options now, since it’s likely many of these things will be changing in the near future. These tips have been prepared for informational purposes only and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Check out our website for more information! 

What to Do If You Don’t Have a 401(k)

Piggybank on wooden table with stacks of coins beside it. A hand putting a coin into the piggy bank.

As the coronavirus sweeps the world and people take a step back to look at their finances for the long term, we are seeing that about half of workers don’t have access to a retirement plan at work.  That means that even as 50% of workers can take advantage of automatic payroll deductions and contribute $19,500 or more to a tax-advantaged company retirement plan, about the same percentage is on the outside looking in.

Some of these people may work for companies that offer plans, but are not eligible to contribute because they either don’t meet the criteria or they are part-time employees. Some may be self-employed, which leads to other retirement savings options and others may simply work for a firm that doesn’t offer a plan at all.

So, as people start putting a tighter rein on their finances during this economic recession, it’s important to discuss retirement saving options for those who do not have access to one through their company.  Below we will share several options for people in this situation according to an article by MorningStar.

1) Invest in an IRA.

A good first stop for any worker who has earned income is to simply fund an IRA to the maximum–$6,000 for investors under age 50 and $7,000 for those over 50. Such accounts are very easy to set up, and the money can be invested in a huge array of options. Contributing to an IRA can provide a terrific building block for retirement security. A person assiduously investing $6,000 a year in an IRA for 40 years who enjoyed 6% growth on her money would have a little over $920,000 at the end of the period.

2) Assess whether self-employment accounts are an option.

For people who are self-employed, there are a host of options for tax-advantaged retirement savings. Some of them are quite similar to what 401(k) investors have, except that there can be setup costs and oversight responsibilities. An investment in a conventional IRA, an individual 401(k), a SEP or SIMPLE IRA’s are all good investment ideas.

3) Assess whether an HSA is an option.

While by no means a first line of defense for people without a 401(k), a health savings account is a decent ancillary retirement account option for people covered by a high-deductible healthcare plan.

4) Invest in a tax-efficient way in a taxable brokerage account.

While it’s ideal to invest in vehicles that provide some type of a tax benefit, people without a company retirement plan can also invest tax-efficiently inside of a taxable account. The key is to select investments that incur few taxes on an ongoing basis.

5) Be part of the solution.

Finally, if you work for a small employer that lacks a company retirement plan, consider offering to assist your employer in figuring out how to get one off the ground. Setting up such a plan has gotten cheaper and less complicated in recent years, and your employer may welcome a financially savvy partner to help with some of the research and vetting.

As always, if you have any questions about your current 401(k) or need help investing money in order to supplement a lack of one, please reach out to us and we would be happy to discuss your future financial goals.  

The Biggest Money Mistakes People Make in a Recession

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During an economic recession, it’s easy to make mistakes when it comes to your finances and managing your money. Many people are facing decisions and situations that they have never had to deal with before. They need help navigating this new territory and recognizing their mistakes. We read a Wall Street Journal article discussing the biggest money mistakes people tend to make during an economic downturn and we want to bring light to a few of them and talk about ways to avoid them.

As you’ll see, the mistakes cover a wide array of practices and situations and not everyone has the luxury of making some of these mistakes. Hopefully, being aware of these errors will make you think as you find your path through the coming months. And ideally, avoiding any of these mistakes will make your economic troubles a little less painful and the eventual recovery a little more robust.

Refusing to Tap the Emergency Fund

Some people experiencing economic hardship choose to live uncomfortably rather than access their savings. This happens when their saver’s mentality—the same one that helped in building an emergency fund—makes the emergency fund seem sacred and unavailable for use. A better framework for thinking about the use of such funds is viewing it as a reward for disciplined saving in good times. Isn’t this why you had the emergency fund in the first place?

No Re-Entry Plan

Investors often sell out of equities during a downturn without a plan of when to buy back in. It’s impossible to tell when exactly the markets are going to recover—witness the rapid bull market since late March—but you need a plan. While everyone’s situation is different, a phased approach could be the way to go, slowly moving back into equities.

Ignoring Your Credit Score

One mistake we make during a downturn is not paying enough attention to our credit score. But this is what affects the interest rate we get on our mortgage and credit cards, as well as whether we’ll be able to get insurance or even rent an apartment. So it is important, even during difficult times, to try to pay bills on time, not max out on credit cards, not open several new credit accounts in a short period of time, and keep a good financial history as much as possible.

No Retirement Funding

During an economic downturn, people often get scared and halt contributions to their 401(k) and/or individual retirement accounts. It’s still important to maintain your pace on contributions and to not jump the gun on withdrawals. You should continue to look at the big picture and avoid taking a loan from your retirement. People often miss the opportunity of buying low and accumulating more shares – a recession is actually a great time to actively look for bargains in the market. Make sure to keep your risk capacity in sight and gauge your cash needs wisely in times like these.

Not Talking About Money

With the pandemic forcing millions of people world-wide into financial distress, a natural response may be to avoid conversations about money at all costs. However, our research suggests that discussing money with your partner in hard times can help your relationship and finances if you approach these discussions the right way.

As mentioned above, an economic recession is the perfect opportunity to take a step back and discuss and organize your finances. Saving for the future, talking to someone about your investments, and organizing your portfolio are all smart moves when setting yourself up for financial success and the ability to navigate an economic recession. If you have any questions or want to talk about your personal finances, please reach out to us at info@shermanwealth.com. To read some of our other blogs, check it out here

Top 5 Pieces of Financial Advice

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As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off. 

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money. 

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere. 

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options. 

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family. 

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips!