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Deciding to be free: My Journey toward financial independence

Early Retirement: Removing Barriers

Many people dream of reaching early retirement.  Few people, however, are willing to do what it takes to make it a reality.  In most cases, to reach early retirement, a person must live differently from how the masses live.  People generally don’t want to be viewed as being different from their fellows.

The masses are living for the day, spending most of what they earn, landing in debt, and are in denial about their personal finances.  They have high hopes that their financial future will be secure.  Hope, however, is not a strategy.

To reach early retirement, a strategy is needed.  That strategy will require action and more action.  The primary objective of that strategy will be to first reach financial independence.  Financial independence is what enables people to retire early.  If a person is no longer working, the money to sustain their lifestyle needs to come from somewhere.  For most early retirees, that somewhere is their passive investments.

The path to being able to retire early is full of barriers.  Many are external like being able to maintain a budget while marketers are doing everything they can to get you to break your budget and buy whatever it is they are selling.  Some barriers are mental.  The purpose of this post is to identify a few of these barriers and to establish a plan of action to avoid them.

Ignorance

Most people are unaware of what is required when it comes to planning for an early retirement.  That is even true for those who have attended college.  People who hold a 4-year degree or beyond still struggle with doing what is required to escape having to work for a living.

When it comes to establishing a financial plan, many people truly do not understand what is required.  They feel that things will just work out like they have in other areas of their life like landing a good job or getting a mortgage to buy a house.  They are generally in denial about what is required to build a large enough net worth to sustain their desired lifestyle once they are no longer working.

The good news is that once a person decides to learn more about personal finance, there is an abundance of great information.  Once a person takes that first step towards learning about budgeting, saving, and investing, they have removed one barrier.  Once that barrier has been removed, they will discover that the basics can carry a person a long way.  The basics alone might be enough to carry some people to financial independence.

Procrastinating

Procrastinating is another barrier that stands in the way of reaching early retirement.  Not knowing about a topic is one thing.  Knowing and not doing anything is another.  To reach early retirement, it takes many years of earning a salary, saving a large percentage of that income, and investing it wisely.

The longer a person waits to start this process, the harder it becomes.  That is based on compound interest.  Let’s assume that an investor needs to have $1,000,000 saved to declare financial independence.  They also want to reach this milestone by age 50.

Based on an 8% percent return, if an investor starts to save $1,800 per month at age 30, it will take 20 years to reach their goal.   If they wait until age 40 to start saving, they will have to save almost $6,000 per month.  If they started at age 22, however, they would only have to save $900 per month.

When you are young, time is on your side.  The older you get, the harder it becomes.  Don’t procrastinate if your goal is to reach early retirement.

Not investing in stocks

To receive a return close to 8%, an investor will need to have a large percentage of stocks in their asset allocation.  Based on how investments are projected to perform for the next 10 years, an 8% return might not be reasonable.  Large-cap stocks are projected to earn 6.7% threw 2026.  For that same period, investment grade bonds are projected to earn 3.1%.

The average person has the tendency to shy away from stocks.  In the short-term, they are volatile.  Over long periods of time, they are one of the best wealth building investments for individual investors.

Instead of parking your money in a money market that returns 1%, consider adding stocks to your asset allocation.  A good place to start is to look at a balanced portfolio of 60% stocks and 40% in bonds.  This allocation is popular because it provides growth from the stock allocation and the bond allocation reduces volatility when the stock market has a correction.  Another general rule of thumb is to invest (110 minus your age in stocks).  If you are age 25, you might want to consider having around 85% of your asset allocation in stocks.

Lifestyle Creep

Lifestyle creep is a form of inflation.   As a person advances in their career and their earnings increase, it is natural for their spending to increase.  As raises and promotions pile up, people have the tendency to upgrade their lifestyle.  Instead of saving more of their earnings, people buy bigger houses, fancier cars, and go on expensive vacations.

If there is lifestyle creep in your life, it is a major barrier between reaching early retirement and being stuck as a wage earner.  Lifestyle creep inflates how much money you need in your retirement account before you can retire.  In contrast, if you keep your monthly expenses low, the less you will need to be able to retire.

If you plan on withdrawing 4% from your retirement account, have $100,000 in annual expenses, you will need $2,500,000 in retirement savings.  For those who only have $40,000 in annual expenses, they just need to save $1,000,000.  The higher your annual expenses are, the more you need to have in retirement savings.

To avoid lifestyle creep, some management is required.  A solid budget is needed.  A financial plan is also a vital tool.  First, focus on the big expenses.  Keep your housing, transportation, taxes, and education costs low.  For example, live in your starter house forever, buy an economical car, live in an area that does not have high taxes, and take advantage of public schools and state universities.

If you can avoid lifestyle creep on the major expenses, you will have more money for savings.  This will also lead to less financial stress.  Instead of stressing to cover your bills that are always increasing, you will be able to better enjoy your life because there will be less demand for having to earn more and more.

