Good day. If you had to guess, which state would you say has the highest credit score on average? We'll narrow it down for you: a. California b. Minnesota c. Texas. Here are the topics for today: - How to Use Asset Allocation to Your Advantage
- Home Prices Continue to Rise — Rent or Buy?
- Credit Mistakes to Avoid
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INVESTING How to Use Asset Allocation to Your Advantage | | | | Proper asset allocation kind of sounds like one of those vague terms you'd hear a financial advisor use without paying it much mind — in short, it seems like it doesn't mean much. But in reality, it does. Where you hold your assets and what kind of accounts they call home can either have big drawbacks or big benefits to your account balance and tax liabilities over time. It's not something we often give much thought to, but a little goes a long way in this case. Here's what you should know - Different account types are taxed differently: For example, a Roth IRA or 401(k) is what's known as a post-tax account, meaning you can't deduct these contributions from your taxable income. Conversely, traditional IRA, 401(k), and other pre-tax accounts are "tax-deferred", meaning you'll deduct those contributions from your income, saving you money on taxes now that you'll need to pay when you withdraw.
- As a result of this, certain types of assets are best held in certain accounts. It's more tax-efficient to hold assets that are able to receive favorable tax rates in taxable accounts, and those that can't in tax-deferred accounts.
- For example, it's more beneficial to hold stocks in a taxable Roth IRA or brokerage account because you can take advantage of a favorable tax rate on long-term capital gains, a rate which you won't be granted if you withdraw the proceeds from a 401(k), where they'll be taxed at your ordinary income rate.
- The opposite can be said of taxable bonds, REITs, and other income-generating assets that can be taxed at the same rate as your ordinary income. These assets should ideally be funneled into pre-tax (tax-deferred) accounts in an effort to take advantage of being in a lower tax bracket at the time of withdrawal.
- Take this example: If you sell your holdings and accrue $100,000 of long-term capital gains in a brokerage account, assuming you make $60,000, your tax rate will be 15%, or $15,000. If, however, you held these same stocks in a 401(k), your tax rate would be 22% on the federal level.
- Of course, it's impractical to keep the entirety of our equity holdings in brokerage accounts. After all, we want to be able to watch our retirement accounts reap the benefits of stock-like growth rates while also enjoying their tax benefits.
- So, a practical way to implement this strategy might look something like this: Place all of your bond/income holdings in a tax-deferred account first, and the remainder of your contribution limit with stocks. You can do this while still keeping the equity portion of the overall portfolio on track with your goal (70%, for example) while reaping the preferential tax treatment benefits simultaneously.
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HOUSING Home Prices Continue to Rise — Rent or Buy? | | | | Home prices are a leading indicator of affordability, but there's a lot more that goes into the cost of owning a home. Among prices, insurance, taxes, and interest rates, the monthly mortgage payment on a median-priced home has increased about 55% to $2,774 in just two years. As a result, housing affordability is at its lowest point since 2006. Meanwhile, median rents remain elevated, but still less than a mortgage at around $1,752. Both renting and buying come with their own pros and cons — but which is right for you? Things to consider - What's your 5-year plan? If you value mobility and you're not sure you want to stay in the area for the next few years, you've got your answer. Don't forget there are expenses associated with buying like upfront closing costs that can be 2-5% of your home price and other ongoing expenses like property taxes and homeowners insurance. Figure out how long you need to be in your home to break even.
- Your monthly budget: Historically speaking, it's never been more expensive to buy and own a home. So, even if you plan to put roots down where you are now, buying a home still has to make sense for your budget. If it fits your monthly income, buying might make the most sense for you, but if not, the most responsible choice is to wait.
- If you want to buy, can afford to buy, but just don't want to in this pricy market, consider this — home prices tend to rise over time, so barring any major changes to the market, we can reasonably expect homes to continue appreciating in aggregate. High rates or not, home prices aren't likely to get "cheaper" for long.
- If your hold up is down payment concerns, note this: With home prices rising, so have down payments, and 20% down on the median-priced home now means about $83,200. But, the popularly circulated idea that you have to put 20% down is a myth. The truth is that 20% down just saves you from having to pay for private mortgage insurance (PMI) every month, and of course, is desirable for equity purposes in the event of a downturn. Nevertheless, it's not a requirement, and there are a lot of mortgage programs out there that will gladly take you in with less than 20% down.
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MANAGING DEBT Credit Card Mistakes to Avoid | | | | Credit cards are a double-edged sword that can serve as either a positive or negative boost to your finances depending on how they're handled. Mismanagement can be detrimental, but with the right discernment and planning, they're a great asset to have in your arsenal. There are some key components to capitalize on in order to do this successfully, and many of them are often not considered enough. - Not maximizing: Don't wear a dress to go hiking, and don't use a cashback card for travel. It's important to use your card for what it's built for to max out the benefits you're able to reap from it. If your everyday card has 3% back on groceries but only 1% on travel, use a card that better rewards you for your travel expenses. This same idea can be applied to numerous scenarios, but the overarching point is to let your card do its best work.
- Opening the wrong card: Don't go for an everyday cash-back card for specialized expenses, and don't get an Amex Platinum just to shop online sometimes. It's alright to open "just any" credit card when you're first starting out, but your palate should become more sophisticated as your credit matures. Apply for new cards rarely and only when their best uses suit your use cases too.
- Don't mess up the basics: Make the plain things the main things, because it's easy to have an oversight on the mundane, and they're boring for a reason. Prioritize paying your card off in full every month, maximizing your cashback, and documenting all expenses you use your credit cards for. These simplistic things alone will avoid trouble if done regularly.
- Not negotiating: Most credit cards don't charge an annual fee, but if you hold one of the 30% of cards that do and find that you're getting value out of it, you could be getting even more by negotiating that fee down. Yes, although it's not advertised, it's almost always possible to ask for a lower annual fee if done with the right manners and for the right reason.
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🌊 BY THE WAY | - 💲 Answer: Minnesota — 742. Apparently cold weather does something for your financial wellness (Experian)
- 💳 Credit card fees are on the rise (Axios)
- 👀 ICYMI. How to stop living paycheck-to-paycheck (Finny)
- 💵 Gen Z is even better at saving than millennials (Business Insider)
- 📚 Finny lesson of the day. The game of tax is exactly that — a game that can be mastered:
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| Advisory services are offered through Origin Financial, a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. The status of registration as an Investment Adviser does not imply a certain level of skill or training. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor, is it intended to be a projection of current or future performance or indication of future results. | | | | | | | |
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