A Heart for Splurging: How Budgeting and Expense Tracking can Free Up Your Time & Money

With love in the air on Valentine’s day, endless amounts of consumers will pile into stores, buying up cards, chocolates, or mega-sized teddy bears to share with the ones they love. In fact, on average Valentine’s Day participants will spend $196.31 according to a recent report. With that decent dent coming in each February, Valentine’s Day can help us softly return our eyes to a very important and relevant topic: Budgeting.

I know, that dreaded B-word, and on the most lovey-dovey day of the year! While it may bring a more serious and somber mood associated with the connotations of it, budgeting can and should be viewed in a much lighter and friendly way! Using modern-day technological and analytical methods, we can more easily wrap our arms around what can seem to be an extremely tedious and cumbersome process.

As with so many an established method, modern analysis has found unique and interesting ways to innovate classic solutions. One great example of such innovation is a theory coined as “zero-base budgeting”. In essence, this idea conjectures that all expenses in a set period should be categorized in advance such that each dollar earned should go towards a specific category. For example. If you made $4,000 per month, in a zero-based budget you’d allocate $2,000 for mortgage payments, $500 for food, and let’s say $500 for savings (wouldn’t it be nice if all budgets were this simple?). Now we have each expense labeled out and our income allocated towards them. But wait! We still have $1,000 left unallocated! Instead of leaving this piece out, we need to find a home for this cash to get back to our zero-based goal. So why not allocate this extra funding we found towards a great goal of paying down debt, or if we don’t have any debt, let’s shoot for an emergency fund or perhaps some extra cash for a romantic weekend getaway! Or, let’s say we don’t end up spending all $500 for food at the end of the month. We could roll this forward, or…go out for a nice date night! Using this technique, you’ll have a purpose for each and every dollar, which ensures you put your money to work for you and weeds out those unnecessary expenses that rears its head along the way!

An even simpler and more general rule to work with that incorporates the same principle is the 50/30/20 rule. Essentially, it’s a zero-based budget with your categories capped to three distinct classes: fixed expenses, discretionary spending, and savings/debt payments. Knowing this, our aim with this method is to re-organize and cut down expenses such that each month, your after-tax income is split between the three with the following, intuitive guidelines: 50% of your income goes towards fixed expenses (think insurance or mortgage payments), 30% goes towards discretionary spending (think entertainment or gifting), and 20% is used to pay down debt or build up savings. This last 20% category may be the most important factor to future financial success. By “paying yourself” i.e. saving on a regular basis, you start in motion the power of compounding. Once again, following these guidelines will also give your earnings a direct usage, which builds a baseline for proactive monitoring, instead of looking back and seeing where you overspent or having a non-distinct spending goal. Now you can move through the month and monitor where you are for each category using each method, and be able to adjust your spending accordingly!

Now, I know what you’re thinking: “This is great in theory, but I still have to come home from a long day and tally up all my various receipts, statements, etc. to create this budget, let alone monitor it constantly”! Well, fear not, as this is where the technological advancement pieces become so handy, and make budgeting a breeze! Nowadays, there’s an app for everything, and budgeting is certainly no exception! For example, a small indie firm called Intuit (yeah the same people who make that obscure tax software, what was it called again? NitrousTax?) has a free app for your phone that can help you tackle this project quite a bit. With Intuit Mint, you can create a link to any number of checking or savings accounts, debit or credit cards, or even straight to billing sites! Once all these accounts are linked, transaction data from each will start pouring in, and are automatically categorized for you into several different arenas which fit nicely with the zero-based budgeting plan we discussed! Within the app, you can also set goals for each of these categories and reallocate existing transactions that might have been mislabeled. Now each month, you’ll get a summary of how much you spent in each division, and Mint can also send you a notification when you’re close to exceeding your goal, to keep you right on track. (Additionally this app has some other cool features like credit score sampling and bill pay reminders, all for free!)

Some other apps that work in a similar capacity include EveryDollar, created by the zero-based budget guru Dave Ramsey, which has a free version that performs the same function with a slightly more intuitive user interface, but will require you to manually enter your transactions each month. There are also several others out there on the app market including Monthly Budget Planner & Daily Expense Tracker, BudgetBakers’ Wallet, Spendee, and many others. Each of these have their own unique setup and categorization but accomplish the task of simplifying your budgeting process!

