Episode: 01-11-2022 | Get Your Finances in Shape

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Get Your Finances In Shape

Allison Dubreuil, Wealthway Financial: While people are usually particularly motivated this time of year to get their life in shape, to get their bodies in shape, it’s a good time to get your finances in shape. So we want to talk about how to do that, how to get your finances in shape. It might include a little bit of detox for some of you, maybe a little bit.

Allison Dubreuil, Wealthway Financial: So, you know, getting your finances in shape may include a little bit of detox. We can talk about that. Hopefully include some healthy habits, just like you might be developing healthy eating habits, and then maybe making sure you’re putting your money to work for you. Just like you were hopefully kicking off a workout program. So just like you treat your health and your body, you need to address your finances. And this is a really good time to do it.

Kevin Zywna, Wealthway Financial: Yeah. A lot of people take the first of the year to reassess and rededicate themselves to healthy financial habits. We’ll give you some tips to do that and get you on a good path right out of the shoot.

Before we do that, though, we’re going to go run out to Virginia Beach and speak with Charlie. Good evening, Charlie. You’re on Dollars & Common Sense.

CHARITABLE REMAINDER TRUSTS

Charlie: Good evening to ya’ll (and that’s a Southern term). I have a question about a charitable remainder trust. If you stand to inherit or due to prior financial investments have a pretty good lump of, cash, tell me about charitable remainder trusts. What’s your opinion? Is that the best way to avoid taxes?

Allison Dubreuil, Wealthway Financial: So, Charlie, did you say you were looking at inheriting a lump of assets?

Charlie: No, in reality it’s a business that it’s going to be sold in the next 12-14 months.

Allison Dubreuil, Wealthway Financial: Selling. Okay. Okay. So you, you have a big, transaction. That’s going to cause an influx of income and you’re looking for ways to minimize that?

Charlie: Yes. Ma’am. The tax implications thereof.

Allison Dubreuil, Wealthway Financial: Yeah. So charitable donations in numerous forms can be a great way to offset a big liquidity event. Like the sale of a business. Like you’re saying. Charitable remainder trust can be a great tool if you are charitably inclined. So it’s a pretty advanced strategy that you would need the help of an attorney to implement. But it allows you to take a tax deduction, a large tax deduction in the year that you create the trust, which would be in the same year that you sell the business. And then you get an income stream for a set period of time. And then at the end of that period, the charity gets the remainder of that asset.

Charlie: When I pass whatever assets are still there and I’m sure there’ll be some, will go straight to the designee.

Allison Dubreuil, Wealthway Financial: Right. They can be set up differently, but it’s typically set up for a certain period of time. So for example, if you put, so we’ve put a million dollars in a charitable remainder trust, and you receive 5% of the trust every year as income over 20 years.

You’d essentially, if it works properly, get your initial investment back. But that investment has been growing over 20 years and is probably hopefully worth more than your million dollars that you put in. And that would all go to charity. So you get the tax deduction, you hopefully get the return of your investment and you make a big charitable impact all at the same time.

Charlie: The magic word you said inside of that was I get taxed on whatever revenues come out of that?

Allison Dubreuil, Wealthway Financial: That’s a good question. I don’t think that’s taxable income to you. No.

Kevin Zywna, Wealthway Financial: No. Well the activity that occurs inside the trust is sheltered from taxes, the distribution to the grantor of the trust. I’d have to check on that.

Allison Dubreuil, Wealthway Financial: It could be K1 income. We’d have to check on that technicality, Charlie. But big picture, you can get a big tax deduction upfront with, still the idea of getting your money, your principal, back over 20 years time period. So you just have to make sure you try to live for 20 years.

Charlie: And you go through lawyers and accountants and all that stuff, but it was just a good way to, if you’ve made all your need and want to give something back target something you want to give to, and then throw a CRT, at them.

Allison Dubreuil, Wealthway Financial: Yeah. And it’s a great way of offsetting a large liquidity event or capital gain in one particular tax year. So, you know, say you sold a business and you got $5 million from receiving that money. Well, a lot of that is going to be subject to taxation, which means you’re going to have a really high tax bill. If you’re charitably inclined and you want to lower your tax bill taking say 1 million of that 5. Putting it in a charitable remainder trust gets you a tax deduction to offset a fair amount of that income. And then you can reap the benefits, for over the next 20 years, as well as donate that money to charity down the road.

Allison Dubreuil, Wealthway Financial: And Charlie, I will offer one other option. It’s a little more simple. It’s not quite the same, but look into a donor advised fund.

So a donor advised fund is where you would make a lump sum contribution to an account that’s designated to a charity, just like the charitable remainder trust, and you get the full tax deduction in the year, you make the contribution. So that could offset some of your business income.

Now the donor advised fund just sits in the account and then over the rest of your life, you can make the charitable bequest. So you get the deduction in year one, and then you can dribble out your charitable contributions over the rest of your life. Now you don’t get money back from this type of account. But if, you weren’t looking to say, do a million dollars, then sometimes a charitable remainder trust is too complex for a smaller dollar amount. So consider a donor advice fund.

Kevin Zywna, Wealthway Financial: Good for say, $50,000, a hundred thousand dollars, maybe even up to $500,000. Donor advised funds, are great for that purpose.

Charlie: All right. Well, thank you very much for the input. I appreciate it too.

Kevin Zywna, Wealthway Financial: All right, Charlie. Thanks for the call. We appreciate that.  All right we were talking about ways to get fit in 2022. Get financially fit. And we’re going to give you some of those tips and techniques in just a minute, but one to follow up on one thing that previous caller Charlie said.

Allison Dubreuil, Wealthway Financial: Yeah. Charlie was asking about charitable remainder trust, which is a complex planning tool that can be great for people who are charitably inclined and who maybe have some sort of liquidity event, like a sale of a business. that’s really the best example. And he was asking about the tax ability of the income.

We weren’t sure, but we just did a little fact checking behind the scenes and yes. So the income you get from a charitable remainder. Yeah. Is taxable.

Kevin Zywna, Wealthway Financial: Mainly taxable as ordinary income that comes out. But it’s smaller percentage of the contribution to the trust will be distributed each year.

So it’s typically around 5%. So you put in a million dollars. $50,000 comes out that comes out. It’s mainly ordinary income. It gets more complicated than that, but that more, more, or less than that, more in general terms that that that’s ordinary income. and then the rest of the cash inside the trust gets invested for long-term growth.

And, while each year you kick out five. over a extended period of time, 10 or 20 years, there should be a lot more than a million dollars left in there. And that then whatever’s left then goes to a charity as a big windfall

Allison Dubreuil, Wealthway Financial: And that account does grow tax deferred. So that’s one of the benefits of that.

Kevin Zywna, Wealthway Financial: All the, all the activity in there, any capital gains, any, dividend distributions, interest, all that stays untaxable while it’s in the wrapper of the trust account, just like an IRA would.

Allison Dubreuil, Wealthway Financial: So it’s a great tool, but pretty sophisticated. So if you think that this is something that interests, you make sure you have a certified financial planner and a trusted attorney that can help you work through those details.

Kevin Zywna, Wealthway Financial: We have a couple of clients who have a charitable remainder trust that we administer and investment for them.

FINANCIAL DETOX

Allison Dubreuil, Wealthway Financial: All right, but back to new year’s resolutions. This is a good time to get your finances in shape.

I mentioned, three keys to getting your finances in shape. The first is a financial detox. So let’s talk about you. If you have holiday bills that have built up, I think this is pretty common because Christmas is just so surprising each year. You know, we don’t realize that it’s coming.

Kevin Zywna, Wealthway Financial: Next thing you know, you’re going out and you’re blowing, blowing a thousand dollars at the last minute.

Allison Dubreuil, Wealthway Financial: Cause Amazon can deliver that fast. Well, if you have holiday bills, this is the time to take care of them. If you can wipe them clean with excess cash reserves, pay off those credit cards.

It is a not good practice to carry a balance on high interest rate credit card debt. If you don’t have enough cash to just wipe it clean, then come up with a good plan that is realistic that you can execute to have it paid off by a certain period of time and then keep it paid off. Really, you should only be using credit cards for convenience and not carrying a balance from month to month.

Kevin Zywna, Wealthway Financial: Yeah, convenience. And maybe perks if you get things like cash back or travel, travel miles, hotel perks. Yeah. Those, those things can be valuable if you use the card properly. And that is to charge it, pay it off in full the following week and get the benefit of whatever the card provides.

Allison Dubreuil, Wealthway Financial: Now, Kevin makes fun of me for this, but I like using buckets.

I have a lot of buckets. They can be great planning tools. They can also have their problems. But, if, if this happens to you every year and you find yourself in debt after Christmas or the holidays or whatever time of year, then it wouldn’t hurt to set a little special fund aside where you pre-save every month so that you don’t have that problem and you don’t start the next year behind the eight ball.

Kevin Zywna, Wealthway Financial: Like a Christmas club, which I used to have when I was a kid and needed, like, contribute, like say $5 a month. And then at the end of the year, you had $60 to go buy Mom and Dad a present.

Allison Dubreuil, Wealthway Financial: So smart. I love it.

Kevin Zywna, Wealthway Financial: And just, magnify that about, tenfold, with today’s numbers, right?

Let’s start saving for, you know, next year’s holiday today, little bit at a time. And that way, you won’t be tempted to run up those credit card bills.

Snowball Strategy To Paying Off Debt

Allison Dubreuil, Wealthway Financial: And if you find yourself in the situation where it’s not just that extra holiday spending. If you really do have impactful amounts of credit card debt, then come up with a good, reasonable plan to pay that down. There are a couple of different strategies that people like to use. There’s the snowball strategy. So pay off the smallest balance first, and then once the first balance is paid off, apply that payment to the second card and so on and so on. So you pick up momentum like the snowball rolling down the hill. Your payment gets bigger and bigger and bigger, and you pay off your debt that way.

Kevin Zywna, Wealthway Financial: And you get the psychological endorphin release of knowing you’ve paid off something. You got one of them off the books, you’ve checked that box. So you feel like you’re accomplishing something by starting with the smallest and working the way up to the biggest.

Avalanche Strategy To Paying Off Debt

Allison Dubreuil, Wealthway Financial: And then I didn’t realize this, but I guess the other way of doing it is called the avalanche where you tackle the highest interest rate. I knew the strategy. I didn’t know it was called the avalanche, but tackle the highest interest rate first because that’s costing you the most and, and pay that down and then move on to the next highest.

Kevin Zywna, Wealthway Financial: So regardless of the size of the loan balance, just try to pay down the one with the highest interest rate first, which could end up taking a lot longer and you could maybe lose some momentum and some enthusiasm for the task. And then you might find that you can’t quite complete the whole thing. So really there’s no perfect answer here on how to attack debt like that.

It’s whatever works best for you, whatever you will be most successful at. Whatever will get you to pay off the debt, the quickest and keep it paid off – that bad debt.

Allison Dubreuil, Wealthway Financial: I think avalanche probably makes the most financial sense, but honestly, I like the snowball for the mental achievement aspect. The motivation it can provide.

Kevin Zywna, Wealthway Financial: The psychological benefits of feeling like you were making an accomplishment, which will give you the motivation, then tackle the next biggest debt. And so that you actually do make progress.

Allison Dubreuil, Wealthway Financial:So it’s time to detox. Handle your credit card debt right away, or come up with a plan to handle your credit card debt. Credit card debt, in almost all cases, is bad debt.

We don’t condone carrying it. It’s just not a good practice. It’s just costing you money. So to avoid that, build up your emergency fund so you don’t have to rely on credit cards. And plan ahead for big expenses that you know are out there.

Kevin Zywna, Wealthway Financial: And I know there are some credit card companies that like to offer introductory 0% rates to get you to sign up for their credit card. And maybe you can charge on it interest free for, say a year. But if you don’t get that balance paid off in full by the end of the introductory period, however long it is, then the interest rate shoots up dramatically. So, it’s sort of like a hook to get you on the line there. So be real careful with trying to play that game. It can get you into trouble real quick if you don’t, treat it properly.

BUDGETS, SPENDING PLANS, AND FINANCIAL GOALS

Allison Dubreuil, Wealthway Financial: Today we’re talking about getting your finances in shape, making a resolution to start off on the right foot for 2022. We talked about detoxing and taking care of your debt. The next step, just like any healthy fitness plan is fixing your habits. So maybe cleaning up your diet. We want to talk about evaluating your spending and developing healthy savings habits.

So knowing what you spend is probably the first step here. And, most people we sit down with don’t really have any idea how much they spend. We usually end up telling them, cause we can do the math. but. Most people don’t really have a clear idea of what they are spending, and in what ways, and so it’s a good time to sit down and review what you spent.

If you use a credit card every month for convenience, hopefully you’re paying it off. Like we just talked about. Your credit card company, very helpfully, creates a whole yearly summary where you can see exactly what you spent in like many, many, many different categories. And while this may not be pleasant to review for some of you, it really can be eye-opening.

It’s a good exercise to see if you’re putting your money where your, I guess let’s say, mouth is. Like, what are your goals? And does your spending reflect your goal and your values? And if there’s a mismatch there, if you find you’re spending in an area that is not a part of your goal or not true to what you really value, then you can make some decisions to do things differently.

Kevin Zywna, Wealthway Financial: Like you make too many compulsive purchases just because you saw something new and shiny, or it was on sale so you’re saving money. That can cause people to get off track. But, you know, we know from a practical standpoint, you know, while you should – a good financial planning exercise to strengthen your financial health is to develop a budget. Most people aren’t going to do it.

