It’s Time To Smart Rebalance Your Portfolio. Here is Why, When, and How.

It’s Time To Smart Rebalance Your Portfolio. Here is Why, When, and How | Clock Work | DESMO Wealth Advisors, LLC

When should you rebalance your investments? As with many questions, the best place to start is with why. Why should we rebalance in the first place? Your asset allocation, how you allocate your savings to different investments, is a key element of an investment strategy. It represents the risk-return tradeoff you are willing to make to achieve your investment goals. You typically arrive at your asset allocation through a process that includes goal setting and understanding your risk tolerance and risk capacity. Your asset allocation, not timing market cycles or picking stocks, determines 90% of how your investment is going to perform in good and bad times.

Continue reading

How To Use Your Goals To Make Decisions Under Uncertainty, And Not Your Feelings.

How To Use Your Goals To Make Decisions Under Uncertainty, And Not Your Feelings | Analytics | DESMO Wealth Advisors, LLC

With the market gyrations and economic uncertainty we are experiencing, investors are feeling the pain of market losses and many may lose faith in their investment plans. The potentially bigger risk, however, is that the focus on short-term losses can lead investors to bad long-term decisions. It’s natural to feel anxious and wonder if there is anything we should be doing to improve the situation. We just have to make sure our natural tendencies do not lead to bad decisions. Remember that investing is a long-term endeavor, and it is important to put the short term losses into the right perspective before you can make any changes to your investments. Here is how.

Continue reading

Is Lifestyle Creep Holding You Back?

Is Lifestyle Creep Holding You Back? | Woman with Shopping Bags | DESMO Wealth Advisors, LLC

When I finally got out of school and started getting a decent paycheck, my first thoughts were mainly about all the things I could spend the extra money on. That nicer car, a new bike, better hotel and restaurant choices, and more. If you feel this applies to you, know that it’s perfectly natural and very common. In personal finance, the steady increase in spending as your income grows is called lifestyle creep. Some lifestyle creep is good and understandable. After all, part of why we are working hard is to get the things we like. There is the risk, however, that you get used to spending habits that hamper your ability to reach more meaningful long-term goals. 

How it happens

Lifestyle creep typically starts when you get a raise or see your checking account growing to higher levels than you are used to. If you have money to spare, the easiest thing to do with them is to spend them. You reward yourself for the hard work you have been doing. A nicer car, better clothing, a first-class upgrade, you go out to restaurants more often, and so on.

The problem isn’t that we do all this. The real problem is that left unchecked, lifestyle creep can create bad habits. You get used to the lifestyle and what you initially thought was a reward now becomes a necessity. Slowly, you find yourself making twice as much money but still haven’t started saving for important things like retirement or your kids’ education. 

A matter of mindset

The biggest issue with lifestyle creep is one of mindset. You start viewing discretionary and luxury expenses as necessities or something you deserve and overlook the opportunities that saving more could provide you. As a result, you may end up prioritizing spending relative to achieving long-term goals. If you are a high earner (find out here) and you often feel like you don’t know where your money is going, then lifestyle creep may be a problem.

Make a plan

The best tool to limit or eliminate the negative effects of lifestyle creep is a financial plan based on your values and priorities, even a simple one. The main benefit of a financial plan is to change your mindset, from just “going through” life to “having a strategy” to make the most out of your resources, including money. Lifestyle creep is a result of not having a strategy. Going through the process of identifying your values and setting measurable goals and actionable items can change your mindset. Kowing what’s really important to you can help you focus on it and lead to better decisions today. So our first advice is to think about why money is important to you and start planning.

Be aware of your spending habits

Lifestyle creep can start small and doesn’t have to be about luxury goods. It generally includes what we call discretionary spending. Discretionary spending isn’t just about things that you don’t need. It also includes spending on something more than what is strictly necessary, like buying a pro bike when you are only cycling once or twice a week (ouch!). The key to deciding whether some spending is good or bad, however, depends on your values and priorities. If fine wine is your passion, spending on wine is not a bad thing. To find out how well it aligns with your values, track your spending for a while. Try this challenge: write down all your expenses for 30 days. At the end of the period, compare your spending to your values and priorities. Is your spending in line with the things that matter in your life? After tracking your spending for a while, give budgeting a try.