All in all, budgeting is one of the biggest pieces of one’s financial puzzle. Most of the time, our income levels, investment performance, social security or any number of other inputs are not 100% in our control. But one important area, in which we do have total control is our spending, which makes monitoring this area a key to long-term financial success. By using analytical ideologies like zero-based budgeting or software aimed at making the whole process easier to follow-along with, we can take out the stress and time that used to be associated with budgeting, and instead create our own steps to reaching our financial goals whether those are getting out of debt, building long-term wealth, or just buying that rose bouquet for our significant other.

For further advice on budgeting and its ties to our financial planning process, please reach out to us! Happy Valentine’s Day!


The Art of the Notebook

What’s your favorite organizational system? How do you stay up to date with the important items in your life? Maybe you don’t even have a system. We all juggle a lot of information on a day-to-day basis. From time to time, everyone could use a little help on their daily tasks, planning their next big trip, or even ensuring their bills are paid on time. There are numerous ways to approach organizing these elements. The Bullet Journal Method: Track the Past, Order the Present, and Design the Future by Ryder Carroll introduces an inventive way to attack these key issues we all face.

The Bullet Journal Method (BuJo for short) is an ingenious organizational system that many people use as an alternative to a journal, or a traditional planner. The best BuJos feature a symbol format that allows you to easily customize your own page layouts, similar to below. The symbols are the syntax that makes this method so useful. By simplifying tasks, notes, and events into a bullet point format, the BuJo method allows you to focus on only that which is essential. Writing effective bullets is the key to success for a productive and mindful journal. Too much information and your mind may lose sight of the goal. Too little information and your bullet may be ineffective.

In college, one of the most popular ways to retain information is by writing the information out or using flashcards. Like flashcards, the Bullet Journal is solely a handwritten process. It allows you to customize your organizational habits as much or as little as you see fit. Many experts suggest that by writing things down you may improve your memory. Carroll offers that by writing out your day to day life and actively organizing your future, you are creating an archive to look back on and learn from. See what worked and what didn’t work. That is essentially the main point, no pun intended, of the bullet journal method.

Why use a notebook? According to a New York Times article titled “Why is Productivity so Weak?” every year from 1950 to 2000 Americans increased their productivity around 2.3%. However, per the Bureau of Labor Statistics, not until 2005 did we start to see productivity decrease on a year by year basis. Carroll attributes this decrease in productivity to an increase in technology, information overload, and other online distractions. He goes on to suggest that when you are forced to write, you are also forced to unplug and, hopefully, bring more clarity to your thoughts.

You may be wondering “Why not use a software or a phone application instead of a notebook?” Flexibility. Today’s organizational applications have a tendency to do one task extremely well, or many tasks not so well. With a notebook, you are in control, and you can customize as little or as much as needed.

Although your Bujo can be a place of combining several important aspects of your life, not everything is to be included. Things not to be included in your journal: passwords! Passwords and other potentially sensitive information shouldn’t live in your handwritten notebook. Much like a checkbook from your bank, your BuJo is something you likely would not want to lose. For a list of potential ways to store your password, you may review our previous blog on this.

At DWM, we have several organizational tools and processes to assist us in servicing our clients. Our core software for relationship management and consistent workflows is Junxure, the leading Client Relationship Management (CRM) software in our industry. In addition to Junxure, our monthly, weekly and daily checklist enables us to make sure we never miss a beat when it comes to assisting our clients with their long-term goals and adding value on a continual, proactive, basis.

In a world where 5-year-olds now know how to use an iPad better than some Millennials, it may not hurt to go back to the basics. For some, these organization pieces come as second nature, but for others, it does not. For your personal life and day to day activities, you may consider the addition of a Bullet Journal (BuJo).


Paychecks 101

The word Payday circled in red marker on a calendar to remind you of the date you receive your wages, income and earnings so you may budget your finances26

Everyone always remembers their first paycheck and asking themselves, “Who’s FICA, and why is he taking all of my money?” If you’re like most people, the number that really matters to you is the bottom line: money in the bank! You may even throw out the rest of your pay stub. However, it is so important to review your pay stub and be able to analyze the information you find there to spot potential errors.