Conclusion

For most people, the road to early retirement takes a long time.  It generally takes a couple decades of solid earnings, a high savings rate, and compound interest.  To achieve this ambitus goal, there are barriers that need to be identified and managed.

To be successful with personal finance, education is required.  The great news is that there is an abundance of good books, blogs, and forums that provide unlimited information.  A good place to start is the Resources page on this blog.

There is no such thing as an overnight success.  Most overnight success stories have been a fifteen-year work in progress.  If you want to be financially successful and retire early, start today.  It is not an overnight endeavor.

Without some risk, there will only be a little return.  Identify the correct mix of stocks and bonds for your situation.  Be sure to take your age and risk tolerance into consideration.

Manage your expenses.  The greater your expenses, the more money you must save and grow.  By keeping your expenses low, the less money you will need in retirement.

There will always be barriers that stand in the way of reaching early retirement.  Once they are identified, they can be managed and overcome.  Keep your eyes open for other barriers that might pop-up.  Be vigilant and stay focused and you will be sure to reach financial independence and retire early.

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Know Your Competition

We start competing the moment we are born.  Competition is everywhere.  Completion is natural.  It is the cycle of life.  Eat or be eaten.  We must compete every day.  Only the strong survive.

When I was a boy, our dog had a litter of puppies.  They too were competing from their earliest days.  They would compete to get to the bottom of their basket to stay warm.  The puppies would compete with their brothers and sisters to get closer to mom to eat.  When I would watch and care for this litter, it did not take long to establish who the alpha of the litter was.  He always ate first and would not roll over when playing with the other pups.  How could such a young and tiny dog have established such will?

You might not see yourself as an alpha or even a competitive person.  If you are working on reaching financial independence, odds are you are more completive than you might think.  I would guess that you are very competitive.

Before I really gave it much thought, I never saw myself as a competitive person.  For the most part, I am a laid-back guy.  Growing up, I played baseball but was not very good.  The only football that I have ever enjoyed playing was when I played Madden.  The chess club or the debating team were also not for me.  I always saw myself as a Type B personality.

The first time that I realized how competitive I truly was when I read about capitalism.  I realized that I was competitive when I read that capitalism as an economic system where trade and industry are controlled by private owners who compete for profit.  I have been competing for a buck since I started earning a paycheck.

Even though I have only won a few trophies and awards in my life, I am hyper-competitive.  My whole adult life has been focused on competing.  I am not referring to being in competition with my neighbors.  What they have is not my concern.  The type of competition I am referring to is competition with myself and society to reach my goal.

I set a lofty goal.  My goal was to become financially independent.  For anyone to reach financial independence, there will be a great deal of competition.  On the road to that level of success, a person will have to face off against and defeat internal and external competing forces.

Postponing gratification is a form of competition.  The ability to save money is always at odds with the desire to spend money.  It is like there is an angel on one shoulder saying to save as much as possible.  On the other shoulder, there is the temptation to spend and waste money.  Temptation says if you want to be happy, buy that new car, house, or boat. You can afford it and you deserve it.

It is easy to give in to temptation.  Who wants to work hard and sacrifice to get ahead?  How can anyone sacrifice for decades to become financially independent?

Spending and having a good time is much easier than saving and investing for the future.  Internal competition is fierce.  At times, It is an internal fist fight.  It certainly felt that way for me.  As the saying goes, it is harder to conquer yourself than to conquer a city.  in order to conquer self, a person needs to develop emotional intelligence.

While it might be harder to conquer yourself, the external competition is also not exactly easy.  Most resources are limited.  Everyone is fighting to get ahead.

If you own a business, you are competing with other businesses and market forces to be successful.  Even if it is a side gig, there is still competition.  To survive, a business owner must provide the best products or services at the lowest price.

While it might appear that being an employee is easier than being an entrepreneur.  Being an employee is far from being easy.  An employee must compete to land a job.  There is competition to keep the position.  There is competition with peers to advance in the organization.  If your boss is a jerk, dealing with them brings on a level of competition.

The competition does not end after you earn the money.  There are competing forces who want to take your money.  Marketers are out to sell you stuff that you do not need.  They don’t care if you land in debt.  They are just competing to sell you something and to take your money.

You might have to compete at home to keep your money.  You might have your emotions under control, but your family has their own needs and desires that need to be considered.  It is not easy to keep a family on a budget.  It takes creativity to keep a family satisfied and not bored.

They might be the most difficult completion that you have to face.  You should not play a zero-sum game at home unless you want to have your family resent you.  It is wise to approach this level of competition with good faith and to negotiate.

Competition truly is all around us.  We face competition daily.  It does not mean that you are not competitive just because you were not the captain of the basketball team in high school.  For some people, it takes longer for their competitive drive to develop.

If you have decided that you want to be successful in this world, that thought alone requires a competitive nature.  If you are taking the required steps to get ahead in life, you are more competitive than you give yourself credit for.  If you are working on reaching financial independence by paying off debt, saving, sacrificing, and investing, you are extremely competitive.

Do you see yourself as being competitive?

