Tag: Investments

Exercise Financial Muscles to Get Financially Fit

March 6, 2023
Uncategorized

“Those who work their land will have abundant food, but those who chase fantasies have no sense.” This ancient advice from Proverbs illustrates the importance of financial fitness.

What is financial fitness? Well, we are all familiar with the term physical fitness. If pressed for a definition, we might define it in terms of our own ideas and circumstances.

When it comes to an explanation of financial fitness, the same applies. A lot may simply depend on the season you are in. Financial fitness might mean something different to someone who is single versus a couple with young kids, an empty-nester or a retiree. Even within those demographics, one’s perception could be colored by personal circumstances. Are you saddled with debt, debt-free, renting or a homeowner?

There are many ways to get ahold of your finances; you can increase earnings, lower spending, start saving more (short-term and longer-term) and implement debt management. For many, earnings are difficult to influence in the short-term. For most, tackling the spending side of the equation will yield the quickest results. Below we consider six principles that will help you get into financially fit shape wherever you find yourself in life.

6 principles for financial fitness

“An investment in knowledge pays the best interest.”—Benjamin Franklin

Set goals. If you don’t have concrete financial goals, both shorter term and longer term, reaching some level of financial fitness becomes much more problematic. Simply put – you don’t have a destination. You are financially adrift. As George Harrison has noted, “If you don’t know where you’re going, any road will take you there.”

Short-term goals you might consider: Establishing three to six months of cash in an emergency fund, saving for a down payment on a home or auto, or saving for a vacation.

Long-term goals you might consider: College savings for your kids or saving 10-15% of your income for retirement.

Do you know what ‘buckets’ your income lands in? How do you spend your income? If you aren’t tracking expenditures, you won’t have a holistic picture.

You might be surprised at how much you spend on eating out, on entertainment, and even on a daily habit of barista-prepared lattes.Unnecessary spending can be diverted into savings or paying off debt, especially high interest rate credit cards. Make timely payments. This will not only prevent you from accruing needless fees, but it will raise your credit score.

Once credit cards are paid off, channel the excess funds into savings. When you accomplish shorter-term goals, reward yourself. It need not be extravagant, but accomplishments should be celebrated.

Finally, you will struggle to follow a plan that is too draconian. Trim frivolous spending but leave some room for fun and hobbies.

Your lifestyle shouldn’t exceed your income. If it does, you are burning through savings or taking on debt, and your stress level will likely reflect it.

Excessive spending is not a path that leads to financial fitness. You want financial space in your life. You want ‘money at the end of the month,’ not ‘month at the end of your money.’ A budget is your blueprint that helps achieve this goal.

Invest wisely. Among various factors, your financial goals, both shorter and longer term, will greatly influence the proper mix of investments. A diversified portfolio that crosses the spectrum can reduce risk and enhance your return over the long run.

“Don’t look for the needle in the haystack. Just buy the haystack!” advises John Bogle, founder of Vanguard. In other words, diversify!

We are here to assist you with that. Our recommendations are tailored to your financial goals and your unique circumstances.

We avoid get-rich-quick schemes, which are usually nothing more than schemes minus the riches. Accumulation of wealth over a longer period is our goal. We believe it should be yours, too.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” says Paul Samuelson, the first American to win the Nobel prize in economics.

Enjoy your retirement. Many enter retirement after accumulating wealth over decades. They have learned how to save. For some, suddenly relying on that savings rather than earning income from labor seems like a daunting leap, one they may be ill-prepared to make. It doesn’t have to be that way.

Your financial plan continues to be a valuable resource in retirement. Your level of spending in retirement, both regular expenses and those planned extras along the way, along with how much risk you should be taking, when and how to draw Social Security and other sources of income…these factors and more should be considered within a sound financial plan.

Clients are often surprised when we encourage them to spend more money. As you work to identify your values and what is important to you, we want to see you realize those dreams and enjoy your life to the best of your ability. Your plan serves as an outline that arms you with knowledge of necessary guardrails and enhances your financial fitness.

Protect your assets. Do you have life insurance, health insurance, and personal liability insurance? Do you have a will and estate plan? Who are your beneficiaries? What happens if you become disabled? Do you have a trusted advisor to handle your affairs? What about a back-up?

If you own your home without a mortgage, do you have homeowners’ insurance? Surprise, not all do. If you rent, renters’ insurance is cheap. It’s a must-have item in our opinion.