While your paycheck may not always give you the physical wealth you were looking for, it will give you a wealth of knowledge about your finances. Carefully reviewing pay stubs is a step we at DWM take with all of our clients to ensure they’re clear on available benefits, tax rates, employer matches, withholdings, and more.

So, without further ado, here’s a comprehensive guide to reviewing and analyzing your pay stub.


Important Terms and Definitions


First, to help you better understand the different acronyms within your pay stub, let’s take a look at a few of them and their definitions:


YTD: Year-to-date

PPD: Pay period

REG: Regular hours worked

OT: Overtime hours worked

HOL: Paid holiday hours

VAC: Paid vacation hours

PTO: Paid time off

FT or FTW: Federal tax withheld

ST or STW: State tax withheld

LT: Local tax withheld

SS: Social Security tax

MED: Medicare tax withheld

FICA: Your employer’s portion of the Social Security and Medicare taxes

WC: Workers’ compensation contribution, typically paid by your employer


Additionally, there are a number of terms you will need to know:


Gross pay: This is the total amount you earned during the given pay period (pay period discussed below). It includes your wages or salary, plus bonuses and tips if applicable. Most pay stubs will also include how much you’ve earned year to date.

As almost all areas of your pay stub relate to gross earnings, this number is usually located on the first line of your pay stub with the remaining figures telling you how much of those earnings were withheld for taxes and other uses.

Pre-tax benefits: Some benefits may appear on your pay stub as pre-tax income. For example, if your employer pays for some or all of your childcare expenses, travel expenses, or your parking pass, these may show up as taxable benefits.

 Net pay: Also known as “money in the bank,” this number is what you receive as your paycheck after taxes, insurance premiums, retirement contributions, and other deductions have been taken out.

Pay Period: By looking at the dates on your pay stub (usually located at the very top of your pay stub), you can tell if you’re being paid monthly, weekly, or bi-weekly. This helps to know if you need to multiply your current pay by 12, 52, or 26 to determine annual salary. If you are using a mid-year pay stub, you may multiply your current pay by the number of pay periods remaining and add this to your year-to-date figure, mentioned earlier.

Federal income tax: Your pay stub will show how much money was taken out of your gross pay for federal taxes. The exemptions you claimed on your W-4 form determine the amount withheld for federal taxes.

With recent changes to income tax brackets in 2018, federal income tax withholding is an area you should review thoroughly. To see if you are currently withholding enough or too much, go to https://www.irs.gov/individuals/irs-withholding-calculator.

State income and local tax: If you live in a state that requires that you pay an income tax, that number will also be determined based on your W-4 exemptions.

Social Security tax: The federal government requires that every employee and employer pay a tax for Social Security purposes. You, as the employee, pay 6.2 percent of up to $128,400 in wages for 2018. So, if you earn $100,000 per year, your Social Security tax comes out to $6,200 for the year. This tax makes it possible for you to receive Social Security benefits when you retire.

Medicare tax: Similar to the Social Security tax, the Medicare tax is mandatory for employees and employers alike. You’ll pay a 1.45 percent tax on wages up to $200,000 ($250,000 if married) for 2018. There is an additional 0.90 percent, 2.35 percent overall, tax on wages over $200,000 ($250,000 if married). Medicare tax exists so that you can benefit from the program when you come of age.


Understanding Your Benefits


Now that the hard part (taxes) is out of the way, it’s time to understand your benefits.

Insurance premiums: If your benefits include insurance like health, dental, vision, life or disability, your employer may require that you pay for at least a portion of the plans’ premiums. That cost will come out of your gross pay automatically, and how much you pay shows up on your pay stub. Be sure to take some time to understand your insurance policies, as well!

Flex spending account (FSA) or health savings account (HSA): If you opted to participate in an employer-sponsored FSA or HSA, you’d typically see a deduction for these on your pay stub and also note whether your employer has made a contribution (free money!).

Contributions to your retirement plan: This figure is how much you agreed to contribute to your employer-sponsored retirement plan. Common retirement plans include 401(k), 403(b), and 457 plans. If you get a match (more free money!), this number is on your pay stub, too, which shows you how much your employer contributed.

You can divide your employer’s contribution by your gross pay to determine what percentage they’re contributing to your retirement. If you know your employer matches your contributions up to a certain percentage limit, this is a good area to see if you are reaching your full contribution potential and whether you need to adjust accordingly.