Some other tips to control your spending

If you have worked on your simple plan and started tracking your spending, try some of these ideas to help you reduce the risk of lifestyle creep.

  1. Pay yourself first. Saving is not a burden if you realize you are buying a slice of your most important goals. Automate some savings each month. You can reward yourself for this good behavior by also setting aside some ‘fun’ money.
  2. Use goals-based investing. Writing down goals and setting savings aside for each goal helps you remind you what’s really important to you and gives you meaningful feedback. For example, if you are on target for your goals and find yourself with extra cash, you don’t feel bad about spending more.
  3. Make gradual changes. As you track your spending commit to small, realistic spending reductions and commit that money to savings. Getting started is big progress.
  4. Spend intentionally. Avoid spending for the wrong reasons, like things or features you don’t need just because you can afford them, but don’t feel bad about buying something expensive if you actually value it. Make a list of your monthly wants and don’t buy anything right away. Let it sit and go back to it after a couple of days to prioritize them.
  5. Beware of debt.  Debt is a commitment. Just because you have good credit and can afford to make the payments, it does not mean you should get the loan. When you take out debt, you are committing yourself to make payments for the duration of the loan. Every additional dollar of debt you have to pay back is a dollar you could use on something else.

Everyone deserves to indulge every now and then, so you shouldn’t feel bad if you don’t think you could live the same way you did during college or grad school. The key is to be aware of your spending habits, making sure they align with your values, and to understand the opportunities that saving today can buy you tomorrow.

Until Next Time!

Massi De Santis is an Austin, TX fee-only financial planner.  DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives.  As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

How to Build a Safety Net for Your Plan

How to Build a Safety Net for Your Plan | Life Saving | DESMO Wealth Advisors, LLC

You don’t have a sound plan for your desired goals in life until you plan for emergencies and setbacks. In financial planning, this means planning for and building the right ‘safety net’, an amount of savings you set aside and only touch in case of an emergency. How should we evaluate the amount of savings required in a safety net? The answer varies by individual and household, but here are some general guidelines.

What are your needs?

The first step is to figure out what your needs might be. One of the main things we plan for is the loss of a job. If you lost your job, how much do you think you will need on a monthly basis to maintain a comfortable standard of living? It helps to have a budget, but getting a rough idea should not be too hard. Keep in mind that if you had to, you’d probably be able to cut some expenses, like eating out or expensive vacations.  For example, say you make $100,000. If you lost your job and had to live on your safety net, your taxes will be minimal and you can probably postpone saving for other goals until you find another job. So you might only need to generate about 50% of your initial income to live relatively comfortably, or about $4,200 a month. One factor you may want to consider is your health condition. If you have recurring health expenses or there is a likelihood you may need additional funds for health expenses, you should plan for those separately in your safety net.

For How Long?

According to the Bureau of Labor Statistics, the median duration of unemployment is about 10 weeks. So a starting point can be to plan for about three months of expenses. But here is where individual circumstances can change quite a bit. The data shows that for about ⅓ of the population, unemployment can last longer than 15 weeks. If you are married and have only one source of income, it may make sense to increase the safety net  up to 24 weeks, in case your unemployment lasts longer.

Your profession can help you determine how long you should plan for. Some professions are in demand, so a shorter time frame may make sense for those. Other, highly skilled workers in specialized fields may need a longer time to land the desired job, and so they may need to plan for a longer period. Continuing our example, if you are single and comfortable with the median estimate, your safety net estimate could be about $12,600 ($4,200 x 3). If you are married and your need is $6,000 for 6 months, your estimate would be $36,000.

Are you flexible?

Being flexible is always helpful. If you think you can get partial employment and income to cover part or all of your basic needs while you look for a better option, that income can help you lower the size of your safety net.  But you have to be realistic, and consider that you may lose your job when there are few opportunities available. Having flexible needs can certainly help too. If you are renting, you could look for a cheaper option, or decide to have roommates. The more room you have to decrease your spending, the lower your safety net can be. Having some form of budget, even a simple one, can help you figure this out.

Do you have any flexibility with other goals? The goal of your safety net is so that you are prepared for an emergency, and you don’t need to give up on other important goals in case of an emergency. But perhaps you can use some flexibility with other goals. If you have been saving for a new car, you may decide to delay the purchase or to choose a less expensive model. Being flexible gives you more room to play across your savings.

Add a buffer

We don’t really know how much we might need when we actually need it, so it may be a good idea to add a buffer. The idea is to go through the steps outlined above, get a good idea of the size of your safety net, then add a buffer of 10-15% to it. One reason is to be on the safe side, in case you underestimated your needs. The buffer can also help you account for unexpected cost of living adjustments.  With a buffer of 15%, the estimate in our example of a single individual goes up to about $15,000, while our married couple example goes up to over $41,000. 

How to invest your safety net

By definition, the safety net should be invested in safe assets. High yield savings accounts work well, but you may also consider short-duration bond funds and Treasury inflation-protected securities or “TIPS.” The inflation protection can help you reduce the risk of unexpected inflation. If you use a buffer as we described above, you can invest your buffer more aggressively. It could even be completely invested in stocks. In our example of the single individual, you could invest $12,600 in a high yield savings account, and $2,400 in a stock market index fund. If the stocks increase in value, say to $3,000, move the additional $600 to the high yield account. If they drop in value, do not replenish it with the $12,600 you have in the high yield savings, as that is your core safety net. With this dynamic strategy, your buffer helps you increase the value of your safety net over time while protecting your essential safety net ($12,600) in down markets.

Safety net and Total assets

You may have been saving for a number of goals and have accumulated some savings. But unless your total assets are one or two orders of magnitude greater than your safety net needs, you should have a dedicated safety net, and only dip into it in an emergency. For many people, as they start saving, the safety net should be the first goal they fund. After that is taken care of, additional savings can be dedicated to other goals. The safety net is part of your basic risk management strategy that helps you grow your assets over time while giving you peace of mind that you and your family are taken care of in case of a financial emergency.

Your safety net should not feel like a waste of capital that could be used to get higher returns. On the contrary, It is the first step to achieving financial independence, as we are learning in this period of crisis.  If you have a safety net, you can focus your portfolio on other goals and can take more risk with these investments, because you won’t need to dip into your investment portfolio in case of unforeseen expenses.

Until Next Time!
Massi De Santis is an Austin, TX fee-only financial planner.  DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives.  As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

How to Apply for the SBA Disaster Loan Advance

HOW TO APPLY FOR THE SBA DISASTER LOAN ADVANCE COVID PANDEMIC

We encourage business owners to check out the SBA COVID-19 relief page. In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000.

The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. The loan advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available within three days of a successful application, and this loan advance will not have to be repaid.

Here is an instructional video for how to apply. You can find the complete application here.

Until Next Time!

Massi De Santis is an Austin, TX fee-only financial planner.  DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives.  As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

What To Know About The Coronavirus Aid, Relief, and Economic Security Act (CARES)

Congress | DESMO Wealth Advisors, LLC

The CARES Act is an economic relief plan for individuals and businesses of unprecedented size, totaling about $2 trillion. As a comparison, the 2019 US GDP was about 21 Trillion. The Act is very broad and includes many different programs aimed at reaching broad sections of the economy. Our goal is simply to inform readers and clients of parts of the Act that may affect their financial plans, not to dig deep. This commentary should not be viewed as tax advice. Consult with your advisor or tax professional, or schedule a call with us if you think any of the items we discuss may impact you, or want to learn more.

Taxpayers’ Recovery Rebates

This is the item that has garnered the most attention. Taxpayers may receive tax rebates up to $1,200 for single filers and up to $2,400 for married filing jointly. The credit amount is further increased by up to $500 for each child under the age of 17. The rebates are phased out according to the following schedule.

The Tax Foundation estimates that over 90% of filers will get a rebate, and nearly all filers below the 80th percentile of income.

If you have not filed for 2019, consider filing now if your 2019 income is lower than 2018. Otherwise you can decide to wait until July 15. The tax rebate will be based on the latest income tax return that you filed (2018 or 2019). A lower income may give you a higher rebate. The final rebate amount will depend on 2020 income (with tax returns filed in 2021). Taxpayers who receive a smaller rebate than they are eligible for based on 2020 income will receive the difference after filing a 2020 tax return, but overpayments of rebates due to a higher income in 2020 will not be clawed back.

