Are your finances your fault?

Posted on September 3, 2020September 8, 2020 by Danielle

Many of us tend to blame every disaster on ourselves. Except for the few who think everything is the other guy’s fault. Even in this pandemic, I hear a lot of people blaming themselves for losing their job, or making bad investment choices, or not seeing it coming.

If you’re making a financial plan, it’s very important to be realistic about what you can control and what you can’t. For example, you can certainly take advantage of all the job training offered you, put together a crackerjack resume, keep up your networking contacts, and try to do the best job possible, all things you can control. Yes, you’re allowed to feel a tiny bit guilty for these things, because you can control them, but you aren’t perfect.

You can’t control getting an unreasonable or sadistic boss (yes, some people are unreasonable or sick), have a change in supervisors and the new one wants their own team. You may have attained an age or pay level where the company concludes it makes sense to get rid of you and get someone cheaper. Your employer may be taken over, lose business, the university may not be able to re-open, or you’re in an industry that suffers in a pandemic. None of these events have anything to do with you, personally, and there’s little or nothing you can do about them.

Let’s look at it another way. Things you can generally control:

How much you spend.
Where you choose to live.
How much you save.
Whether you contribute to savings.
Whether you have an emergency fund.
Whether you continue to develop your job skills.
Whether you maintain your home well enough to prevent little problems from becoming big ones.
Whether you’ve established realistic goals and made a financial plan to address them.
What investments you choose.
Whether you have enough insurance to prevent catastrophe.
Whether you have an estate plan that preserves wealth and takes care of your loved ones.

Things you can’t control alone:

Whether unemployment benefits are adequate.
Accidents and illnesses (except for doing what you can to lead a healthy lifestyle)
Whether Social Security will be there for you.
Whether your employer operates fairly.
What “the market” will do in the future.
Whether you will have the perfect kid.
What college will cost.
What taxes will be.
What your home will be worth.
Whether you can depend on adequate care if you are disabled or elderly.

I’m sure either of these two categories could be expanded for many more points, but I want to make the point that the first group is things you can make individual, hopefully good, choices about—or your own individual mistakes. The second group is societal, and can only be addressed by groups of people banded together: parent/teacher associations, unions, consumer-group pressure and regulations, and political action.

You Star Trek fans will understand what I’m after. In Star Trek, individuals can still make poor choices, or rise to their highest capabilities, or be kind or cruel. But that society has organized itself economically so that no one goes hungry, everyone has access to education and housing and leisure time (and there still seems to be plenty of scope for personal expression). Perhaps most startling is the issue of disability. Technology has developed system-wide responses to most handicaps, whether blindness, injury, personality volatility, or mobility issues. Thus, although people may have handicaps, they are not disabled from fully functioning in society.

So, when difficulties arise, try to distinguish whether it’s an individual decision (or error) you’ve made—because those are often in your power to control and correct. Or is this an issue with the society you live in, and is the only solution group action or policy change?

Planning to give to charities: should you consider a donor-advised fund?

Posted on August 25, 2020August 25, 2020 by Danielle

It hasn’t been covered much, but charitable donation deductions were almost eliminated for the middle class in the tax “reforms”. You can only deduct your charitable contributions if you decide to itemize, and your allowable itemized deductions exceed $12,000 for a single and $24,000 for married filing jointly—and remember, all state and local taxes are capped at $10,000, no matter what your property tax is. If your mortgage interest is significant or your itemized deductions will exceed these caps, your charitable deductions will still be deductible. If not, nada.

There’s one exception. For the 2020 tax year, you can separately list up to $300/taxpayer as an “above the line” deduction, without itemizing. That’s not a fortune, but it’s something. But what if you give more, or plan to?

If your total allowable deductions exceed $12/24 K and you plan to itemize, then charitable donations will be deductible. Let’s say you pay $10,000 in property taxes, $14,000 for mortgage interest, and make a $10,000 charitable donation = $34,000 in itemized deductions.

But what if you’re married, with a paid off house, and your property tax is $10,000? Then you don’t get any deduction for the charitable donation, because you won’t itemize. In this case, probably the simplest way to deduct charitable donations is to bunch them into years where your itemized deductions will exceed the standard deduction, even if that means you make the donation every other year. So, with $10,000 in property tax, and $20,000 ( 2 years’ worth of donations), you’ll have an itemized deduction of $30,000—but only $6,000 benefit over the standard $24,000 deduction. You’ll also have to park the yearly budgeted charitable amount in an account somewhere, and pay taxes on whatever the probably minimal earnings are.

Then there’s the donor-advised fund, available to set up at most of the big investment houses. When you establish this fund, you put in a large lump sum, for which you get a tax deduction in the year you contribute the money. Then, you can keep it invested (and hopefully growing) until you decide to distribute it. The investment house will gleefully set this up for you, AND charge you a yearly management fee of about .60% to park it in the investment(s) you select. For that, they’ll faun all over you and tell you what a good person you are. But this is another one of those instances where there’s money to be made off of you, so why not? Even better, they’ll work with your financial advisor, who will also charge you a fee. So just let me know, okay? (not!)

For the most part, it seems worthwhile to me to simply park your donations in your own investment account and avoid the .60% fee. You can always donate the appreciated investment and avoid capital gains taxes when you make the donation (if that’s a consideration). You’ll have to pay tax on any earnings (dividends, interest), but you can choose an investment with very low or no payouts of this kind. If this is a donation that you make pretty regularly, there probably won’t be that much in earnings anyway.