Absorbing the fundamentals—the foundation for success

Those who fail to put sound principles into practice are like those who build their homes on sand. The rains come and the winds blow, and financial misfortune overtakes them.

Wisdom encourages us to build our homes on a solid financial foundation. Though the rains come and the winds blow (and they will), the house and foundation are designed to withstand financial storms. In the words of Maren Morris, “If the bones are good, the rest don’t matter!”

Every situation is unique. You may have mastered the fundamentals, and only need to apply the principles we highlighted selectively, plugging small holes and shoring up your finances. Or a more aggressive approach might be in order. Focus on one theme at a time. Some may apply. Others may not.

Having said all that, we never want to give the impression that you are all alone on a financial lifeboat. We are always here to assist.

To learn more about CapSouth Wealth Management and the services we offer, visit our website at www.capsouthwm.com or capsouthwm.com/what-we-do/

By: Scott F. McDowall, CFP® | Wealth Advisor

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Taxation of Investments

March 2, 2022
Uncategorized

It’s nice to own stocks, bonds, and other investments. Nice, that is, until it’s time to fill out your federal income tax return. At that point, you may be left scratching your head. Just how do you report your investments and how are they taxed?

Is it ordinary income or a capital gain?

To determine how an investment vehicle is taxed in a given year, first ask yourself what went on with the investment that year. Did it generate interest income? If so, the income is probably considered ordinary. Did you sell the investment? If so, a capital gain or loss is probably involved. (Certain investments can generate both ordinary income and capital gain income, but we won’t get into that here.)

If you receive dividend income, it may be taxed either at ordinary income tax rates or at the rates that apply to long-term capital gain income. Dividends paid to an individual shareholder from a domestic corporation or qualified foreign corporation are generally taxed at the same rates that apply to long-term capital gains. Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. (Some types of capital gains may be taxed as high as 25 percent or 28 percent.) The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. But special rules and exclusions apply, and some dividends (such as those from money market mutual funds) continue to be treated as ordinary income.

The distinction between ordinary income and capital gain income is important because different tax rates may apply and different reporting procedures may be involved. Here are some of the things you need to know.

Categorizing your ordinary income

Investments often produce ordinary income. Examples of ordinary income include interest and rent. Many investments — including savings accounts, certificates of deposit, money market accounts, annuities, bonds, and some preferred stock — can generate ordinary income. Ordinary income is taxed at ordinary (as opposed to capital gains) tax rates.

But not all ordinary income is taxable — and even if it is taxable, it may not be taxed immediately. If you receive ordinary income, the income can be categorized as taxable, tax exempt, or tax deferred.

Taxable income: This is income that’s not tax exempt or tax deferred. If you receive ordinary taxable income from your investments, you’ll report it on your federal income tax return. In some cases, you may have to detail your investments and income on Schedule B.
Tax-exempt income: This is income that’s free from federal and/or state income tax, depending on the type of investment vehicle and the state of issue. Municipal bonds and U.S. securities are typical examples of investments that can generate tax-exempt income.
Tax-deferred income: This is income whose taxation is postponed until some point in the future. For example, with a 401(k) retirement plan, earnings are reinvested and taxed only when you take money out of the plan. The income earned in the 401(k) plan is tax deferred.

A quick word about ordinary losses: It’s possible for an investment to generate an ordinary loss, rather than ordinary income. In general, ordinary losses reduce ordinary income.

Understanding what basis means

Let’s move on to what happens when you sell an investment vehicle. Before getting into capital gains and losses, though, you need to understand an important term — basis. Generally speaking, basis refers to the amount of your investment in an asset. To calculate the capital gain or loss when you sell or exchange an asset, you must know how to determine both your initial basis and adjusted basis in the asset.

First, initial basis. Usually, your initial basis equals your cost — what you paid for the asset. For example, if you purchased one share of stock for $10,000, your initial basis in the stock is $10,000. However, your initial basis can differ from the cost if you did not purchase an asset but rather received it as a gift or inheritance, or in a tax-free exchange.

Next, adjusted basis. Your initial basis in an asset can increase or decrease over time in certain circumstances. For example, if you buy a house for $100,000, your initial basis in the house will be $100,000. If you later improve your home by installing a $5,000 deck, your adjusted basis in the house may be $105,000. You should be aware of which items increase the basis of your asset, and which items decrease the basis of your asset. See IRS Publication 551 for details.

