A Week of Thoughts September 22, 2018

Living on less than one makes doesn’t have to feel like money diet. It is about an approach to lifestyle. The cliche of giving up the expensive latte has merit. It can be replaced by an upscale cup of coffee prepared at home for less. Ultimately, there is money saved while still having a certain lifestyle enjoyment. Likewise, in the Chicago area some shorter car trips can avoid the tollways and perhaps only take a few minutes longer to get to the destination. It is not as much about the $2 or so saved on the toll or the latte as it is about making conscience small money choices that add up over time. Most importantly, these small choices causes a shift in ones attitude toward lifestyle and spending that pay large dividends over a lifetime.

There are often both intellectual and emotional reactions and solutions to financial problems. For example, let’s consider credit card debt. Intellectually and by the numbers, it is better to pay off a card that has the higher interest rate first. Sometimes this card has one of the higher balances and it is therefore hard to get traction and feel like there is progress in the debt reduction. Often, it is more effective to make the minimum payments on the higher balance cards and put the biggest effort on the lowest card balance. This permits the card with the lowest balance to get paid off more quickly. Paying off the low balance card provides emotional traction in the process of debt reduction. The monthly payment dollars that are no longer being applied to the lowest balance card can now be applied to the next lowest balance card. Often this means even a larger amount getting applied to this second card. This smallest card debt first approach answers the intellectual requirement of getting the card debt paid off while feeding the emotional side with demonstrated progress in debt reduction.

Is your house leveraged through a mortgage? Having a 30-year fixed mortgage can be great thing especially at today’s historically low mortgage rates. The mortgage locks you in to fixed payments which you pay back with money that due to inflation is worth less in purchasing power while possibly deducting the mortgage interest. This permits you to invest less in your home and use the money elsewhere such as for emergency funds, general investments, college funds, or retirement funds. It is important with such a mortgage to have an emergency fund that is equal to 20% of your mortgage balance as safeguard against any unexpected drops in income. Though against the prevailing American thoughts of retirement, it can be useful to have a mortgage in retirement to provide funds for other uses.

Should I still give to charities given the new tax law? In short, yes. Why do you give to your favorite charities? Likely because you respect the work of the organizations. The tax deduction reduces the taxable cost of the donation. For example, if you give $100 to a charity and are in the 22% tax bracket, the true cost of the contribution is $88. That is the reduction in income reduces your tax burden by 22%. You still have an out of pocket cost of the $100 no matter how you figure it out either to the charity or with the tax going to the government. The new tax law pushes many taxpayers who in the past itemized deductions into the new higher standard deductions. With these new standard deductions one way to view the situation is that the government is subsidizing your deduction whether or not you give. So, I am continuing to give to my charities like my church without direct concern for the tax deduction. I am not letting the tax tail wag my personal values.

Eating out frequently can really upset ones finances. It is easier to eat higher quality foods such as Organic or Non-GMO items at home than in most restaurants. Picking out items and planning ahead does take some deliberate effort. ( I keep a running list of food items using Google Keep on my phone.) I often pick quick cooking food items from Costco and the local grocery that provide convenience and organic contents in the same package. I pick them out of the freezer and refrigerator based upon the time I have to prepare a dinner that day. Even though organic and convenient, they provide a meal cheaper than going out to eat a similar meal in a restaurant.

A fear for many folks worse than dealing with their finances is public speaking. Toastmasters is a great organization that helps people improve their communication and leadership skills in a positive, constructive environment. Members often find themselves creating contacts and improving skills that enhance their professional development and paychecks. While I am partial to the Orland Park Toastmasters, look for a club near you at https://www.toastmasters.org/find-a-club.

What share class are your mutual funds? Many people don’t understand that one mutual fund may have several share classes that hold identical holdings yet charge different expense ratios depending upon how they sold and other factors. This expense ratio can vary by 1% and sometimes more. All things being equal it is best to have the fund with the lowest expense ratio or annual charges. That keeps the funds invested and can make substantial difference in the long term account value. Ask your financial professional if you are holding the cheapest fund class.   If not, can you do an exchange into the cheaper fund class. Make sure to understand any tax implications of the exchange so you are not surprised in tax season.

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