Please share in the comment section below.

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Funding Retirement with the Bucket Approach

Have you ever considered separating the money that you plan on drawing down during your retirement based on the phases of your retirement?  A common approach is to allocate different piles of money in separate buckets based on when you plan on using the money.  The Bucket Approach was made popular by Raymond J. Lucia, CFP as the result of his book Buckets of Money.  The theory is based on building a diversified portfolio and spreading the risk out across different buckets of money.

A common approach is to use three buckets, however, more buckets can be used:

Bucket A – Money that will be used for the first few years of retirement (years 2 – 5)

Bucket B – Money that will be used for the second period of retirement (years 3  – 10)

Bucket C – Money that will be used to fund the remaining years of retirement (years 11 – 25 and beyond)

Asset Allocation for Each Bucket

Since Bucket A is going to be the first source of retirement funding, it is suggested that this portion of the asset allocation be ultra conservative.  That is to prevent a major stock market sell-off or recession to deplete the money that will be used to cover the first 2 – 5 years of retirement expenses.  In this bucket, the assets should be invested in CD’s, money market accounts, short-term bonds, or FDIC insured savings accounts.  By always having between 2 – 5 years worth of expenses in liquid assets that are easy to access, it helps from having to sell-off stocks when they have gone down in value.

Bucket B is going to be constructed of a more moderate asset allocation than Bucket A.  This bucket is designed to produce higher returns than Bucket A.  This bucket should have an asset allocation of around 65% in bonds and 35% in stocks.  The bonds are a low-risk investment that provides higher income than short-term holdings.  The stock portion is used to fuel growth and stay ahead of inflation.  The bond allocation could be made up of both an intermediate-term bond fund and a TIPS fund.  A large-cap index fund or large-cap dividend fund are good options for the stock portion of Bucket B.

Bucket C is going to have a more aggressive asset allocation than Bucket A and B.  This bucket of money will be used for long-term growth.  It will be made up of an asset allocation of 75% in stocks and 25% in bonds.  By keeping a portion in bonds, an investor can rebalance annually.  This practice of buying low and selling high improves the long-term performance and reduces the risk of this asset allocation.  For the bond allocation, a total bond market fund is a good option.  For the stock allocation, a more diversified mix of large-cap, small-cap, and international stock funds are used in this portion of the bucket for aggressive growth.

Refilling the Buckets

With a more traditional approach to asset allocation, a portfolio is viewed as a whole and not fragmented into different categories based on when the money will be needed.  For example, a balanced portfolio might be made up of 40% in bonds and 60% in stocks.  If stocks have a good year and the new asset allocation is 65% stocks and 35% bonds, the investor simply sells the stocks high and rebalances back to the desired asset allocation.

With the bucket approach, there is rebalancing within each bucket as well as replenishing between buckets.  Bucket A has 2- 5 years worth of living expenses.  When Bucket A has 1 years worth of living expenses drawn down, the difference will be replenished from Bucket B.  The same process applies between Bucket B and Bucket C.  When money is moved from Bucket B to Bucket A, Bucket B must be replenished from Bucket C.

Buckets vs Systematic Drawdown

Some financial advisors favor the buckets approach for the psychological benefits it provides investors.  When an investor is faced with a major market decline, they feel more confident because they know they have 5 years of living expenses in cash.  That financial cushion helps to prevent investors from selling stocks when they are at or near the bottom of a market.  Bucket A provides a level of comfort during good times and bad.

Other financial advisors prefer a systematic drawdown approach.  It is viewed as an easy approach for investors to understand and apply.  They feel that it is less complicated for an investor to view their portfolio as a whole and to use a safe withdrawal rate of 3 – 4% from a conservative portfolio of 50% in stocks and 50% in fixed assets.

There are more similarities between these two approaches than there are differences.  Even though there are three different asset allocations, in the three different buckets, when they are added together, they still can simply add up to the same mix of 50% in stocks and 50% bonds in the portfolio that is applied in a systematic drawdown approach.  It is just a different way of mentally accounting for assets during retirement.

Implementing the Buckets Approach

The buckets approach should be considered by people who are planning on retiring early.  Many people save up substantial resources in their 401K, but cannot access their money until age 60.  The buckets approach can be an alternative to a Roth conversion.  This approach just has to be planned years in advance because it requires an investor to build up substantial savings in their taxable account along with their tax-deferred accounts.

For this example, let’s assume that a person wants to retire at age 50, requires $50,000 per year for living expenses, and has $500,000 of their $1.5 million-dollar portfolio in taxable savings.  This scenario would be ideal for the buckets approach:

Bucket A – $250,000 in taxable savings (age 50-55)

Bucket B – $250,000 in a taxable account (tax-free bonds, age 56-60), the remaining mix of assets in an IRA or 401K to be drawn down after age 60

Bucket C – All in an IRA or 401K

Conclusion

The buckets approach is slightly more complex than a systematic drawdown strategy.  The main benefit is that it helps to keep the mind of the investor more at ease during all market conditions.  If managed correctly, the theory is that an investor will always feel secure because they always have 2 – 5 years of cash to fund the next few years of expenses.