Calculating your capital gain or loss

If you sell stocks, bonds, or other capital assets, you’ll end up with a capital gain or loss. Special capital gains tax rates may apply. These rates may be lower than ordinary income tax rates.

Basically, capital gain (or loss) equals the amount that you realize on the sale of your asset (i.e., the amount of cash and/or the value of any property you receive) less your adjusted basis in the asset. If you sell an asset for more than your adjusted basis in the asset, you’ll have a capital gain. For example, assume you had an adjusted basis in stock of $10,000. If you sell the stock for $15,000, your capital gain will be $5,000. If you sell an asset for less than your adjusted basis in the asset, you’ll have a capital loss. For example, assume you had an adjusted basis in stock of $10,000. If you sell the stock for $8,000, your capital loss will be $2,000.

Schedule D of your income tax return is where you’ll calculate your short-term and long-term capital gains and losses, and figure the tax due, if any. You’ll need to know not only your adjusted basis and the amount realized from each sale, but also your holding period, your taxable income, and the type of asset(s) involved. See IRS Publication 544 for details.

Holding period: Generally, the holding period refers to how long you owned an asset. A capital gain is classified as short term if the asset was held for a year or less, and long term if the asset was held for more than one year. The tax rates applied to long-term capital gain income are generally lower than those applied to short-term capital gain income. Short-term capital gains are taxed at the same rate as your ordinary income.
Taxable income: Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. (Some types of capital gains may be taxed as high as 25 percent or 28 percent.) The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income.
Type of asset: The type of asset that you sell will dictate the capital gain rate that applies, and possibly the steps that you should take to calculate the capital gain (or loss). For instance, the sale of an antique is taxed at the maximum tax rate of 28 percent even if you held the antique for more than 12 months.

Using capital losses to reduce your tax liability

You can use capital losses from one investment to reduce the capital gains from other investments. You can also use a capital loss against up to $3,000 of ordinary income this year ($1,500 for married persons filing separately). Losses not used this year can offset future capital gains. Schedule D of your federal income tax return can lead you through this process.

New Medicare contribution tax on unearned income may apply

High-income individuals may be subject to a 3.8 percent Medicare contribution tax on unearned income (the tax, which first took effect in 2013, is also imposed on estates and trusts, although slightly different rules apply). The tax is equal to 3.8 percent of the lesser of:

Your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity), or
The amount of your modified adjusted gross income that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return)

So, effectively, you’re subject to the additional 3.8 percent tax only if your adjusted gross income exceeds the dollar thresholds listed above. It’s worth noting that interest on tax-exempt bonds is not considered net investment income for purposes of the additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.

Getting help when things get too complicated

The sales of some assets are more difficult to calculate and report than others, so you may need to consult an IRS publication or other tax references to properly calculate your capital gain or loss. Also, remember that you can always seek the assistance of an accountant or other tax professional.

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 to schedule an appointment to speak with an advisor.

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

The Nuts & Bolts of Wealth Accumulation

January 11, 2022
Uncategorized

Wealth accumulation is the act of increasing your net worth over time.

The modern approach to Wealth accumulation relies on increasing accumulation during the earning years and the draw-down of accumulated wealth during the retirement years.

The accumulation phase tends to take place during our 30’s, 40’s, and 50’s. The preservation stage begins once we begin approaching retirement age. This will lead us to entering the distribution or draw-down phase during retirement.

Wealth Accumulation Strategies:

Lower Expenses

One of the first steps in a successful Wealth accumulation strategy is lowering expenses. Lowering expenses may be easy enough to say but following through can be the hardest part. Creating a budget can be one of the best ways to start lowering your expenses.

You could begin the process by identifying your total monthly expenses. Figure out how much you’re spending each month vs the amount of income you are receiving. Once you have the expenses nailed down, you can proceed with creating trade-offs. These trade-offs may come in the form of cooking meals instead of dining out or pouring that cup of coffee before your leave home vs. stopping at Starbucks. According to the U.S Bureau of Labor Statics, pre-pandemic housing, transportation and food costs make up more than 60% of U.S. Consumer spending. (Consumer expenditures report 2019, 2020)

These tradeoffs may seem small, but small is where most of us need to start. This small start can help us use excess income to pay down high interest debt, which will ultimately lead to the accumulation of wealth.