Distributions and loans from retirement plans

The act relaxes requirements for qualified distributions under employer sponsored plans and IRA accounts. Up to $100,000 can be withdrawn in total across such plans by someone affected by the Coronavirus. The withdrawals will be:

  • Exempt from the 10% penalty for early withdrawals;
  • Exempt from normal withholding requirements;
  • Eligible to be repaid over 3 years;
  • And the resulting income distribution can be spread over three years.

The act also relaxes some of the constraints on loans from retirement plans. Loan amounts are increased to $100K and 100% of the vested amount can be withdrawn.

Relief for Student Loan Borrowers

Student loan payments on federal student loans are deferred until Sept 30, 2020. Over the six months, no interest is accrued on the loans. You have to proactively suspend the payments. So, if you have a federal student loan, call your provider to suspend them. If you think you may qualify for student loan forgiveness, you may want to suspend the payments in case the loan is forgiven in the future.

The act also contains a special provision that allows payments of student loans by employers to be excluded by taxable income, up to the $5,250 amount typically allocated to employer educational assistance programs. If your employer has an educational assistance program, ask them if they are willing to include student loan repayments for you this year. 

Small Business Help

The act contains a number of programs to help small businesses affected by the coronavirus. Here is a rundown. Check the SBA website for details and to apply. The criteria are intentionally broad, so if you are a small business affected by COVID-19, chances are there is a program for you. One catch is to apply early, as some of these may be on a first-come first-served basis. Check out our instructional video to apply for a disaster relief loan on the SBA website.

Paycheck Protection Program

Small businesses may take out loans to help pay for payroll costs, health insurance premiums, rent, mortgage interest, and other costs. A portion or all of the loan may be forgiven if used in the first eight weeks on eligible expenses. In addition, the maximum interest rate that can be charged for a loan made under this program is 4% and the term of the loans can be up to 10 years. That can be a good rate for many small businesses. Finally, payments on these loans can be deferred for six months.

The SBA has additional programs to help small businesses, so we encourage you to check them out.

Employee Retention Credit and deferral of payroll tax payments

Employers whose activity was partially or completely suspended may be eligible for a payroll tax credit. The credit is equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee, subject to caveats. 

In addition, according to the Act, employers are able to defer payroll taxes through the end of 2020, until the end of 2021 and 2022. Specifically, 50% of the payroll taxes that would otherwise be due throughout 2020 can be deferred until December 31, 2021. The remaining 50% is due on December 31, 2022.

Net Operating Losses (NOL) rules

The CARES Act allows NOL from 2018, 2019, or 2020 to be carried back up to five years. This should allow companies to reduce prior years’ tax bills, allowing them to claim refunds of amounts previously paid to provide further liquidity to get them through the COVID-19 crisis. The law allows for up to 100% of taxable income to be offset for 2018, 2019, and 2020.

Waived Required Minimum Distributions (RMDs) from retirement accounts

The Act eliminates any RMD that needs to be taken in 2020. If you have taken your RMD within 60 days, you can roll it over to your retirement account by the end of the 60 days window.

Increased tax deductions for charitable contributions

Charitable contributions may drop during this crisis period. To reduce this drop, the Act introduces a new above-the-line deduction (directly reduces your adjusted gross income or AGI) of $300 for charitable contributions. In addition, the AGI limit for cash contributions (currently limited at 60% of a taxfiler’s AGI) is raised to 100%.

Increased unemployment benefits

The Act gives a substantial boost to unemployment benefits. The first week of unemployment is now covered. In addition, there is a boost to the benefits of $600 a week, and a 13 week extension beyond the normal duration determined at the state level (26 weeks in Texas).

Overall, the CARES Act addresses a number of key issues that individuals and businesses are facing right now as a result of COVID-19, so it is a welcome development. Take a look at the list and the links provided, and consult your tax professional or financial advisor to learn more. Act quickly, as some of these programs have time limits or are on a first-come-first-serve basis.

Until Next Time!

Massi De Santis is an Austin, TX fee-only financial planner.  DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives.  As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.