The buckets approach is customizable to your unique situation.  The three buckets approach is the most common strategy.  It is the most ideal for a retiree who has at least 25 years of living expenses in savings.

More buckets can be added.  For example, if you have more than 25 years worth of projected living expenses in savings, you can add more buckets to extend your savings further out into the future. You also must take into consideration if you have a taxable account, a 401K with RMD’s (Required Minimum Distributions) at age 70, a Roth IRA account that does not require RMD’s, and Health Savings Account (HSA) to cover future medical bills.

If you are looking at establishing a conservative drawdown strategy, a buckets approach is worth considering.  It requires a little more work than a standard systematic strategy.  However, if you enjoy the mental accounting, the extra work might add to your peace of mind.  Just as when you were working towards building your wealth, the best plan is the one that you can follow.

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Is Investing Like Gambling?

Over the years, I have heard people compare investing to gambling.  It normally occurs during periods when the stock market is experiencing negative returns. People will make comments comparing investing in stocks to casino gaming.  Those who market alternative investment products will use heavy rhetoric and refer to conventional investments as the Wall Street Casino.

There are a few similarities between investing and gambling.  Investing and gambling both require money.  Both can be profitable.  Both can cause you to lose money.  Both require consideration.  Gamblers and speculators who trade frequently will look for favorable odds and try to come up with their own strategy to capitalize on what they think is a sure thing. That is basically where the similarities end.

Gambling is a game of chance.  Gambling is based on greed.  It involves a wager on an uncertain outcome.  Gambling comes in many different forms.  A gambler can bet on a sporting event like a football game or horse race.  Gamblers can play cards, roll dice, spin a roulette wheel, or play other casino games.  Buying lottery tickets is also a form of gambling.

Some forms of gambling are legal and others are not.  Betting on a horse race at a track like Churchill Downs is legal.  Calling up a bookie to place a bet on the big game is illegal.  The major difference between illegal and legal gambling is based on regulation and taxation.

One of the main differences between gambling and investing is that gambling is quite often based on immediate results.  For example, the results from a scratch-off lottery ticket are known as soon it is scratched off.  Some forms of gambling have longer waiting periods to know the outcome based on the results of a future sporting contest.  With all gambling, once the results are in, the outcome is known.

Investing is not a game of chance.  It is not a game of probability.  Investing is based on being prudent.  When you buy a mutual fund, it is not similar to hoping your number will come up when you roll dice.  By the way, you have a 2.778% chance of winning at rolling two dice and the casino has a 97% chance of taking your money.  Those are not favorable odds.

To invest in the stock of a company is to buy ownership in that company.   That company produces a product or service.  It is an entity that has financial statements and records.  Those records generally reflect why the stock price is worth its current value.

A mutual fund or ETF is a basket of different stocks.  By owning more than one stock in a fund, it helps to reduce risk and increase the likelihood of better returns. That is known as diversification and is based on the efficient frontier.

Diversification does not improve the odds when it comes to gambling.  It does not matter how many times you roll the dice.  The odds of rolling a pair of 6 sided dice will always be 2.778%.  The best you can do to improve your odds with games of chance is a switch from rolling dice to flipping a coin.  That would improve your odds to a 50% chance of winning.

Bonds can also be used to improve investment returns.  When stocks go down in price, bonds tend to go in the opposite direction.  Bonds are a loan to the government or corporation.  Some are guaranteed by the government.  They have a quality grade and risk associated with the term length.  Generally speaking, the shorter the term, the less risk.  Bonds are used for offsetting the risks of stocks or for income.

Stocks and bonds are also different from gambling when it comes to time.  Gambling is bound to time.  When the game is over, it is over.  There is just one opportunity to win or lose with gambling.

When an investment such as a stock is purchased, the amount of time that an investor has to earn a profit is based on how long they own the stock.  It can be a profitable investment for many years.  It can also lose money, but recover and become profitable again.  It is a time rewarding activity.  That is why many financial experts suggest a buy and hold approach.

Another key factor that separates investing and gambling are dividends.  Ben Carlson writes about this in his book A Wealth of Common Sense.  By investing in investments that pay a dividend, investors are rewarded for putting their dollars at risk based on market performance.  By holding on to a stock, a company will continue to pay a dividend.  Dividends are a key factor for making money in stocks over long periods of time.  There are not any dividends with gambling.

Investing also uses the power of compound interest.  This is another time rewarding aspect of investing that does not apply to a one-time wager.  For example, if you invest $100 and it has a 10% annual return, the following year the investment is worth $110.  If the investment is held for 25 years and continues to have a 10% annual return, the final amount of money will be $1,205.

Not only are gambling and investing different, they are totally different.  Every form of gambling is a game.  It is a game of probability.  The probability is always in favor of the house because of the vigorish.  It is a one-time chance to place a wager that might have a payout.

Investing in stocks is a business transaction.  It does not matter if you buy stock in a single company or buy hundreds of different stocks in a mutual fund.  It is a business transaction because the investor is buying ownership in a company or group of companies.  It is only a small fraction of ownership, but it is ownership never the less.

With investing, there are ways to improve performance and reduce risk.  An investor can buy stocks that pay dividends.  An investor can hold on to their investments and let compound interest work its mathematical magic.  The short-term market risks of owning stocks can be offset by also owning bonds.  By owning both stocks and bonds, an investor can rebalance their holding and always be buying low and selling high.

With gambling, the odds do not change.  As I explained with the dice example, there will always just be a less than 3% chance of winning.  The odds will always be in favor of the house.

During the next major market correction, you are likely to hear people say that you are better off taking your money to the nearest horse track or gaming parlor than to put it at risk in the stock market.  Yes, in the short-term, investing in stocks can be volatile.  Over the long-term, however, stocks are the greatest wealth building investment for the individual investor.  When they decline in value, look at it as a buying opportunity.  Gambling is based on a one-time event and the odds favor the house.  As long as you invest wisely and have patience, the odds are far greater in your favor than by playing games of chance.

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Impacts of the 2018 Tax Reform Law

After what seemed like many months of debate, tax reform has been passed into law for 2018.  This is not a political blog, so I will not be sharing my opinion on any of these changes.  The purpose of this post is to just share some of the highlights that will be useful for people who are interested in reaching financial independence.

This post does not cover every change.  The bill is more than 1,000 pages, so that would be impossible.  Plus, I am not an Accountant.  Trying to read the whole 2018 Tax Reform Law would be as painfully difficult as trying to read Ulysses by James Joyce.  This post just covers some of the main changes that have the greatest impact.

Tax Rates

The marginal tax rates have been lowered.  There was much debate on reducing the number of tax brackets.  In the end, seven tax brackets remained.  The lowest tax bracket is 10% and 37% is the new highest tax bracket.

Rate Single Married Filing Jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% $38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $$157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% Over $500,000 Over $600,000

Standard Deduction

The standard deduction was increased.  Individual/married filing separately is $6,350 in 2017 and will be raised to 12,000 in 2018.  For those who are married filing jointly or are a surviving spouse, the standard deduction is $12,700 in 2017 and will increase to $24,000 in 2018.  Head of household will increase to $18,000 from $9,350 in 2017.

There are additional deductions for those over age 65, blind, or disabled.  The deduction is $13,000 per individual if married.  The deduction is $16,000 per individual if unmarried.

The personal exemption of $4,150 has been eliminated for 2018. The Child tax credit, however, was increased to $2,000.  The tax credit is $500 for non-child dependents.

SALT

The State and local tax (SALT) deductions are capped at $10,000.  This drastically impacts homeowners in states with high state and local taxes.  States like New York, New Jersey, and Connecticut will be impacted the most.  It might be a good time for those living in these states to make like Mr. and Mrs. Groovy and move to North Carolina.

AMT

The Alternative Minimum Tax changes reduce the likelihood of paying AMT.  The income threshold was raised.  It has been raised to $1,000,000 from $$160,900 for joint filers.  For single filers, it has been increased to $500,000 from $120,700.  The number of families who paid the AMT will be drastically reduced to 200,000 from more than 5,000,000.

Roth Conversions

The ability to re-characterize a TIRA was removed (Roth Conversion).  Contributions can still be re-characterized.  This eliminates the horse race strategy of Roth conversions.  On the bright side, the ability to do “backdoor Roth contributions” has been retained.

Mortgage Interest

Mortgage interest deductions are now limited to newly originated loans up to $750,000.  The previous limit was $1,000,000.  Mortgages that were taken out before December 15, 2017, can continue to deduct the higher amount.

Home equity loan deductions have been eliminated.  That Is for both new and existing loans.  There is not a grandfathering provision for any current home equity loans.  There is no longer a tax benefit for taking a home equity loan to purchase a vehicle like some people used to do.

Medical Expenses

Medical expenses can still be deducted, but changes are coming.  Medical expenses above 7.5% of AGI for 2017 and 2018 can be included in itemized deductions. This reverts to 10% in 2019.

ACA Mandate

The Affordable Care Act (ACA) mandate has been eliminated in 2019.  There will no longer be a penalty for not having health insurance.  This does not go into effect for two years.  Please remember that having health insurance is still a vital part of your financial plan.

AGI Deduction

The 2% AGI deduction will be eliminated in 2018.  Investors can no longer deduct investment fees and expenses.  The ability to deduct the convenience fees to pay taxes with a credit card has also been eliminated.

The Surtax of 3.8% does not change.  There is an indirect change, however.  As stated earlier, the 2% floor for investment expenses will no longer be deductible.

Estate Tax

The estate tax exemption has been doubled.  The new limit is roughly $11,000,000 for individuals and $22,000,000 for those who are married.  This provision remains in effect until the end of 2025.  Please note that these changes do not affect state-level estate taxes.

529 Plan

The new tax law helps people save on school costs.  Up to $10,000 can be distributed annually from a 529 plan to cover the cost of sending a child to a public, private, or religious elementary or secondary school.  More than 30 states offer income tax deductions for 529 plan contributions.

Kiddie Tax

Kiddie tax (i.e. unearned income by a child under age 19 or a full-time student under age 24) is now subject to trust tax rates instead of their parents’ tax rate.  In the past, the kiddie tax applied to earnings that were taxed at the parents’ tax rate.  In 2018, the rate that applies to the parent does not matter.  Moving forward, investment earnings that exceed $2,100 will be taxed at the rates that apply to trusts and estates:

  • Up to $2,550 = 10%
  • $2,550 to $9,150 = 24%
  • $9,150 to $12,500 = 35%
  • More than $12,500 = 37%

Charitable Contributions

Charitable contribution deductions can be impacted.  Since the standard deduction has doubled from $12,000 to $24,000 for married couples, it is expected that fewer filers will itemize in the future.  This can cause charities to take a hit in 2018 because most Americans will have less incentive to give.

Electric Vehicles

There is still a justification to buy a Tesla Model S other than the cars impressive zero to sixty time. The tax credit for electric vehicles has been retained.  The $7,500 tax credits are available for the first 200,000 electric vehicles that a manufacturer sells.  Once that quota is met, the incentive stays in place until that calendar quarter ends.  After that, it is reduced by 50% every six months until it is ultimately eliminated.

Medicare Surtax

The Medicare surtax of 0.9% on earned income has been retained.  This only applies to employees who earn more than $200,000.  That includes wages, income from those who are self-employed, and railroad retirement compensation (RRTA).  The threshold is $250,000 for those who are married and filing jointly.

Conclusion 

Again, this is not a comprehensive review of the 2018 Tax Reform Bill.  It is more of a quick and dirty overview.  These are just some of the highlights that I found important for myself and for other people who are working to reach financial independence.  Understanding the tax laws might be boring unless you are a CPA.  However, creating an optimized tax strategy will greatly impact your financial plan.  Everyone who is planning on reaching financial independence should at least be aware of the basics.

Always be sure to check with a financial professional before you make any financial decisions and be sure to read the Disclaimer page.

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An Abundance Mindset

An abundance mindset is the opposite of a scarcity mindset.  A scarcity mindset is one where a person is consumed by fear, desperation, and self-centeredness due to the obsession with not having enough resources to live and thrive.  An abundance mindset is a mindset where a person feels that there are enough resources and opportunities for everyone to succeed and live a fulfilling life.

There are many things in life that we do not have control over.  We do not get to pick our parents, how we were raised, or what resources were available to us as children including nurturing, food, medicine or education.  As adults, however, we do have the power to make the decision as to how we think and react towards every situation.

Our ability to think and how we view situations is a powerful tool.  It is critical to developing a healthy perspective if we want to be successful in life.  Just as negativity attracts negativity, positivity attracts positivity.

I am not referring to a Pollyanna mindset.  Nor am I referring to faking your positivity to the extent where it is transparent and the people around you just label you a phony.  I am referred to a hopeful mindset.  A mindset that will allow you to be happy, help people, and expand your horizons.  The best mindset to have to achieve all of those goals is to develop an abundance mindset.

Honesty

Honesty is a resource that we cannot have too much of.  Many people think of honesty as not telling lies or taking something that does not belong to them.  Yes, you should always be truthful and not steal.  In this context, I am referring to gut-level honesty.  This is the type of honesty that will allow you to be true to yourself and not fall victim to a scarcity mindset.

Do you have self-respect and value who you are as an individual?  Do you accept your current lot in life as a starting point for what’s next?  Do you have personal, professional, and financial goals that you are currently working on?  A person who can answer yes to those questions is highly likely to have an abundance mindset.

Fear

There is positive fear that tells you to look both ways before walking across a busy intersection.  There are also negative fears.  Scarcity is a negative fear.  Scarcity is negative because it consumes you and holds you back from taking the calculated risks that are needed to succeed.

A person who has an abundance mindset is sure to feel fear along the way.  To overcome that fear, they take hold of the steering wheel.  They do not let their emotions hold them back.  They pick up the ball and run with it.  They might fail.  They might fail more than once.  They might never succeed, but it will not be due to the lack of not trying because fear held them back.

Esteem

Many people in society have a scarcity mindset.  They live in fear to some extent.  They are afraid to take risks because they might lose their positions, money, or some other sense of security.

People who have an abundance mindset have high self-esteem.  They have to have healthy self-esteem because they are aware that they are different from other people.  Nobody generally likes feeling different from their fellows.   It does not, however, seem to bother these people who have an abundance mindset because they embrace their difference by moving forward towards their next success.  They do so while those with a scarcity mindset sit back and wallow in fear or envoy.

Comfort

Those who have an abundance mindset often appear cool.  They display grace under pressure.  They wear life like a loose fitting garment.  They are comfortable in their own skin.

There is a reason for their aura.  Don’t confuse it with being blasé.  They are in competition, but not with other people.   They generally see people more as conduits than threats. They are in competition, but it is based on winning by executing a plan.  They do not harbor negative feelings towards their competition.

If it is a competition between two people and they do not win, they humbly congratulate the victor.  They do not fall prey to resentment.   A person who has an abundance mindset is grateful for the challenge and for the opportunity. They feel that there are other opportunities for everybody to succeed and move on to the next challenge.  They have a growth mindset and will diligently prepare to do better when the next opportunity presents itself.

Big Picture

People who have an abundance mindset do not settle.  They think big.  They focus on the long-term.  That is why they are successful investors.  Where a person might cower at the thought of volatility, a person who has an abundance mindset does not fall victim to shortsightedness. They have above average emotional intelligence.  They know that change is constant and embrace it.  When others are selling low, they are looking to buy value.

Conclusion

It is rare to find people who have an abundance mindset.  Unlike unicorns, they do exist.  There might not be any in your inner-circle, but I can tell you where to find them.  They can be easily found online.  They gather on blogs and on forums.  There is a whole community of these folks who are working on achieving financial independence by embracing an abundance mindset as well as empowering others to do the same by sharing their stories.

These folks come from many different walks of life and can be found at different stages of the journey. Some are just starting out in their careers and working on eliminating debt.  Some are millionaires by mid-career.  Others are multi-millionaires and retired while they were still young enough to live out all of their dreams.  If you want to meet some of these folks, check out my Resources Page.  I hope you get to meet some of them and take advantage of what they freely have to offer you.

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Basic Economic Concepts for Consumers

 

Gone are the days when you just use to go out and shop with very little knowledge of what you are having, we use to have our faith on the salesperson but now, now there is a significant shift in our course of actions.

Modern customers know that the person guiding them about a particular product is getting paid to do what he does, he has to sell their product no matter what and here where people start to question that whether the product is worth buying?

Customers now are more familiar with their power than before and like to know about the dynamics of the product even without leaving home. Several reviews are there on the websites to help the people to make better judgments.

Following are the three concepts that I believe every consumer must be aware of for better economic understanding.

SCARCITY

As a human our needs are endless, one day we may be crying over no food at all, but another day when we have bread we would ask for eggs. The next day we would have eggs and bread, but we would find the milk missing, and this will continue until our own end. The list is never-ending, you may think it would end but it would not, that is how we human work.

The gap between our limited resources and our endless wants is known to be scarcity. Scarcity requires people to list down their needs and wants separately and then to figure out how to satisfy their needs first and only then their wants. British economist Lionel Robbins defined scarcity as

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

There is nothing free in this world. Take breathing as an example, we take breathing as free of cost but give it a good thought. We breathe in this air of industrial revolution with so many poisonous gases all around. These gases expose us to so many diseases that make us end up in a hospital bed, and we all are familiar with the bills that are charged by hospitals. So we end up paying for breathing too. Now as we understand that air is not free also, the government has another thing to invest into with the limited money to invest in. Here is where the government has to decide which thing should be given preference regarding investment.

DEMAND AND SUPPLY

The market works with this phenomena; demand and supply is the key to be found, and you have a properly functioning system to yourself. But make no mistake, a constant check and evaluation is a must.

What happens is manufacturers determine what their products’ demand is and then only they could know how much supply is needed. And the slight shift in the change of the supply can make a drastic difference to your product.

For instance, if you are the monopoly in rice manufacturing or as a group all you rice manufacturers decide to supply lesser rice for a period this will make your price boom in days as people will sense scarcity. But if one of you sells there product with the same or cheaper price than the traffic of customers from rest of the companies will flow your way hence, more demand for you more supply for them.

As shown in the figure, the increase in demand increases the supply and price and the decrease in demand decrease the supply and price

MARGINAL UTILITY

Marginal utility is one of the core concepts in economics because it helps the economist to determine the demand people have and supply producers have to make. The negative marginal utility is when the consumption of a product decreases, and the positive marginal utility is when the consumption of a product is increased.

This concept helps the economists to determine what things and ways people get happy and satisfied and how that affects their decisions for buying any commodity.

Economists also came up with the law of diminishing marginal utility. This phenomenon claims that the first unit of a product holds more utility for the consumer than the second one, like, when we feel thirsty and have a glass of water, we feel satisfied, the next unit of consumption gives us satisfaction but not as the first unit did. And if we keep on drinking, the pleasure will only turn into displeasure.

Economists’ claims that every individual wants to reach the highest level of satisfaction to get the total utility to make their purchase worth it but total utility differ from product to product and person to person.

For instance, maybe a shampoo brand is perfect for me, it makes my hair look good, but when I bought it for my daughter, she ended up with frizzy hair all day. Here I may love that brand but she did not. This is how different our demands can be.

Author Bio: Sarah Smith has been a personal finance author for the last five years. She is also an independent and very passionate finance and investment advisor. She regularly posts at www.personalincome.org.