Increase Income

We have already discussed lowering expenses. Now we can talk a little bit about increasing your income. You may be thinking, “If I knew how to increase my income, I wouldn’t need to read this article”. In some ways this thought may be accurate, however increasing your income will not help with the accumulation of wealth if your expenses continue to inflate at the same rate.

People tend to earn higher wages by means of a promotion or career change. The area of concern we face revolves around the inherent nature of humans to buy the big new house or brand-new car. I’m not saying that buying a bigger house or brand-new car is bad, but I will put caution around this action until your budget can support the increased debt while continuing to accumulate wealth. This means that you may need to focus on eliminating other debt before embarking on the new lifestyle.

What if you can’t seem to get that promotion or land that new career? You may want to consider working more hours. Working additional hours may help increase temporary wages long enough to pay down debt. Once this debt reduction has taken place, you may be able to reduce working hours while still accumulating wealth.

Keep in mind, we would want to create that emergency fund, based off budgetary needs. This Emergency fund should be in place before trying to advance to the last strategy that I have listed in this article.

The Entrepreneurial Spirit

We have now arrived. Our journey started by lowering expenses and creating a budget. We have also increased our income, which led us to accumulating excess cash and creating our emergency fund. Now, the fun begins. We are ready to invest our accumulated cash in a variety of ways. Let’s talk for a moment about growing our accumulated wealth. There are many ways to grow wealth, but we will focus on the following three: investment accounts, entrepreneurship, and real-estate.

Investment accounts can include a tax advantaged IRA, 401k, 403b, Roth IRA (to name a few) or retail non-tax advantaged investment accounts. Tax deferred investment accounts can be a great way to grow wealth without the growth being hindered by taxes today. Sure, you will have to pay taxes on this growth eventually, however the tax advantage today can help that wealth grow faster. The Roth IRA can help you guarantee the taxes paid, at today’s rates, without hindering the future growth. You may be asking yourself, which one of these accounts should I use? The answer to that question would be, “It Depends”. It depends on the growth strategy that you may currently be using, your current position within the wealth accumulation process, or the need for current tax relief. The best way to decide an answer may be to make an appointment with a Certified Financial Planner or other fiduciary planner.

Entrepreneurship can be defined several different ways. The Entrepreneurial spirit is full of endless opportunities, but what does it really mean? Entrepreneurial is defined as “taking financial risks in the hope of profit, enterprising.” This can be done by starting a business, investing in an established business, or buying a business. It is important to do your homework on this strategy, as it can be a risky but rewarding endeavor.

Real-Estate

The last strategy that I will mention in this article revolves around real-estate. Real-estate can create several avenues for growing wealth. You could be looking to buy commercial buildings in hope of creating a fixed income stream while also allowing for property appreciation. Alternately, you may be looking to buy a piece of property with the intent of improving it to sell. Which option is for me you may ask? Well, it depends on the goal you are trying to achieve. This goal could be limiting taxable income by creating a passive income stream, or it could be rapid capital appreciation achieved from buying and selling properties. Either way, real-estate investments can help a person grow their accumulated wealth with an entrepreneurial spirit.

Conclusion.

We have discussed several great strategies for accumulating and growing wealth. All previously mentioned strategies tend to build on one another while developing an over-arching portfolio of growth assets. We all need a starting point; whether this means creating a budget to lower expenses or increasing income to accumulate excess cash. Everyone has an opportunity to build wealth, and sometimes building wealth can come with trade-offs. Our responsibility revolves around deciding on a solid path and understanding the trade-off’s required to achieve our goals. Many people measure wealth by the amount of money you have, or the cars in your garage, however accurately measuring wealth goes much deeper than a bank account balance.

I will leave you with this thought. What is the difference between being Rich and being Wealthy?

Anyone can have a large income, or hefty bank account to support a windfall of debt. Wealth on the other hand, is about learning how to make your money grow for you and sustain your future. Identifying and defining what type of life you want to live is one of the most important aspects of truly being wealthy. Our goal at CapSouth Wealth Management it to help you identify, define, and live your One Best Financial Life.

To learn more about CapSouth Wealth Management visit our website at www.CapSouthWM.com

If you would like to further discuss wealth accumulation strategies, request an appointment at www.CapSouthWM.com/conta ct or contact our office at 800.929.1001.

Article by: Wes Hayes, CapSouth Wealth Manager

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.