The one situation where I can see that a donor-advised fund makes sense is if you 1) receive a large, taxable payout in one year (as with a taxable executive compensation payout at retirement), 2) have charitable intent anyway, and 3) have sufficient taxable earnings in the same year that you can use the entire donation as a deduction. It’s not going to be a direct trade off—your deduction won’t reduce your taxes in the same amount, but you will get a break IF YOU INTENDED TO DONATE ANYWAY. Or maybe you think you’re a savvy enough investor that you can grow the money better and faster (over and above the management fee) than the charity’s endowment team can. Um.

Other than that, I think most charities would rather have the money now. Or every other year or three. In the meantime, you can always designate one of your investments or investment accounts as earmarked to be donated, keeping it invested until the year when you can itemize.

That’s the story as I see it. If anyone can point out other situations, I’d be happy to hear about them.

College contingency plans

Posted on August 18, 2020August 18, 2020 by Danielle

Gandalf and Frodo I’m a big fan of always having a plan B, and having more than one stream of income. You can only control you own actions, and try to have a plan on how you might cope with unexpected events. That’s why we diversify our portfolios, have an emergency fund, and try to think of some type of side job that keeps some money coming in if the main gig goes kaput. The era we’re currently enduring highlights the worth of these principles. So let’s apply them if you, or your nearly-adult child, is in college at the moment.

If you’re returning to campus

I wouldn’t. If we view the recent experience with the Univ. of North Carolina at Chapel Hill, it’s entirely possible that schools that open will rapidly close down. This means that all the expense of moving clothes and tiny refrigerators, purchasing sheets for the extra long twin that exists nowhere else on earth, getting there, getting a college wardrobe (often for a different climate than where you live), etc., will all be spent again getting out of there. It’s easily hundreds, if not more, directly down the hairy dorm drain.

Nevertheless, I see the desire to get rid of parents/kids and live your life independently. I’ve heard that some students are still renting apartments near campus and using those as a base to study remotely. My concerns, as might be anticipated, are about health (and costs).

Sign a HIPAA form. Without permission, a school or health service cannot discuss student health with parents. Often the school will include these with registration, but double check to make sure one is on-file with the student health service and if possible, with the local hospital and any doctors that the student may use.
Double check insurance. Some types of insurance may not have in-network providers in the campus area. Know what and whom the insurance will cover, and take a list of in-network hospitals and maybe a few names of internists with you. Bookmark the insurance tool that allows you to check whether a health provider is in-network. You don’t want to be scrambling to find this out in an emergency. If your health insurance is lacking, you may want to purchase the school’s insurance, if only for backup.
Where is the nearest emergency room? For urban campuses, there may be a choice and the whole family should know where the student would go (or where EMTs would take them), so that no one has to experience the horror of calling around to find someone.
If you need medical care, how will you get there? What if you’re too sick to drive, or call a ride-share, or even walk to the health service? Does the school have anyone to send to check up on you, or are you dependent on friends (who may also get sick)?
How will you get food or prescriptions? Even well-intentioned friends may not be dependable for three meals a day for many days. They also may not be eager to get something contagious. This is even harder if you’re not living in a dorm with food service. Be sure you know what pharmacies, groceries, and restaurants will deliver, and if it applies, whether they’ll deliver to a dorm.
Have a credit card. Okay, maybe everyone does but these have more protection than a bank debit card. This is one instance where student and parent should be able to see charges coming up as an alert, and because fraudsters are happy to take advantage of the sick, the protections are worthwhile. Even being on a parent’s account builds credit history.
You might need an emergency fly out plan. More than one university closed its dorms while students were on spring break. Students were then faced with returning to campus to clean out their rooms. This would be a really good time, if returning to campus, to take only the minimum with you until we all see whether this is going to work.

If you’re working remotely

Yeah, we’re all climbing the walls. There’s little that will substitute for the chief advantages of learning IRL. You won’t get the spontaneous conversations with professors and students; won’t get a campus job assisting a prof; won’t get the late-night debates about profound life issues; won’t get to meet famous people brought on campus; and will have a much harder time getting drunk and getting laid.

However, actual college study is much more about what you do yourself—reading, thinking, forcing yourself to develop your writing and argumentation skills. In fact, learning remotely is much more about self-instruction, with the advantage of professorial guidance and, most important, personalized feedback—the one thing that is hard about self-instruction. College is a great time to become the person responsible for your own learning. While you may be accountable, and appreciate the accountability, nobody is going to track you the same was as in high school. Even on campus, many people can’t muster the self-discipline, and those people are called dropouts. Work your goals: you’re in control of your learning.

Sure, it’s not what you dreamed of. Sure, it’s tough and you’re missing out. So is everybody. It’s a great time to learn to roll with the punches and make the best out of a bad situation—a most valuable and frequently used adulting skill. Don’t hesitate to get help—you don’t have to “desperately need it”. Therapy or counseling can also be growth enhancing, helping you to a better life. Most mental health professionals are doing tele-health appointments, and many insurance policies will cover those, at least right now.

On the other hand, you might find that you have more time than what you’d have on campus. You’re not walking to class, and you’re probably not going to parties, working, or hanging out in the campus cantinas. This is a great found opportunity to learn something additional—coding, home repair, guitar, adulting skills. My most recent newsletter had a much longer article on these ideas, so email me if you’d like a copy.

“I wish it need not have happened in my time,” said Frodo. “So do I,” said Gandalf, “and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”