The Scarcity Mindset

Even though you are doing your best to actively manage your finances, do you ever think that you might not have enough money to pay all of your bills, enjoy life, and save for a meaningful retirement?  Do you feel lonely, isolated, or even terminally unique?  Do you make financial decisions out of fear?  Does the thought of early retirement and drawing down your assets make you feel like panicking?  Do you project about the future and only see things getting worse?  If you do, you might have a Scarcity Mindset.

Living in Fear

If you have ever studied Economics, you learned that Economics is the study of limited resources.  The Scarcity Mindset is rooted in the fear of not having enough.  The scarcity mindset manifests itself in extreme self-centeredness.  It is based on an obsession with not having enough resources to meet both your needs and your wants.  No matter what course of action a person takes who has a Scarcity Mindset, the glass always appears to be half-empty.

Why do people have a Scarcity Mindset

People who have a Scarcity Mindset are focused on loss aversion.  Many people who have this mindset were once underprivileged or are currently struggling financially.  Everyone has limited cognitive space in their brain.  People who have the scarcity mindset have unmet needs.  These unmet needs cause the brain to focus on these deficits instead of focusing on the tasks that are at hand.  It is not based on a lack of intelligence, but a constant interruption in the flow of thoughts.

Short-term thinking

The Scarcity Mindset causes one to focus on the short-term.  It draws attention to the urgent.  A sell-off in the stock market would cause a person who has a Scarcity Mindset to panic and sell low because the recent loss will wipe out their finances.  They lack the foresight to see the correction as a short-term blip on the radar.  People who are stuck in this mindset also think that current situations will never change or improve.

Mentally Draining

The consistent mental obsession with not having enough rapidly drains the brains battery.  The focus on scarcity is mentally exhausting.  The brains finite mental resources are always in a state of debating trade-offs.  For example, it is exhausting to debate if you will have enough money to cover future expenses.  It is a mental debate that can occupy a person’s whole day.  The Scarcity Mindset truly is a form of suffering.  Other decisions become clouded because of this mental fatigue.  Because of this lack of mental energy, people are more prone to make poor decisions since their mental debates can lead to irrational solutions.

Symptoms

The symptoms tied to having a Scarcity Mindset are easy to identify in your life.  Hoarding things because of the fear of running out is a major symptom of the Scarcity Mindset.  Complaining about your general living situations is another symptom because there is a lack of satisfaction in your life.  Living in chaos as the result of people pleasing, addiction, lack of production, or self-deprivation.

Barrier to Wealth

Having a Scarcity Mindset is a barrier to building wealth.  If your mind is consistently producing a negative message, it is difficult to make positive financial strides in your life.  To succeed as an investor, you need to be able to think long-term and can handle some degree of short-term market risk and uncertainty.  If you panic based on daily volatility, it will not be good for your investment returns and only add to your mental anguish.

How to Change the Scarcity Mindset

The Scarcity Mindset is all in your head.  It is not easy to break away from this mindset.  It is possible, however, if you are willing to work on changing your thought process.

  • Write a list of everything in life you are grateful for. This list should include everything including food, housing, health, friends, family, and work.  If it is a source of gratitude, add it to the list.  Review this list at least once per day and more often if you are feeling negative.
  • Don’t compare how you feel too how others are living. Don’t compare yourself to others on any level.  Don’t try to keep up with neighbors, friends, or siblings. Live your own life.
  • Build your self-esteem through positive actions. Take a class. Volunteer to help people who are in worse financial or physical shape than you are. Take on extra responsibilities at work.
  • Focus on the present moment. Don’t project into the future where there is fear.  Don’t rewind to the past to feel resentments.  Keep your mind focused on what is currently in front of you.  Refocus as many times as you need to during the day.
  • Look at setbacks as a learning experience. Repeating the same mistakes, but expecting different results is a sign of insanity.  When you make an error, learn from it.  Try a different approach when faced with a similar situation.
  • Build closer friendships. If you want to gain a friend, becoming a better friend.  People are not going to come looking for you.  It is up to you extend your hand and keep reaching out to others.
  • Avoid negativity. Avoid the political and financial media.  There are great things happening in the world.  You just will not find information about those things in the media because they do not sell.  Check out this blog’s Resources Page for unlimited positive blogs, forums, and podcasts.
  • Reduce clutter and add order to your life. Embrace minimalism.  If you own things that you no longer use, give them away.  Whatever those things might be, they might be more useful to others.  Some examples are old books, clothes, sporting goods, or electronics.

Conclusion

Don’t beat yourself up if you feel you have a Scarcity Mindset or some of the symptoms.  The good news is that you can change this mindset.  It will take time and effort, but you can do it.  If none of the above suggestions are helping, seek professional help from a therapist.  After you break away from the Scarcity Mindset, you can start working on developing an Abundance mindset.  That is when life starts to become more of an adventure than an obsessive based existence.

Do you feel that you have a Scarcity Mindset?

What are some of the steps that you have taken to change how you think?