In this post I’m tackling a tax topic: The difference between ordinary income taxation and capital gains taxation. What’s the difference and why is it important to know? One word: taxes.
The IRS taxes your income, as you know, but it also taxes profits. If you buy a stock for, say, $100/share, and then sell it for $120/share, you have a $20 gain which is taxable. The original $100 purchase price is what’s called your basis in the stock. Basis is increased by sales taxes paid on the item, any legal fees associated with its purchase – even inbound freight costs. When you sell at a profit, you want your basis to be as high as possible, to reduce your taxes on the gain.
Let’s look at how that $20 gain is taxed. It all depends upon your holding period for the asset – how long you owned it. If you held the asset for more than one year, then it is taxed at a capital gains rate. That rate...
An important financial concern that we often hear from clients is, “How can I improve my credit score?” First of all, I have to give a quick disclaimer that our company, CameronDowning, is not a credit repair or debt consolidation service. Our goal is to arm you with the education you need to establish a strong financial foundation. Consequently, this often includes advice on how to raise your credit score.
If you’re considering buying a home, taking out a loan, or you’re getting yourself organized after a season of personal financial challenges, you understand that your credit score may determine what you can and cannot do in life.
The most widely used credit score are FICO scores. FICO score and credit score are often used interchangeably. FICO is an acronym for the Fair Isaac Corporation. Founded by William Fair and Earl Isaac in the late 1950s, they developed a mathematical algorithm that predicts consumer behavior,...
With this blog post I’d like to share some thoughts about investment risk tolerance.
Generally, we think about risk as a bad thing – something we want to avoid. “I won’t drive faster and risk a speeding ticket”, and, “No, baby, that dress doesn’t make you look fat,” are two examples of conscious choices made to avoid unpleasant consequences.
The context for risk in this post is investment risk – I put money out there in some type of vehicle, and expect it to be returned to me, and then some. And then some can be interest, dividends, capital gains, and lottery winnings.
I’m here to tell you once and for all.
Yes, I know . . . this is a little off the beaten path for me.
I usually write about financial topics, given that I’m a professional financial planner. But occasionally some NIGO aspect of the world (that’s Not in Good Order, in my professional parlance) comes to my notice with such frequency that I just can’t take it anymore. Sort of like the crescendo in Lucy in the Sky with Diamonds. It builds and builds, and you know that a climax is coming.
Well, today it peaked, and I’m seized with great generosity of spirit (and indeed, humility) to set the English-speaking world right.
Ready? Here it is: data is the plural of the singular datum. There is your pronunciation: dāta with a long a. Not dăta with a short a. Never Ever EVER.
Now that that’s settled, let’s turn...
Channeling David Letterman and all those Top Ten lists. I thought it might be fun to compile one of my own. To wit:
This is a list compiled after about 25 years of experience.
You eat out way too much. This is what your kitchen is for! If you get a sandwich and a coffee in Miami on a daily basis, you’ve spent ($10/day * 20 days) $200 in a month! How about all that fast food? I’m seeing families who spend several hundred dollars each month eating out, when a little planning and Publix time could save much of that money and everyone would be healthier and richer for it.
You don’t have enough life insurance. What happens if you get hit by a bus? Are your existing savings enough for your surviving spouse and children? Term insurance is relatively cheap and easy to obtain. No excuses. See Mistake #5.
You don’t have an emergency fund....
We usually understand the time value of money in two contexts: the growth rate of an investment, and the inflation rate. Nonetheless, the TVM is a topic that should be understood by everyone serious about financial planning.
To conceptualize this, sketch out a timeline of your life. At the leftmost point is your date of birth. The rightmost point is your date of death. In between, mark your retirement date, and today’s date. If you are not yet retired, then the time value of an investment pertains to you in particular.
Let’s look at investment growth rates. On your timeline you have 10 years before your retirement. You're interested in projecting out your IRA balance over these 10 years, assuming an 8% annual rate of return, compounded monthly. Your current balance is $250,000, and you are depositing $300/month – less than what is permissible by law. I make...
By early 2015, the amount of outstanding student loan debt in the U.S. exceeded $1.2 trillion. What a staggering number! Tens of millions of young professionals carry significant student debt balances. The payments may be stiff. It can take years to pay off many of these loans. Consequently, other financial priorities get postponed. Commonly we see saving for retirement pushed ahead into the future. Does this describe you?
The good news is, there are federal programs for income-based repayment and even loan forgiveness. Before you get too excited, though: only certain kinds of federal student loans qualify. These include Stafford and Grad PLUS loans. Each year, program participants verify their income and family size. The loan servicer then calculates a new required monthly payment amount. Loan payments go up or down as appropriate. The intent is to assist borrowers in making on-time payments. These payments, however, may...
In this blog post I want to go just a little bit beyond the basics of traditional IRAs and how they work.
An IRA is an individual retirement account by definition, with the emphasis on individual. One IRA means one owner, so there can be no joint titling. In order to contribute to an IRA you must have earned income. That is, income from compensation defined as wages, salaries, tips, alimony, and separate maintenance payments. These are all earned income. Income from capital gains, dividends, and interest is not considered earned income by the IRS – they classify it as investment income.
Your contribution limit is $6000 per year (2020). If you’re over 50 an additional $1000 catch up contribution is allowed, so the limit becomes $7000. Age limits on contributions have been repealed in the 2020 CARES Act, so as long as you have earned income you can contribute.
Most people are familiar with the 401k, but what’s a 403b? Basically a 403b is a retirement plan that is sponsored by a 501c3 organization, meaning a not-for-profit employer. A local school board or hospital are good examples. The employee invests in mutual funds or annuity contracts – the only choices available. If annuity contracts are the only investment choice, the plan is likely administered by an insurance company, and can also be known as a TSA, or tax-sheltered annuity.
Money can go into your account from two sources: deferrals from your paycheck (money that you could have taken in cash) and your employer can also make contributions. The employer’s contributions can be discretionary or according to a match formula. Say the employer will offer you 50 cents on the dollar of whatever you contribute, up to 6% of your earnings. That’s a fairly typical formula. We’ve seen some out there more generous, and some not...
Nobody plans for a disability. In our experience, people are more willing to incorporate life insurance into their financial plan than disability insurance. Why is this? Let’s first get into the differences between disability and life insurance.
Here are a few key differences between these two types of insurance: