More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Long Term Care Insurance: Premiums While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.
The past year’s wild gyrations made it a frightening one for investors, and not all that rewarding. While the market ended flat, the market swings were so great that investors who avoided the year’s three worst days would have made a killing. But let’s not kid ourselves: Who can succeed at timing the market? Those who tried could as easily have missed the year’s three best trading days, which would have murdered your portfolio.
Before we embark on 2012’s market roller coaster, let’s consider a few investments with guaranteed results for a change.
1) Paying down debt:
In these tough times, many of your clients continue to carry debt, including dangerous credit card debt. The average advertised credit card interest rate is about 14% right now, according to lowcards.com. Credit card customers who regularly carry balances are paying much more. Your clients will appreciate a reminder that paying off holiday spending balances will guarantee them a very high return. And clients with unsustainable debt, like a lot of fiscally strapped countries, states and municipalities we know, cannot afford a risky investment until they have stabilized their balance sheets.
2) Refinance debt:
Clients carrying sustainable debt, say a mortgage at a fixed 6% per year, can lower their funding costs substantially in today’s low-rate environment. This is news to no one, of course, and many people feel the frustration of not being able to obtain financing because lending standards have grown so tight. This is an opportunity for advisors to add tremendous value by acting as the financial coach their despairing clients need. A powerful new year's resolution could be to prepare for a mortgage refinance in 2013. By gradually reducing debt and controlling spending, clients’ credit scores will improve, Reducing unneeded consumption will also help–even if the income side of the balance sheet remains unchanged. The possibility exists that mortgage rates will no longer be as attractive a year down the road, but it is guaranteed that your clients will have gained valuable control of their finances, and the client relationship will have immeasurably improved.
3) Reduce Consumption:
Even those who are debt free could gain guaranteed results through a rebalancing of their consumption patterns. This can be understood intuitively: We buy things we don’t really need. If we reduce certain regular expenditures, we will find over time that we don’t really miss them, thus freeing up more of our resources. A good place to start would be the category of “entertainment.” Movies, cable TV add-ons, concerts and games are costly and can easily be replaced with library visits, free public concerts and, best of all, more intensive family involvement.
4) Increase Giving:
Unlike the previous category, this one is counter-intuitive. How could giving increase your wealth? Here’s how: First, if you make charitable contributions to an organization that, say, feeds or provides scholarships to the poor, the results are instant and measurable in increased calories or enrollment numbers. Buying a stock, in contrast, involves the risk that the value of your investment will go down. Remember, we’re talking about guaranteed returns here. Secondly, on some level you cannot help but feel better about yourself, and this effect will likely spill over into other areas of your life. The increased sense of self-worth will make you more successful in business and other relationships. Finally, and this is really the key point, wealth–at least as a state of mind–is the result of being satisfied with what you have. By switching your focus from consuming to giving, you are sending yourself the powerful message that you have enough. Setting a monthly budget–say, earmarking 10% of your net income to charity–is a good way to lock in a guaranteed return on investment.
5) Watch Your Spending:
We already discussed limiting consumption; this idea concerns how you spend your time and it is closely connected with wealth. Imagine you are earning all that you need through your current client relationships and another business opportunity comes along. By taking on this project, you can increase your income substantially but it will also increase your work time substantially. The increased income can be very tempting, but it is worth considering that someone who is truly wealthy is master of his time. If you have thought about the things that matter to you and spend time on those things–whether your marriage, children, community and charitable interests or learning ambitions–your wealth is guaranteed.