Now What?


Final step! Now that you’ve reviewed each aspect of your pay stub, you have probably come across one or two items you’d like to change. Unfortunately, you can’t do anything about Social Security and Medicare taxes, but you can increase or decrease your federal and state tax withholdings by updating your W-4 form. This can be done by contacting your HR department.

If you’d like to review your pay stub, DWM is always happy to be your second set of eyes and ensure that your pay stub reflects your best interest.

Put Longevity into Your Planning

We’re living longer.  Back in 1935, when Social Security was started, there were 8 million Americans 65 or older.  Today, there are 50 million and by 2060 there will be 100 million 65 and older. It is projected that in 2033, the population of 65 and older will, for the first time, outnumber those under 18.

In addition, there is a better than average chance that 65 year old investors with at least $1 million of investable assets will reach age 100. These folks not only have enough money to cover rising costs, they are also generally more physically fit, healthier and engaged.  BTW- May is Older Americans Month, with a theme of “Engage at Every Age.”

Longevity is having and will have a huge impact not only on social security but also on long-term financial planning.  The trust fund for social security retirement benefits is expected to be depleted by 2034.  After that, the program is projected to pay out about 75% of benefits.  At that time, the ratio of workers paying into Social Security, as compared to those receiving benefits, is projected to drop from 2.8 now to 2.1 then. Last month, Ginny provided information on social security including possible fixes http://www.dwmgmt.com/blogs/142-happy-national-social-security-month-.html.  We hope Washington will enact some appropriate changes soon, though we can’t control that process.

We can, however, control our own financial planning.  Here are some general tips on incorporating longevity into your planning:

  1. Plan based on living longer. For those of you in great health, use an eventual age past the actuarial age, perhaps even age 100.  Your plan may end sooner, but let’s make sure the plan is designed for you to have sufficient funds during your life time.
  2. Plan on your normal retirement expenses continuing until at least age 90. Most older Americans we know are engaged. They are working and volunteering, traveling, mentoring, learning, and participating in activities that enrich their physical, mental and emotional well-being.  Don’t expect your normal expenses to start declining before age 90.
  3. Plan on health care costs escalating faster than inflation. Investors worldwide agree that health expenses are their biggest financial concern related to longevity. This worry is most acute in the U.S. with 69% listing it as their number one worry, versus 52% globally.  We are currently using 6% as the estimated annual increase in health care costs in our planning for clients.
  4. Review your long-term care strategy early. Long-term care costs can be huge.  On the other hand, your plan might “end” without you ever needing long-term care.  What would be the cost and best way to insure? Should you self-insure?  Should you keep your current policy?  Should you modify it?  Every financial plan needs to address long-term care and develop an appropriate strategy.
  5. Use an ample estimate for inflation. Inflation can have a huge impact on expenses over a long period of time.  You should stress test the plan at inflation rates above 2%, such as 3% or higher.
  6. Use a realistic real return for investments. The real return for your investments is defined as your total return (which is the price change over the period + dividends/interest) less inflation.  From 1950 to 2009, the real return was 7%; composed of an 11% total return less 4% inflation.  Of course, the 50s, 80s and 90s all had double digit real returns.  Today, it’s a good idea for you to stress test your plan projections using lower real return assumptions like 2.5% to 4%, depending on your time horizon and asset allocation.
  7. Consider separating travel goals into two parts. When you are retired and mobile, your travel will likely be primarily for you (and your significant other) and may include your children and/or grandchildren. As you get older and can’t travel easily yourself, you might still provide a second travel goal to cover transportation of the kids and grandkids to come visit you.
  8. Don’t count on too much from Social Security. We work with successful people of all ages.  We think that long-term social security benefits may be subject in the future to some “means test,” perhaps the same way that Medicare Part B premium costs are tied to taxable income.  The younger you are now and more financially successful you are in your life will likely reduce the amount of social security you will eventually receive.  If you are not starting social security soon, consider using discounted values of future social security benefits in your planning.
  9. Work to have a planning graph that doesn’t go “downhill.” Our financial goal plans show a graph of portfolio value over time, beginning now until your plan ends.  If expenses and taxes exceed income and investment earnings in any year, then the portfolio declines.  If that situation continues, then the graph looks as if it is heading “downhill.”  A solid plan results in the graph moving uphill over time or at least staying level.  A solid plan therefore reduces anxiety about longevity as, year by year, the portfolio value stays “solid” without diminishing.


Just like possible changes in social security, none of us can control our future health or when our plan will end.  We can however, develop, monitor and maintain a long-term financial plan that will provide us with the best chances for financial success by recognizing the possibilities of longevity and incorporating it into all aspects of our planning.  We can also adopt and/or confirm an objective to “Engage at Every Age” for our own well-being, as well as making a difference in other’s lives.   If you have any questions, please give us a call.


Impact of Hosting the Olympics

2016-08-01-1470024501-2875993-RioOlympicsThe past several months have been extremely disheartening due to the countless acts of violence and terror that has wreaked havoc across the entire world. An event like the 31st Olympiad, in Rio de Janeiro, brings hopefulness to the world as we set aside our political, religious and other differing beliefs to come together and stand behind the athletes that represent our countries. With all the optimism that surrounds the Olympics, it’s surprising to think that only a few cities offer final bids to host the games each election period. For these 2016 Games, Rio, Chicago, Madrid and Tokyo were the only cities that offered final bids. With the extensive media coverage, publicity and millions of tourist that travel to the Games, it begs the question as to why more cities are not clamoring to host the Olympics?

There is no doubt that the Olympic Games brings national pride to citizens of the host city. However, the underlying fact is that hosting the Olympic Games is an extremely risky megaproject that most cities want to avoid. Since the first modern Olympics held in Athens back in 1896, the cost for hosting the Games has increased exponentially. In today’s dollars, the post-war 1948 London Olympics cost $30 million. From there, the budgets continued to grow until the 1976 Games when Montreal spent $1.5 billion that took 30 years to pay off and almost bankrupted the city. Fast forward to Rio, and the Olympics are expected to cost roughly $12 billion, but could end up costing as much as $20 billion.

Not only are the actual costs of the event astonishing, but the maintenance costs for these Olympic venues after the Games have ended are a burden on the host city. Most of these venues are built specifically for the Olympics. Once the Games have finished, the city has to find ways to utilize these venues to help offset the cost. For example, the Bird’s Nest stadium built for the Beijing Games cost the city $480 million dollars to build. The city is currently looking for a regular tenant, but while it searches, the city has to front the $11 million annual maintenance costs.

The host city does generate revenue from the Games which helps offset some of the costs. Cities receive a portion of the media rights and sponsorship income generated by the International Olympic Committee (IOC). In addition, cities will generate revenue from local sponsorships and ticket sales. An economist from Smith College in Massachusetts estimates that the Olympic Games will generate about $4-5 billion in revenue from these four sources. The remaining funds have to be generated from local and national governments. Any overrun in budget falls on the host city. Since 1960, the average budget overrun is a staggering 179%.

The cities that submit proposals to the IOC understand the risks that are associated with hosting the Olympics. Essentially, they are writing a blank check to fund the infrastructure and security demanded by the IOC. Just because a city hosts the Olympics, doesn’t mean the city will always incur years’ worth of debt. Although past statistics are not favorable, studies show that some hosts experience a positive effect on their economy. The 1992 Barcelona Games may be the most successful in the last several decades. Although Barcelona blew their budget by 400%, the long-term benefits have far exceeded expectations.

When Rio was awarded the Olympics nearly 8 years ago, the country’s economy was thriving. Since then, the country has experienced political turmoil and a suffering economy. The infrastructure and security improvements described in Brazil’s proposal to the IOC were delayed due to the country’s widespread instability. Like Barcelona, Brazil hopes that the newly completed infrastructure and increased publicity will help boost their economy by attracting future tourist and global and local businesses. Once the games have finished, it will be essential for Rio to utilize the infrastructure to help offset the long-term costs.

As great as the Olympic Games are to watch and experience, it’s amazing that the IOC puts this type of pressure on the host city. Unfortunately, there is no indication that the program will change. For the time being, we applaud those cities that volunteer to host this great event. Even with the negativity that has surrounded Rio the last several months, the 2016 Rio Games have been a great success and we hope that these Games will bring a boost to the Brazilian economy and well-being.