Allison Dubreuil, Wealthway Financial: Oh, I didn’t say the word budget.

Kevin Zywna, Wealthway Financial: I know. Well, let’s see if we’ve given up on that. We’d given up on budget. We’re call it a spending plan. Well, you’re still not going to develop a spending plan, anyway. We know that. We know that 99% of the people aren’t going to do that.

But what you can do is a little back of the envelope calculation to help you figure out what your spending plan is. Whether you know it or not. And that’s to simply take your after tax, take home, pay, your household take-home pay. So if you have, you and a spouse, then you add it up. What is your monthly, after tax, take home pay. And then what do you save from that? Are you contributing to a 401k plan, company sponsored retirement plan? Are you contributing to an IRA? Do you have a regular savings plan to, say a money market account in a bank or something like that? Any known savings? So you simply subtract the savings from the after tax take home pay, and there is your budget. That is what you are spending at a macro level on a month. Don’t care what you’re spending it on, doesn’t matter, but you’re spending it. So that’s a good, simple starting place for most people to realize how much they might be saving.

And if they aren’t saving anything regularly and you are, you see your credit card balance creeping up, then you are overspending. You are spending more than your take-home pay. And that’s a recipe for financial failure.

Allison Dubreuil, Wealthway Financial: Yeah. So a lot of people don’t know how much they’re spending, but that’s a really quick and simple way of saying, okay, well I know how much I make, and I know how much I’m saving. So it’s safe to assume the rest is being spent.

HEALTHY FINANCIAL SAVING HABITS

Allison Dubreuil, Wealthway Financial: And then it’s really time to evaluate your savings habits. Are they healthy? You know, everybody’s different. So the amount that everyone needs to save is different, but a very general rule of thumb is you want to be aiming to save probably about 15% of total household gross income. Now in this area, we have a lot of people with pension. So that may mean you don’t need to save quite as much, but, pensions are not as prevalent as they used to be. So now most people are responsible for their own retirement savings and their own retirement income.

So 15% is a good goal. And if you are just spending throughout the month and waiting to see what’s leftover and hoping it’s a certain amount to save, you probably aren’t going to be very successful. You have to save first and then spend what’s left. Just rip the bandaid off, increase or set your savings where you think it needs to be, and then figure out how to adjust from there. But you’ll never just have it magically leftover at the end of the month. I don’t know anybody who does.

Kevin Zywna, Wealthway Financial: Because it will be nothing left over at the end of the month if you save last. You have to save first if you want to be financially successful. And like Alison was say saying, you just have to commit to a certain amount.

So start small. Something that is sustainable. I don’t care what that number is. $50 a paycheck, $50 a month, whatever. And it’s got to get out of your hot little hands. It’s got preferably shouldn’t even hit the bank account. So again, for most people that means take advantage of your company sponsored retirement plan.

The 401Ks the 403Bs, DSP, 457s, the simple IRAs, all those company sponsored retirement plans. Start there, start by saving a small amount that you can commit to and you will not stop. And then gradually over time increase that amount. And then you will start to see some traction. And then, and as you’re doing that, then you spend what’s left over and you force yourself to live in the remainder of the take-home pay that you have left.

Allison Dubreuil, Wealthway Financial: Yeah, so many, well, I don’t know many, but a lot more people I think are seeing cost of living increases. I know social security went up significantly, government pay. So you are seeing some cost of living raises. Now of course, cost of living has also gone up, to feed into that. But it’s still a good opportunity. The minute you get a raise, take that opportunity to, to raise your savings just a little bit. It doesn’t have to be for all of the raise, you know, put a part of it towards increased savings and then let yourself spend a part of it as well. If you did that every time you got a raise, you would be much better. You’d be on a much better path to financial security.

Kevin Zywna, Wealthway Financial: Yeah, don’t think of a raise or a bonus either as a hundred percent disposable income. Every raise, you get, every bonus you get, a portion of that should go to your long-term financial security through for savings in either a company retirement plan or some other, an IRA or brokerage account like that.

You’ve got to take those opportunities. You’ve got to capture those opportunities when they happen to shore up your personal financial future. If you don’t and you wait for the next time or next year, we hear it every time we meet with somebody. I wish I had started sooner. The years turned into the months, turned into years, turned into decades too …I’m 62 years old and I haven’t saved nearly what I should. We see it all the time.

Allison Dubreuil, Wealthway Financial: Well back to 401ks, Kevin, like you mentioned. Hopefully you are saving enough to at least get any company match. So if your company makes a matching contribution, you want to contribute enough to at least get that matching money.

That’s free money. Don’t leave that on the table. But if you’re looking to max it out, the maximum contributions went up just a little bit for 2022. You can contribute up to $20,500 per year in a 401K, 403B, TSP. And if you are over age 50, you can add another $6,500 for a total of $27,000. So, increasing that each year as the limits go up will really help you solidify your retirement plan.

Allison Dubreuil, Wealthway Financial: We’ve been talking about getting your finances in shape. New year’s resolutions. Things you can do to start 2022 off on the right foot. We talked about detoxing, getting rid of your debt or coming up with a plan to handle your debt. And now we were on to healthy habits. So just like, hopefully, you’re trying to eat healthier. Healthy spending and savings habits, whether that’s tracking every penny you spend, or just increasing your savings to a certain target.

HOW SHOULD YOU SAVE?

Allison Dubreuil, Wealthway Financial: So let’s talk about where the savings should go. We talked about 401k savings, especially if your employer does matching, you want to take advantage of that matching benefit and contribute to your 401k. The 401k contribution limits for this year are $20,500 and then up to $27,000 total, if you’re over age 50.

So that’s a great bucket to save into. We always prioritize that. I think even better though, before that, sometimes before that, it depends on your situation, is the health savings account. We talk about these accounts a lot, but health savings accounts are the most tax advantage account that exists because you get a tax deduction for the contributions. It grows tax deferred. And it comes out tax-free in retirement.

If you used properly. So maximizing your health savings account, if you can, if you have a high deductible health plan, then you can use a health savings account. Is a great savings tool to you.

Kevin Zywna, Wealthway Financial: Yeah, they’re becoming a lot more prevalent – health savings accounts are. Because of the more, usage of high deductible health insurance plans. So with a high deductible health insurance plan goes a health savings account. And while the primary purpose of the health savings account is to contribute money tax-free into the account, and then ultimately use it to pay for qualifying medical expenses that fall below your medical insurance deductible. So that between the two devices, you’ve got rock solid, health insurance coverage, that’s the primary purpose.

But the secondary purpose is, you don’t have to spend that money in the health savings account, even for qualified medical expenses. Just because you incur those expenses doesn’t mean you have to spend, you use the health savings account money. You can use your regular checking account money. So it’s also the health savings account is also a great long-term retirement savings tool because money can build up in it, tax-free. All the investment activity in there remains sheltered from taxes.

And when you reach the age of 65, you can withdraw the money from a health savings account for any purposes. It does not have to be just for qualified medical expenses. Now, if it’s not for medical expenses, then it will be taxed as ordinary income on the way out, just like a traditional IRA, but you get that tax free growth along the way. And there are no income limitations to contributions to health savings account like there are with a Roth IRA. So high-income earners can also get this tax deduction.

Allison Dubreuil, Wealthway Financial: So for 2022 individuals, if you have a high deductible health plan, you can contribute $3,650 to a health savings account, or for families, more than one person on your health insurance plan, you can contribute up to $7,300 a year, plus an extra thousand dollars if you’re 55 or older. So we love maxing out the health savings account bucket. And then, of course, there’s always IRAs.

So individual retirement accounts, whether that’s pretax, traditional IRA, or a Roth after tax IRA. You can contribute up to $6,000 a year to an IRA (subject to income limitations) or $7,000 total for those over 50. So those are the main savings buckets we like to prioritize. Of course, after that there’s regular brokerage or investment accounts savings. That’s always beneficial, but regardless of the bucket, we just encourage you to automate that. Just something that happens before the money even hits your account on a regular basis before you even are tempted to spend it.

Kevin Zywna, Wealthway Financial: And remember getting money into the account is phase one of the process. Once it’s in the account, then you’ve got to get it invested for long-term growth. That’s phase two. So while you can open up IRAs, Roth IRAs, health savings accounts at banks. And buy bank products with them, like CDs and money market accounts, that defeats the purpose of these types of accounts. These should be invested in securities stocks, mutual funds, exchange, traded funds for long-term growth. That’s their primary purpose.

Allison Dubreuil, Wealthway Financial: So let’s, liken that to working out, adding a little muscle behind the plan is making sure they’re invested for long-term growth.

Kevin Zywna, Wealthway Financial: Yeah. A lot of times we will stumble across accounts where people have money in an IRA and they got that far, but then they didn’t realize they had to take the next step and actually purchase a mutual fund with it, or many mutual funds or stocks or, or what have you, but something built for long-term growth. So just make sure you see it all the way through to the finish line.