Financial resolutions are only 2nd to weight loss resolutions as we come into a new year. By now, many of us have given up on our resolutions. For two reasons, this year, more than ever, you should consider paying extra attention to your financial resolutions and your finances in general.
First, if you have not yet noticed, it will become more evident in the upcoming months that costs are going up. I have most noticed this at the gas pumps. News reports last week announced that some of the highest cost increases for groceries and household items are coming before the end of the year. Johnson and Johnson, Proctor & Gamble, and Kimberly Clark are all indicating 4% to 10% price increases by Labor Day. Look at the number of products you use, including laundry detergent, diapers, toilet paper, and more made by these companies. JM Smuckers and Kraft Foods are looking at significant price increases. And – it is not just when you go to the grocery stores you will see price increases. If these product prices are going up, it means costs of businesses you frequent, such as restaurants or entertainment venues, will see increased costs that they will probably pass onto you. Your local carpenter, electrician, plumber, and other contractors will see increases in their job materials which they likely will pass onto you.
There are indications that experts see inflation being at 4% within the next five years. For most, increases in their wage, pension, or other retirement income will not increase as fast as inflation. This means you will need to come up with more cash from somewhere else. You have more control over decreasing expenses rather than increasing income.
Second, as we have been discussing for several months, there is a concern about increasing taxes. The American Jobs Act, if passed, will raise the tax rates at every level. The 12% rate will go to 15%. The 24% rate will go to 28%. The highest tax rate will go to 36%. The increase in tax rates is only one component of changes.
There is a proposal to do away with the SALT limitation, allowing many higher-income individuals to start itemizing again because taxes would no longer be limited to $10,000. This would decrease taxable income for those whose itemized deductions exceed their standard deduction. In the same proposal is a plan to bring back the Pease deduction, which places a percentage limitation on itemized deductions, thereby increasing taxes for those individuals. There is also a proposal to get rid of the 20% cap for capital gains tax rates. Changes may be coming for estate taxes, gift tax exclusions, and stepped-up basis changes.
The above are all proposals. We cannot know the outcome when the final versions are passed and signed into law. Whatever the final versions are, the likelihood is it will mean an increase in taxes.
The recommendation is – start now in reducing expenses where you can. Several steps we would suggest:
1 – Know where you are spending your funds. Review your credit card statements, your bank statement, and/or track your expenses for 30-60 days to see where your funds are going. Adjust what you feel is out of line.
2 – Review your debt. Consider paying more frequently to pay off sooner. Does refinancing make sense to lower interest rates? Do you have cash sitting in the bank earning little in interest while carrying a balance on your credit card, paying 10%, 15%, 20%, or even 29% interest?
3 – Review your fixed expenses and see how you can adjust. Can changes to your insurance lower your premiums? Can changes to your Internet, cell phone, or TV viewing reduce those expenses? How about prepaying for fuel?
4- Do you have monthly subscriptions you are paying for and not using? Apps? TV subscription services? Gym memberships? Magazine subscriptions? Review credit card or bank statements for automatic payments that should be stopped.
5- Can you change where or how you are shopping? Are there deeper discounts online? At dollar stores? At discount stores? At flea markets, thrift stores, or second-hand shops? Buying in bulk can be advantageous depending on what you purchase and how you use it. Coupon or sale shopping can reduce expenses. Stocking up during sales and participating in a loyalty program can reduce your grocery, personal care, and household product expenses.
6- Understand your overall tax situation. What should you be doing now to minimize future taxes? Consider what you need to do once the final laws are passed. This could mean recognizing capital gains sooner rather than later. Roth conversions, even to the point of increasing a tax bracket today, may make sense. Bunching your itemized deductions can be a tax savings measure. Qualified charitable contributions of up to $100,000 from your IRA can avoid taxes on an IRA distribution and reduce your future RMDs.
Does this all seem overwhelming? Our final recommendation – start a weekly family financial meeting. Agree to spend 60-90 minutes a week discussing your financial situation. Take some of the suggestions above, and they can be the basis for several months of meetings. And – you can add in more items like reviewing your current retirement or estate plans. Talk about significant expenditures coming up like a vacation, home improvement, college education, or vehicle purchase.
Some items you will resolve in 60-90 minutes. For some items, you will need to assign someone to research outside of the meeting and bring back recommendations and suggestions. We suggest that you involve the kids to make sure they understand what you are trying to accomplish and give them a good foundation to manage their finances in the future.
Need more ideas? Please review some of our earlier blog posts, especially those under the cash flow and debt management sections and the tax planning sections. With tax planning, you are welcome to come to see us at Planning with Purpose to discuss your personal situation.